South Africa may be beset by numerous challenges but the one thing we most certainly have going for us
is competitive leisure and tourism offerings: the sector is a boon for the economy, contributing billions
towards the fiscus.
StatsSA’s latest tourist accommodation data shows South Africa had a bumper December, with a sharp
increase in income for the tourist accommodation industry, which grew by 10.2% year-on-year. That
translates into a 3.6% increase in the number of nights sold, and a 6.4% increase in average income per
night sold. In 2023, international arrivals surged to 8.5 million people.
In 2019, the travel and tourism sector contributed 6.4% to GDP. The sector was hard hit by the pandemic
but has been experiencing a steady recovery since 2021. The World Travel and Tourism Council forecasts
that South Africa’s travel and tourism sector will grow at an average rate of 7.6% annually – significantly
outperforming the country’s overall economy – and creating over 800 000 jobs over the next decade. It
expects that by 2032, the sector could be injecting nearly R287 billion into the economy and employing
around 1.9 million people.
Growth of the African travel and tourism industry is also expected to be healthy with the World Travel &
Tourism Council forecasting that the value of travel and tourism will rise by 5.1% per year to $300 billion
by 2033, beating the long-term global rate of growth for travel of 4% a year and the forecast 3% annual
growth in African GDP. The Council says investment in African travel and tourism rose faster than the
global average between 2000 and 2019, increasing from $11 billion to $40 billion, while global
investment in the sector doubled over the same period from $559 billion to $1 000 billion.
What these figures clearly illustrate is that the growth potential for travel and tourism in both Africa and
South Africa is huge. Research indicates that one new job is created for every 30 new tourists, so any
growth in this sector helps to alleviate unemployment.
In South Africa, approximately 57% of tourism expenditure is classified as leisure, representing a
significant opportunity for investors – depending on the model, structure, and, of course, location.
Key to the success of any hospitality property investment is the model. A rewarding hospitality property
investment gives investors the security of owning the property – or part of thereof – so that they can fulfil
the landlord relationship with a trustworthy management company.
A hospitality property investment should always be pulled within the total property, to ensure that all
investors get the benefit of their investment, whether or not their room, apartment, or villa is occupied.
Rather than basing the investment on pure profit, it should rather be based on a percentage of gross
revenue. This means that the investor always wins.
Knowing where to invest, is key and for that, you need to understand trends in the leisure property
market. Given the semigration trend away from metropolitan areas, small coastal towns near Cape Town
should be a prime investment opportunity, as well as towns easily accessible to Gauteng and to the
Kruger National Park.
Hotel developments involving third parties such as property developers and contractors dilute
investments. For this reason, the management company’s relationship to the property must be a close
one, so that they are making money over a long-term lease and not over the initial construction period
of the property.
Greenfield properties can be successful, but they come with numerous potential pitfalls, which is why we
typically advise against these kind of developments, unless new construction is linked closely to a well-
established successful property with facilities, activities, experiences, and existing infrastructure
including reliable wi-fi and uninterrupted power supply given that guests choose hospitality
establishments based on their ability to provide both a work and leisure environment.
Start-up properties can also be trickier to exit. Investors need to know that they can own a property and
make their money liquid as quickly as possible. Selling with a lease allows the new buyer to benefit from
rental income.
Staggered development is tough for hospitality property investment companies wanting to get a
foothold in the industry. While larger players can afford to continually expand, using public investment,
smaller operators need to be able to offer an enticing business model if they hope to persuade investors
that they will see consistent annual growth, with guaranteed increases.
The best way to guarantee that is by paying investors an income based on gross revenue – which
increases annually with inflation. Marketing, maintenance, property refurbishment, housekeeping,
operational equipment, and client consumables should all be paid for by the management company.
With this model, the investor benefits every year when rental rates are increased.
When the developer and management company are the same entity, and the aim is to make a profit out
of the latter function, investors benefit given that the profit lies in managing rather than constructing. Be
wary of investments where the developer intends to make a profit out of the construction phase.
Ultimately, the best advice is to do your homework before making any investment decisions. Assess the
market conditions and consult with financial and property professionals to ensure that the investment
aligns with your goals and appetite for risk. Having done your homework and made the decision to invest
in a well-managed hospitality property with popular amenities and facilities on offer and located in a
sought after location, there’s one way your investment will go and that’s up.
