HOSPITALITY: It's Not All 2010 Cup's Fault
Recent Western Cape Business News
Today one of the most critical issues facing the local hotel industry is the current accelerated growth in capacity, together with a common misconception in the market that this increase has been motivated by the FIFA 2010 event, says Kamil Abdul-Karrim, MD of Pam Golding Tourism & Hospitality Consulting, a member of the Pam Golding Hospitality group.
“This growth in capacity is based extensively on the unprecedented economic growth experienced over the decade leading up to the global contagion which was ignited in September 2008, and which resulted in the pent-up demand for hotel accommodation all but dissipating in the wake of the economic meltdown. While the prevailing capacity growth in hotel rooms is widely reported on, with conflicting viewpoints being expressed, a major challenge is addressing the unsubstantiated and unspecified basis of commentaries and reports on the South African hotel industry inventory capacity. Generally these are fraught with inaccuracies and misrepresentations, presenting somewhat of a ‘dog’s breakfast’ perspective on one of South Africa’s hallmark industries that compares with by far the best the world has to offer,” says Abdul-Karrim.
As specialised consultants to the broader South African tourism and hospitality Industry, Pam Golding Tourism & Hospitality Consulting (PGTHC) maintains an empirical database of hotels operating in the country.
South Africa has approximately 66 000 rooms in the formal hotel sector. Data analysed over a period of nine years reflects that growth in capacity was fairly static over the period 2002 to 2007 but accelerated over the period 2008 to 2010, with a substantial surge in 2010. Measuring the current inventory to 2007 levels reflects that there has been an overall increase of 17.4 percent with a substantial increase in the 5 Star segment (28.5 percent) and 19.7 percent and 12.6 percent respectively in the 4 and 3 Star segments. Albeit that the 1 and 2 Star segments come off an extremely low base, very limited growth is evidenced in these segments.”
Abdul-Karrim says it is naïve to believe that the capacity increases have been motivated by the Soccer World Cup, and that an industry which enjoys the typical life-cycle of 20 years would be as irresponsible to create capacity for a 31-day event. He says the Achilles heel of the South African hotel industry is the demand-reactive nature of the industry - resulting in the prevailing growth spurt in capacity over the past three years. The hotel industry naturally enjoys a generally direct relationship to economic stability and growth being experienced both in South Africa and internationally.
Until the second half of 2008 South Africa's economy had been in an upward phase of the business cycle since September 1999 - the longest period of economic expansion in the country's recorded history. During this upswing (based on data for the period up to the fourth quarter of 2007), the country's annual economic growth rate had averaged over 4 percent. In the decade prior to 1994, economic growth averaged less than 1 percent per annum.
Until the global economic crisis, South Africa's real gross domestic product (GDP) rose by 3.7 percent in 2002, 3.1 percent in 2003, 4.9 percent in 2004, 5 percent in 2005, 5.4 percent in 2006, the highest since 1981, and 5.1 percent in 2007. Economic growth in 2008 declined to 3.1 percent as South Africa entered a recession, however, from the first quarter of 1993 to the second quarter of 2008 the country enjoyed an unprecedented 62 quarters of uninterrupted economic growth. As the crisis made itself felt, GDP contracted in the third and fourth quarters of 2008, officially plunging the economy into recession. This contraction continued into the first and second quarters of 2009, with GDP growth at -6.4 percent and -3 percent respectively.
This translates into a compounded GDP growth of 29.7 percent over the period 2002 to 2008, with growth in hotel capacity over this period of 21.8 percent, as measured in 2010. While there is a prudent time-lag between hotel inventory capacity reaction and the prevailing economic bullishness, it must be understood that the time frame from inception to planning and construction of a hotel project is typically between 30 to 36 months. As a result projects initiated in 2005 after fair comfort that the economic bullishness was sustainable and that the prevailing pent-up demand was reaching saturation levels, only started coming on-line in 2008, resulting in the current accelerated increase in inventory. The additional inventory being introduced would have by most measures been absorbed by the pent-up demand, but for the economic downturn from late 2008.
The Greater Cape Town hotel industry experienced 19.5 percent increase in overall capacity with the strongest growth in the 5 Star segment at 51 percent. Growth at the 4 Star level was 18.6 percent, while the remaining segments were static. A major contributor to the growth in especially the 5 Star segment has been the large scale introduction of luxury hotel apartments. While a proportion of these were always planned as apartment hotels, a substantial proportion of these were conversions from planned luxury residential units to hotel apartments resulting directly from distressed residential developments due to the prevailing credit-crunch.
Interestingly, recent comments from Cape Town Routes Unlimited, the marketing arm for the city, on the Southern African Tourism Update Online (Wednesday, 19th May 2010) mentioned that capacity in Greater Cape Town increased by 40 percent compared to our measured and substantiated 19.5 percent. The article further referred to the Greater Cape Town hotel room capacity being 50 000 compared to our empirically substantiated capacity of 11 584 hotel rooms.
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