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Western Cape Tourism on the Offensive

According to Tourismrsa.com the Western Cape only brings in 13% of South Africa’s domestic tourism revenue or R2,8 billion. That compared to KwaZulu-Natal with 26% of revenue or R5,7billion. But tourism in general grew by 5% in the Western Cape in 2011 contributing 10 per cent to the province’s gross domestic product (GDP) creating 70 000 jobs over five years.

The Western Cape Tourism department is mindful of the need to “encourage our locals to travel more within our cities. We need to reinvent our tourism sector and rethink the way we are doing things” Tourism MEC Alan Winde is reported to have said recently.

Mossel Bay and Plettenberg Bay are among coastal areas under pressure to refurbish, renovate and develop. Western Cape government’s Tourism department has announced a seafront development plan incorporating and connecting Kalk Bay, Muizenberg and Gordon’s Bay among others.

Previously disadvantaged communities seem to be targeted to become involved both as tourists and as proponents of tourism in their greater areas. Areas intended to benefit from upgrades to their tourism and entertainment infrastructure include Masiphumelele,  Ocean View and Mitchells Plain.

Fish Hoek will be paired with Masiphumelele and  Ocean View residents with the intention of making it a friendlier tourist destination. Formal stalls for craft work and displaying art in general will adorn the beach front.

Kalk Bay’s Main Road is to be revamped connecting communities previously effected by the Group Areas act. Muizenberg’s old retail and culinary district is to be refurbished and developed too.

Recently Tourism MEC Alan Winde referred to projects in Lambert’s Bay and Cape Agulhas as model examples of where communities previously excluded from decision making  were given the opportunity to become part of the process in the upgrading of their surroundings. An area like Monwabisi is to be similarly the target of investment.

“We need to encourage our locals to travel more within our cities. We need to reinvent our tourism sector and rethink the way we are doing things,” Winde said to the Cape Times.

The knock-on effect to properties in these areas is expected to be very positive. As upgrades take place for infrastructure and retail spaces, commercial nodes will increase in demand. Subsequently residential properties will find themselves on the up and up as areas improve and demand increases.

Meanwhile at the other extreme of the province next to the Eastern Cape Border, Plettenberg Bay’s ten-year-old plans to build a small boat harbour may be coming to fruition with an invitation to residents and interested parties to take part in an environmental impact assessment.

In March, Bitou council put pressure on Western Cape Marina Investments to take the small boat harbour project forward or lose the contract. WCM which won the tender in 2002, has finally  released  a document detailing designs to build the harbour in the Piesang River mouth, besides the Beacon Isle Hotel.

The development includes construction of residential blocks on either side of the river with a commercial zone to replace the derelict edifice which accommodates the Moby Dick restaurant and its adjacent buildings. The intention would be to transform Plettenberg Bay’s Central Beach area into a modern waterfront with a broad tourist friendly appeal.

The Central Beach is to be developed, becoming the site of a number of residential and commercial properties some of them multi-storey buildings which will completely change the look and feel of the beachfront . Dredging of the shallow Piesang estuary  will be mandatory  if it is to be deep enough to accommodate boats and moorings, and the harbour is to be flanked by buildings up to seven stories high in some cases on the northern and southern banks of the river mouth. The proposed small boat harbour  should also assist the operators of Plettenberg Bay’s whale and dolphin watching as well as charter fishing operations.

The overall expectation is that the whole enterprise will be the much needed shot in the arm to the struggling local economy with regard to construction contracts as well as job and tourism opportunities. The overall value to the local property market  is easy to underestimate given the long term nature of the developments.  Though tourism may suffer in the short term those who get into the market early will benefit as the dust settles and beach front occupancy climbs.

Looking at another example of development of Western Cape beachfronts we turn to Mossel Bay. A few important developments  in their area are likely to draw substantial capital as well as many people to Mossel Bay. Firstly Petro SA’s offshore latest drilling operations have received the go-ahead and work has  started.

Another project is the refurbishment of The Point precinct. This is the pivot of Mossel Bay’s tourism industry. The Point is about to be confirmed as a Provincial Heritage Site. The intention is to see it become a World Heritage Site within the next five years. In the refurbishment plan a public square is in the offing  as well as little carriageways and a museum.

A further development is to follow the successful model of the Victoria and Alfred Waterfront in Cape Town by creating a much anticipated waterfront. The Mossel Bay Harbour, the smallest of fully functioning harbours in South Africa is to be transformed into a tourism focused node with retail development a top priority.

Local government seems very much on-board . Minister Alan Wilde spoke to a local estate agency assuring them that growth in the Mossel Bay was a priority. An estate agent at the meeting said: “His message was that people needed to bring tourism and business together to move forward and reach for new goals.”

Some astute investors are already buying up property suitable for renting here, in the knowledge that demand for such properties will increase. With Petro SA’s new projects will come new staff needing rental accommodation.  This is expected to grow at 7% a year. The influx of professionals for this and the developments at the waterfront and harbour are expected by one estate agency to be a market that will grow by 4% a year, renting or buying. Also a 5% increase is expected for the conventional property market, including retirees and locals.

It’s clear that the Western Cape Provincial government is following the state’s lead in investing in local infrastructure. The CBD of Cape Town had a boost in infrastructure development in time for the 2010 world cup, now it’s the rest of the province’s turn.

Are South African Hotel Rooms Oversupplied and Overpriced

The hospitality industry which boomed in South Africa in 2010 has admittedly had some post World Cup benefit. The industry has also shed some of its fly-by-nighters. However the debate continues as to whether hotel rooms are overpriced and over accommodated. Regardless, the question remains, aren’t hotels a property industry problem and therein lies the root dynamic behind the quantity and price of rooms.

Stepping back and looking at tourism in general we are reminded of what valuable foreign currency it brings into the country. The hospitality industry provides coveted direct employment too. The potential for growth is huge and its knock-on effect on the commercial property world worth taking seriously.

South African tourists, who make up the largest section of the market, have to bear the brunt of the high hotel room rates which are often aimed at the overseas tourist. Despite the belief that foreign tourists are ‘loaded’ there is some resistance to our higher room rates. By comparison Brazil, which is similar to South Africa in some respects, is geographically closer to most of the same source markets that we rely on for inbound visitors. Upscale hotels in the major cities of Rio de Janeiro and Sao Paulo reported average room rates of between $300 and $400. Although the South African equivalent is around $190 at current exchange rates, the difference can arguably be absorbed by the cost of travelling to South Africa, a destination which is generally regarded as a long-haul destination.

Here’s the rub: High room rates have the knock-on effect of an oversupplied market. Customarily this should lower daily room rates as a result of market forces of supply and demand. However what has been observed is a reduction in occupancy rates. In some parts of the world various solutions are formulated to deal with oversupply. On the other hand other governments have not interfered and left it to market forces. It is important from the outset to ascertain where this oversupply exists and to quantify its extent.

One intervention by hoteliers is to discount room rates. The down side to this is the unintended message that the value has decreased too. To then return to the higher rate becomes a negative movement. Another strategy, instead of dropping rates, is to add value, offering two-for-one deals where visitors get one night ‘free’ on top of the original booking, extras such as free bottles of wine with a dinner in the hotel restaurant or vouchers for various entertainment in the city are supplied.

Countering this there is the school of thought that sees this as only a temporary solution whilst hotels engage in a price war of undercutting rates. The visible nature of hotel rates means short-term occupancy gains are quickly offset as competitors rapidly follow suit in cutting rates. This leads to a lower priced hotel market yielding lower revenues in the face of normally unchanged demand, proving that rate discounting alone does not induce additional hotel demand.

Looking at the big picture, some would encourage government intervention for the tourism industry in general. A more competitive ZAR/dollar exchange rate will help make hotel rates more affordable for the inbound tourist market. The Department of Transport could relook at increasing the number of airport slots for international airlines. This would help bring more visitors  and bring down costs through competition.

One country whose government hasn’t been shy to intervene in the tourism industry is Ireland. A country very dependent on tourism. In the wake of the Global Financial Crisis Ireland’s NAMA (National Asset Management Agency)  took control of over a 100 hotels with the intention of circumventing bankruptcies of the operators through paying out the creditors and then removing the remaining stock from the market. As a result, competition in the market was reduced and room rates were stabilised for the entire market. Although the removal of competition is seldom seen as beneficial in a market economy, especially when taxpayers’ money is involved, such drastic action is a further indication of the seriousness of the hotel room oversupply problem and the extent to which some countries will go to protect their tourism industries.

Coming round to property, many would point out that hotels are, in essence, in the property industry, and construction costs are the capital outlay that hotel incomes and profits have to provide a return on. For the last decade, tender price escalation, as an indication of construction costs, has averaged 12%, indicating that hotel returns are diminishing.

One may argue that new investments in the hotel industry should only have been introduced into the market if the potential for the market was there to ultimately sustain the room rate. By 2008, most market commentators had already forecast the “property bubble” bursting. The SA Reserve Bank Governor issued warnings to businesses and consumers to reduce debt and to forgo acquiring more. Most hotels that entered the market without taking into consideration those warnings, perhaps should not have been built in the first place.

The higher-than-inflation building costs whilst South Africa is experiencing deflationary conditions are similarly to blame for the high average daily room rates. The materials, labour and overheads are also to be considered. Recently the rise in cost of materials has been much more than inflation and other building cost indicators. The largest construction companies were also recently investigated by the Competition Commission for anti-competitive behaviour. Some of them have come clean and have been penalised.

To quote Hotel commentator Makhudu in his online blog article: ‘Hotel Oversupply’: “For the investor, the opinions that room rates are greater than normal means that hotel properties are currently overvalued. Some bankers have gone further than conducting debt reviews. Instead of recalling loans they have on hotel properties they have gone and interfered with the market dynamics by unilaterally dropping rates. Established hoteliers have bitterly criticised the actions of so-called ‘zombie hotels’ which have been taken over by banks and are undercutting rates for the sector in general.”

Reading the market with the wisdom that many of the most experienced hoteliers have, acting with owners who resist the skittishness that has come upon many investors of late, decisions about room rates will hopefully be made with sober judgement and a steady hand. It makes little sense to kill the goose that lays the golden egg. We should cherish every tourist that comes our way and reward them with reasonable rates. History may just remember us according to how well we cared for our golden geese.

Durban’s shouting: “Look at me, look at me, look at me.”

Look at me, look at me, look at me.

 

After the successful holiday season, Durban isn’t letting the limelight fade any time soon.

 

Durban had ‘a bumper festive season’ where tourists spent an estimated R1.2Billion offset against the R500 million spent by the city improving infrastructure. Since before the 2010 world cup Durban has been as industrious as an ant farm digging things up here, laying paths down there. New and renovated concourses. A flurry of new restaurants. Sprucing up the informal trading areas. Laying on the recreational facilities.

 

It seems like yesterday that the Durban streets were awash with green fingered types taking a break from the, what turned out to be, highly successful Cop17 conference – well, from an organisational point of view anyway, ahem.

 

But just when residents thought it was safe, the City eThekwini plans to host a R31million Top Gear festival in June.  It materialised early this year that the ANC-run municipality and the provincial government had signed a 3 year contract for the festival that is to arrive in Durban in June, with municipality and the provincial government expected to carry the financial burden. Oops Durbs is beginning to look like seriously high maintenance.

 

This comes in the wake of Auditor-General Terence Nombembe’s report for 2010-11, which showed that 364 tenders worth R126m were illegally awarded. Democratic Alliance councillor Tex Collins said the provincial government had signed the Top Gear contract without consulting the municipality. Apparently the event does not submit to the goals of eThekwini’s  integrated development plan. Alas there is simply no provision for the festival in the city’s budget.

 

Opposition parties are hardly shouting yippee at the thought of fast cars and all manner of techno-wizardry gracing the Durban shore. The DA’s Ronnie Veeran said councillors battled to find money for infrastructure in their wards, and asked how the municipality had found the funding for the event so readily. He also said that the tickets of R250-R500 were too expensive for the average Durbanite. The minority front suggested building a permanent race track.

 

At the end of the day ANC councillors played the familiar tune that the Top Gear festival was similar to the 2010 Soccer World cup or Cop 17 in that such events brought extraordinary revenue to the city, hotel industry and allied tourism industry. The event is expected to generate an estimated income of R35 000 000 in the City’s hospitality industry. R26 000 000 will be spent on local suppliers and legacy programme. How those figures are arrived at is little mysterious though.

 

Apparently the deal was struck in December last year and the city is bound by the contract – so all the debate is academic. It’s a bit like dad spending all the grocery money on booze – you might as well enjoy the party.

 

On a more constructive note though Durban’s place in the sun is keeping it in the public eye for a very green reason.   Pioneering the way for cleaner energy in South Africa, three partners have come together in a cutting-edge energy-saving pilot project. Durban is the city chosen in this project aimed at harnessing  the power of solar energy.

 

It’s called The Lincoln on Lake Rooftop Solar Project. The three main players are: Growthpoint, South Africa’s largest JSE listed property company; Hudu, a pioneer in the world of Solar Power and the world’s largest solar panel manufacturers Suntech Power.  Eskom naturally has a huge role to play to.

 

Growthpoint‘s Lincoln on lake on Umhlanga Ridge provided the location whilst Suntech and Hudu provided the solar panels and the installation. Eskom shared in the costs. The project is the largest photovoltaic installation to an office building in the province and represents a potential saving of 44kWs, which equates to some 87,000kWhs per annum.

 

The carbon saving is estimated at being around 89 610kg CO2 annually or 240 trees saved a year. “The latest innovations in the solar energy sector provide increased applications and effectiveness, as well as financial viability,” I-NetBridge quoted  Martin Viljoen, Managing Director of Hudu. “We are excited to be part of this resourceful project and to be a participant in the solar energy revolution that that is taking hold in SA.”

 

The pilot project has serious potential for application in buildings across South Africa. Durban has another reason to say “look at me.”