Buying and selling guesthouses in SA

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19 Apr 2013

The guesthouse property market in general follows the trends experienced in the hotel industry, says Peter Bruil, managing director of Pam Golding Lodges and Guesthouses (PGLAG), a subsidiary of Pam Golding Hospitality.

Whale Rock Lodge, a 4 Star property in Hermanus in the Western Cape is owned by Dave and Anouk Bakker, also owners of WedgeView country House & Spa in Stellenbosch, which they bought through PGLAG at the beginning of 2007.

Bruil explains that as per the 2012 Smith Travel Research (STR), guesthouses in general also have enjoyed an increase in RevPAR (revenue per available room) above inflation during the last year compared to the previous year.

Recent STR reports reveal that for the 12 months ended 31 December 2012, RevPAR in South Africa grew by 10.5 percent compared to the same period in 2011.

“The same report showed that RevPAR over this same time frame increased by 9.4 percent in the Western Cape and 14.5 percent on the Garden Route,” says Bruil.

However, Bruil points out that they have noticed that some smaller guesthouses are sometimes converted back into normal residences, following a period of oversupply after the 2010 FIFA World Cup.

“To run a guesthouse profitably you need a minimum critical number of rooms in order to benefit from certain economies of scale.”

He says there are quite a few material fixed expenses and overheads that  need to be covered, for example, rates and taxes, marketing, salaries of the managers and other staff, insurance, car expenses, telephone and internet connection, repairs and maintenance of the building.

“Without sufficient rooms providing for significant income it is hard to remain profitable,” he says.  

He notes that in his speech at the Fórum Panrotas Tourism Trends Summit in São Paulo, Brazil, during the opening ministerial panel on Tourism opportunities among emerging markets and best practices held on 19 March 2013, South African Tourism Minister Martinus van Schalkwyk had this to say about the market: “as emerging markets, we are also the most amazing destinations in our own right. Over the next 20 years, international tourist arrivals in emerging-economy destinations are expected to grow at double the pace (4 percent) of advanced economy destinations (projected at 2 percent).

As a result, arrivals in emerging economies will likely surpass those in advanced economies by 2015. Yes, that is correct: The crossing point at which inbound tourism to emerging market destinations will exceed those to the advanced economies is 2015, a mere two years from now. We, as emerging markets, are thus on the verge of becoming the centre of the tourism universe.” 

Bruil says a large percentage of their sale transactions are made by international buyers who buy in areas they know such as around the Kruger National Park area, Mpumalanga, in or around Durban, The Garden Route and pretty much all of the Western Cape, albeit that Cape Town and the Winelands within 1 and 1.5 hours from Cape Town remain most popular.

Bruil says from the comments it appears the South African tourism market is poised to grow at 4 percent per annum for the next 20 years, providing for a sustainable and continuous flow of travellers in need of accommodation.

“We must, however, be prudent that we do not over react and increase the room stock inventory excessively.”

Star grading in guesthouses

Speaking to Property24.com, Bruil says star grading is important in the hospitality industry, as not only do guests and clients derive comfort towards meeting their expectations of the standards of a certain place, but it also manages expectations and provides comfort to prospective buyers of a hospitality establishment.

As grading is carried out annually, the standards need to be kept at a consistent and appropriate level. 

This will safeguard the guesthouses from possible deterioration which is to the benefit of the hospitality industry in general, he explains.

The Tourism Grading Council of South Africa (TGCSA) is the governing body that issues the TGCSA stars to hospitality establishments.

The TGCSA recognises the following categories:

Bed & Breakfast

Accommodation is provided in a family (private) home and the owner/manager lives in the house or on the property. Breakfast must be served and bathroom facilities may or may not be en suite and/or private.

In general, the guest shares the public areas with the host family. 

Country House

A large guesthouse, usually situated in natural, peaceful surroundings such as near a nature reserve, a forest, a lake, for example and offers all the services of a hotel, including dinner. 

Guesthouse

This can be an existing home, a renovated home or a building that has been specifically designed to provide overnight accommodation.

A guesthouse will have public areas for the exclusive use of its guests and is a commercial operation enterprise and as such the owner or manager may live on the property.

Hotel

Provides accommodation to the travelling public, has a reception area, and offers at least a breakfast room or communal eating area.

Bruil says the outlook for the prime tourism locations in the Western Cape is positive, with market activity in the guesthouse and boutique hotel market indicating growing interest in this region.

In general a hotel makes food and beverage services available to guests; these may be outsourced or provided by the hotel. 

Lodge

An accommodation facility located in natural surroundings. 

The rates charged are usually inclusive of all meals and the experience offered at the lodge, with game drives, battlefield tours, etc.

Bruil says only establishments that cater for transient guests (travelling public) will qualify for grading. 

Grading covers a large scope of requirements that are being critically looked at such as safety and security, cleanliness and comfort, statutory obligations, access, courtesy, marketing, reservations and pricing, the condition of the exterior and interior of buildings, the quality of furniture, fittings and equipment in the bedrooms, bathrooms, public areas and garden as well as other services provided.

He points out that the grading requirements for a guesthouse differ from a hotel and are updated annually - click here for more information.

Buying and selling guesthouses

Bruil says a large percentage of their sale transactions are made by international buyers who buy in areas they know such as around the Kruger National Park area, Mpumalanga, in or around Durban, The Garden Route and pretty much all of the Western Cape, albeit that Cape Town and the Winelands within 1 and 1.5 hours from Cape Town remain most popular. 

The vast majority of overseas buyers are interested in the 4 to 5 star category and return on lifestyle seems to be the dominant factor in their decision process.

He explains that return on lifestyle means a beautiful home providing privacy and space for the owner, combined with a hospitality business that provides sufficient income to live off and this is more important than the commercial aspect only.

“The 4 to 5 star guesthouses that offer a comfortable residence in a desirable location and a sufficiently large business would be hard to find under R8 million.”

Bruil points out that for South African buyers, the general consensus seems to be that it must make financial sense first and foremost and commercial principles play the dominant role in their investment decisions - a beautiful home attached to the business is of less importance.

4 Star Albourne Guesthouse in Somerset West in the Cape Winelands is owned by the Korevest Leisure Management Group, a specialist investment company which helps build sustainable small and medium sized leisure and hospitality businesses in emerging markets.

“The business can be of a 3, 4 or 5 star grading - to be able to generate sufficient income one would need sufficient rooms, hence a large property.

“Sound opportunities are available from R6 million and upwards,” he says.

In addition, he says they completed a number of transactions with investors from other African countries, in which cases commercial viability was mostly the key driving factor behind their decision making process.

Guesthouses in the Western Cape

Bruil says the outlook for the prime tourism locations in the Western Cape is positive, with market activity in the guesthouse and boutique hotel market indicating growing interest in this region.

To this end, PGLAG, saw increased sales in guesthouses including two 4 Star guesthouses – Albourne Guesthouse in the Cape Winelands town of Somerset West and Whale Rock Lodge in Hermanus.

Somerset West is extremely popular among ‘swallows’, mainly European retirees and holidaymakers who stay for approximately three to four months of the year, making the town their base from which to explore the Cape.

The town attracts very high occupancies from September/October through to April. 

With its fisherman’s village charm, the thriving holiday resort of Hermanus has a six week longer season as the whales frequent the bay from as early as July/August, according to PGLAG.

He says the combined value of these two sales is close to R17 million and each property has been trading for almost 20 years, being one of the first guesthouses in their respective towns.

Buyers of these prime located establishments are overseas investors who already have a presence in South Africa.

Buyers also didn’t need to apply for bank finance and he points out that obtaining bank finance can be a stumbling block for investors, and often places a buyer in a weaker negotiating position in comparison with cash buyers.

The new owners of Whale Rock Lodge, Dave and Anouk Bakker, were already owners of WedgeView country House & Spa in Stellenbosch, which they bought through PGLAG at the beginning of 2007. 

Albourne Guesthouse has been acquired by the Korevest Leisure Management Group, a specialist investment company, which helps build sustainable small and medium sized leisure and hospitality businesses in emerging markets.

Both properties have quite a few aspects in common – in excess of 10 rooms, of a 4 Star standard and set on very spacious grounds, and each has tremendous potential.

They both cater predominantly for the overseas tourist in high season, servicing mainly markets from the UK, Germany and the Benelux countries (Belgium, The Netherlands and Luxembourg), while in low season they attract mostly South African corporate travellers, says Bruil.

He points out that the properties needed refurbishment and a fresh look and the buyers identified an opportunity to add value by investing a limited amount of additional capital.

“Conservative calculations allowing for increased room occupancies and room rates show a very attractive yield on the investment over the medium to long term,” says Bruil.

Buyers also didn’t need to apply for bank finance and he points out that obtaining bank finance can be a stumbling block for investors, and often places a buyer in a weaker negotiating position in comparison with cash buyers.

He says without sufficient interest free cash available, it remains very challenging to obtain the finance to purchase a guesthouse.

Both buyers decided to invest additional capital as part of their expansion strategy, which is a major vote of confidence in South Africa’s hospitality industry as a desirable investment destination.

Bruil points out that foreign interest in guesthouses and boutique hotels in South Africa is increasing when compared to a year ago.

“In addition to the healthy growth in revenue during 2012, confidence has been boosted by the rand exchange rate, which makes South Africa some 20 percent more affordable as a tourist destination than a year ago.”

He adds that they are currently in an advanced stage of negotiation with a number of overseas buyers, including clients from Korea, Thailand, Germany, Switzerland, The Netherlands and England, and have a selected number of quality investment opportunities available. – Denise Mhlanga

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