By Wayne Troughton, CEO, HTI Consulting
Diversifying into more than one property sector is not new in the South African context, but it's a growing trend that's impacting the hotel pipeline.
Nowadays we're increasingly seeing investors who weren't traditionally interested in hotels now investing in this asset class and, whilst mixed-use developments are by no means a new concept in South Africa, it's certainly interesting to note the upswing in mixed-use hospitality investment. As a trend, it's allowing developers and investors to diversify portfolios, spread risk and, in many cases, deliver significant added value to a development or precinct
Historically, few developers wanted to own hotels, instead opting to secure leases through the typical developers model used in other asset classes. In recent times, however, there's been a noticeable shift in the nature of hotel development and the manner in which such developments are funded and owned. This has resulted in the construction of more hotels within larger mixed-use buildings and communities. There are a number of contributing factors at play here:
Firstly, the influx of several major international hotel brands into South Africa has brought more developers into the hotel fray, with classic hotel management contracts turning towards more 'hybrid contracts' that attune the individual needs and risk appetites of the parties by providing some downside financial protection, giving comfort to investors, developers and banks.
Developers in South Africa are often in possession of the development rights of the most prime real estate in the business areas of the country, which means that Operators typically have to deal with property developers as opposed to traditional hotel investors. Developers and owners have achieved a much greater understanding of hotel operations and the high yields that can be achieved through investment with management contracts. They've also become more sophisticated in the negotiation of contract terms, often with the help of specialist advisory firms.
Both the power of the developer and the lack of international brand penetration in the South African market have resulted in management companies (especially those with limited or no presence in the market), developing more flexibility in order to achieve a strong brand presence. These factors have brought developers and operators closer together.
Secondly, the real estate market is cyclical by nature, with different stages of the market cycle presenting different levels of opportunities and risk. When the economy is growing, demand for space in commercial properties is generally high and landlords have flexibility in setting rents. In the last few years however, the country's sluggish economy, rand weakness and muted GDP growth have made operating conditions difficult, reflecting in low business and consumer confidence levels. As a result, many of the more traditional assets – such as office, industrial and retail components – haven't performed as well in terms of yields, and the lack of real business expansion has meant that new office stock has typically outpaced overall growth.
The above has resulted in less speculative development and more developers and real estate investors taking on more than one asset class in order to further business opportunities and reduce their reliance on a single market. This downturn in traditional real estate has been counteracted by an upturn in the hospitality market, with a promise of greater yields driven by increased tourism growth and supported by the weak rand and the lack of hotel development in the market in the last 5 years.
The opportunity to spread risk by having investment revenue flow through multiple revenue streams and the ability to achieve a nicely balanced ratio of variable to fixed cash flows – as well as from diversified market sectors like hotel, office and retail – is also appealing. Mixed-use developments, such as Gauteng's Melrose Arch and Cape Town's V&A Waterfront and Century City, with different components that complement one another, exemplify such cases.
Research has also shown that diversification often ensures a higher potential for a property project to be successful and the real benefits of mixed-use is that it provides generally enhanced development viability for both the hotel and the residential/ retail / office development that could be too prohibitive individually.
Research also reveals that a hotel can boost revenue by 15 – 20% if attached to a shopping or retail centre.
Towards the end of last year SA's Amdec property development group announced the investment of R3-billion into five brand-new hotels in Johannesburg and Cape Town to be managed under the Marriott International Hotels brand. Both Johannesburg hotels will be developed at One On Whiteley, a larger development by Amdec within Melrose Arch. They are expected to open their doors in 2018.
In Cape Town, the five-star, 200-room Cape Town Marriott Hotel Foreshore and the 150-room Residence Inn by Marriott Cape Town Foreshore will be situated within Amdec's latest mixed-use development named Harbour Arch, modelled on Melrose Arch. A 189-room AC Hotel Cape Town will be situated in Amdec's The Yacht Club mixed-use development, close to the CTICC and Waterfront.
Similarly the V&A Waterfront has recently undergone substantial development in its new Silo district, which currently houses the new headquarters of Allan Gray at Silo 1 and apartments at Silo 2. The project will be completed this year, with the Zeitz Museum of Contemporary Art Africa, a Virgin Active gym and a new 252- key Radisson Red hotel due to open in September 2017.
The former Triangle (Safmarine) House, a landmark office building in the heart of the Mother City is currently being transformed by developer Signatura and land owner Stonehill Property Fund into the Radisson Blu Hotel and Residence – a five-star hotel plus 166 branded sectional title apartments and penthouses for sale due to open in April 2017. Owners of these apartments are able to add them to the hotel rental pool.
Another newcomer is the 207-room Radisson Blu Hotel in Durban's Oceans Umhlanga development that's anticipated to open its doors in 2019. Designed as an urban resort, the high-end complex will feature luxury apartments and a shopping mall with leading international brands.
The mixed-use development trend is being replicated in other African cities. Big developers and hotel operators have also joined forces in Nairobi, Accra, Lagos, Dar es Salaam and Maputo. Such relationships can only bode well for the hospitality sector across the continent as the combination of world class development with world class brands will take the supply of hotels to a new level.
