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5 star hotel market in Cape Town

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09 Apr 2013

Five star hotels will benefit even more than four star hotels from the increase in tourism over the next five years and five star hotels are expected to be the fastest growing hotel category, according to PricewaterhouseCoopers (PwC).  

According to Abdul-Karrim, the biggest challenge to the 5 star hotel segment in Cape Town is simply that there are an unproportionately high level of 5 star hotels in a market that is globally ‘value-driven’ and is reflecting a rejection of ‘over-priced’ luxury accommodation.

PwC says the fast-pace of growth in the five star segment is expected to be seen in occupancy, which is forecast to increase from 51.4 percent in 2011 to 70.5 percent in 2016.

The 2016 forecast rate is higher than the 2007 occupancy rate of 65.8 percent, says PwC.

Occupancy levels

Speaking to Property24.com regarding the 5 star hotel market in Cape Town, Kamil Abdul-Karrim, managing director of Pam Golding Tourism and Hospitality Consulting (Pty) Ltd, explains that occupancy in the Cape Town 5 star segment in 2012 at 60.1 percent grew by 12.1 percent on the occupancy level in 2011.

“While this seen on a stand-alone basis is a very positive indicator, one has to understand the Cape Town 5 star market over a longer term.

“At its peak, the Cape Town 5 star market traded at 71.6 percent in 2008,” says Abdul-Karrim.

He points out that the decline to its lowest point of 48.3 percent was driven in part by the Global Economic Crisis and in part the FIFA 2010 over-expectation.

However, the bigger element of the very slow pace in recovery is undoubtedly the unprecedented increase in inventory stemming from the 2007-2008 boom period, he says.

“Inventory at the 5 star segment level grew by a substantial 71.4 percent between 2008 and 2012, and while there are positive signs in recovery, the market’s ability to absorb the increased inventory remains weak.”

Abdul-Karrim says this can be clearly gauged from the performance in the Average Daily Rate (ADR) achieved which increased only by a marginal 0.2 percent in 2012 compared to 2011, but remained a significant 8.7 percent below the high achieved in 2009.

He notes that projects planned and initiated over the peak 2007 and 2008 period obviously took into account the least inflationary growth in revenue to provide a sustainable Return On Investment added to which a much shorter market gestation period was envisaged.

Speaking to Property24.com regarding the 5 star hotel market in Cape Town, Kamil Abdul-Karrim, managing director of Pam Golding Tourism and Hospitality Consulting (Pty) Ltd, explains that occupancy in the Cape Town 5 star segment in 2012 at 60.1 percent grew by 12.1 percent on the occupancy level in 2011.

When looking at RevPAR (revenue per available room) as the benchmark, he says the overall decline in the Cape Town 5 star segment is a staggering 16.6 percent.

“Compounded Inflation over the period 2008 to 2012 at the upper 6 percent per annum level computes to an effective 26 percent - telling us that actual return is down by over 40 percent,” explains Abdul-Karrim.

According to PwC, hotel room revenues will expand at a 12.3 percent compound annual rate to R1.9 billion in 2016 from R1.1 billion in 2011.

5 star market challenges

According to Abdul-Karrim, the biggest challenge to the 5 star hotel segment in Cape Town is simply that there are an unproportionately high level of 5 star hotels in a market that is globally ‘value-driven’ and is reflecting a rejection of ‘over-priced’ luxury accommodation.

“The market is more geared to mid-upscale (3-4 star in South African grading) hotel segment pricing, resulting in 5 star hotels discounting substantially to attract business. “

He says this is reflected clearly in the ADR performance pointing out that the sustained challenge is that this is not going to improve to expected levels at which the more recent hotel developments were initiated, resulting in these 5 star operations having to survive on a substantially lower return.

However, Abdul-Karrim says occupancy will improve and over time the market will absorb the increased supply.

The million dollar question is whether the market will accept the required rapid increase and optimisation in rates, as the long-term sustainability of the Cape Town 5 star segment depends on the ability to achieve a considerably higher return level – or does this lead to declining service levels and product presentation, in effect gradually reducing the level of the 5 star Cape Town hotel industry, he asks.

Meanwhile, Joop Demes, chief executive officer of Pam Golding Hospitality and managing director of Pam Golding Hotels (Pty) Ltd says early indicators for 2013 do reflect overall growth compared to 2012, but the daunting task is the ability to improve return by a substantial level before ensuring sustainability and start seeing growth.

“What is important to note is that the indicators used in analysing the Cape Town 5 star market is an industry wide aggregate, and what needs to be understood is that certain established hotels as well as some of the globally distributed brands operate at a higher level than the aggregate, indicating that some hotels remain in a crisis situation.”

Furthermore, the Smith Travel Research sample constitutes only 70 percent of the total Cape Town 5 star hotel segment, and the performance of non-participating hotels remains an unknown and questionable, he adds. – Denise Mhlanga

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