Investing in Randburg leisure property

05 Mar 2012

The South African hospitality industry experienced a decline in performance with demand for accommodation being affected over the past four years.

Located on 267 Surrey Avenue in Ferndale Randburg, Diaz on Surrey Boutique Hotel is a 4 star establishment, which opened in October 2010.

According to Pam Golding Tourism & Hospitality Consulting (Pty) Ltd, the global economic crisis which started in September 2008 and the ensuing recession in South Africa have all contributed to performance levels and low demand for accommodation in this sector.

The state of the hotel industry in South Africa

Kamil Abdul-Karrim, managing director of Pam Golding Tourism & Hospitality Consulting says this decline had been exacerbated by the accelerated increase in hotel room inventory, driven by the high demand levels from 2005 through to the third quarter of 2008.

This was coupled with the fact that many of these projects were accelerated to meet the expected high demand during the FIFA World Cup during June and July of 2010.

Abdul-Karrim explains that the post World Cup period has been especially debilitating as the full impact of the global economic crisis embedded itself and government and corporate travel spend was substantially cut back in the prevailing recessionary climate.

Speaking to Property24.com, he says commentary on the current and historic state of the industry is based exclusively on the formal hotel sector as there is comprehensive and substantiated data on the sector.

He notes that there is very limited comprehensive data on the Guest House and Bed & Breakfast sector and the information available is not always substantiated.

To clarify things right from the start, he points out that commentary on the hotel industry is based on the published Smith Travel Research performance data on the South African Hotel Industry and the comprehensive hotel inventory data computed independently by Pam Golding Tourism & Hospitality Consulting.

The comparative analysis is based on current trading levels relative to the peak demand period experienced in 2007, he says.

A room at the inn

According to an Abdul-Karrim, Hotel Room Inventory recorded an increase of just under 20 percent between 2007 and 2011 on a national basis.

While the increased inventory complimented existing inventory over the high demand World Cup period, it has generally had the effect of diluting occupancy post the World Cup.

One of the spacious bedrooms at the Diaz on Surrey Boutique Hotel in Ferndale Randburg.

“However, there is a leveraged relationship between occupancy and demand, and comparing only the occupancy level to previous years does not necessarily reflect the development of demand over the same period,” he says.

He says the occupancy level in 2011 of 56.3 percent reflects a decline of 22 percent when compared to the occupancy level of 72.2 percent in 2007.

Absolute demand has declined by 9.2 percent over the same period resulting from the diluted occupancy level over the increased inventory.

Abdul-Karrim says encouraging enough is the fact that performance over the last three months of 2011 reflects an accelerated increase in demand towards the previous high levels experienced in 2007.

To illustrate this, he says in October, demand was down by 5.9 percent compared to October 2007, November shows a decline 6.3 percent compared to November 2007 while December recorded an increase in demand of 3.6 percent compared to December 2007 providing the first indication over the period 2008 to 2011 of an increase in real demand.

“This trend has carried over into January 2012, providing an indication of a sustainable recovery.”

Focus on the Randburg hotel market

It is against this background that Property24.com spoke to leisure property owners to find out what the market is really like currently.

According to Abdul-Karrim, there has been no new hotel room inventory increase over the period 2007 to 2011 in Randburg, Johannesburg.

However, he notes that there has been substantial growth in the Greater Johannesburg Region encompassing Johannesburg North, Johannesburg South, Johannesburg CBD, Johannesburg East and the Ekurhuleni Metropolitan Municipality and Midrand.

“No growth in inventory was recorded at the 2 Star level while the 3 Star recorded an inventory increase of 27 percent and the 4 Star an increase of 30 percent,” he says.

He says demand for hotel accommodation in the Randburg region has experienced a sustained decline over the years 2008, 2009 and 2010 with a marked recovery in 2011.

What is important to note is the improvement in the last quarter of 2011, where on a month-on-month basis, demand has surpassed the level of demand experienced in the same period in 2007, he says.

In November 2011 demand at the 3 Star level was up by 2 percent and 4 Star was up by 5 percent compared to the same period in 2007.

Demand in December 2011 at the 3 Star level was up by 4 percent and 4 Star was up by 8 percent compared to the same period in 2007. 

Three years ago, Henry Beath bought a 6 000 square metre property for R4 million and turned it into a 3 Star establishment known as the Greenwood Manor Guest House & Conferencing in Linden Pine Park.

Although occupancy levels remain below those experienced in 2007, the fact that demand has now broken the 2007 barrier reflects the first indicator of a sustainable recovery, he says.  This trend has carried over into January 2012 providing further indication of sustainable recovery.

Perhaps the owner of Diaz on Surrey Boutique Hotel had been watching market pundits when he opened his 4 star establishment in October 2010.

It is a member of the Diaz International Hotels & Resorts Group with two other hotels namely the Diaz Strand Hotel in Mossel Bay in the Western Cape and Silver Oaks Boutique Hotel in Berea, Durban.

Located on 267 Surrey Avenue in Ferndale Randburg, the boutique hotel is within walking distance to M-Net Multichoice, film studio hubs, the Brightwater Commons Shopping & Entertainment Centre and the Gautrain feeder bus route.

The site on which the property is located used to be Lifecare Hospital offices.

Hotel and property owner Gerhard van Niekerk bought the property five years ago after it had been sitting empty without finding a buyer.

According to hotel general manager Sanitia Rheeder, although the property was not specifically bought to cash in on the world cup hype, they did get bookings which they could not fulfil as the hotel only opened in October.

While Van Niekerk did not disclose the purchase price of the property, he is a savvy property investor and has developed residential and commercial properties in Johannesburg.

Rheeder says the hotel mainly caters for corporate and business people during the week and she has not yet seen many locals staying over at the hotel.

As with many hotels, rates are tailor-made to fit the individual but expect to pay from R599 per person per night sharing with a complimentary full breakfast to experience boutique living in the heart of Randburg.

The hotel offers 34 spacious rooms with plans for further expansion to add at least 20 rooms and yes, a penthouse for extra exclusivity.

Rheeder explains that they are busy during the week because of conferences with February to November being the busiest times of the year.

December to January demand tapers off as people head off to the coast for holidays and businesses shut for the holidays too.

However, she says she doesn’t think they have competition as they are aiming at a niche market but mentions possible competition who may be attracting the same guests as the Randburg Inn and the Road Lodge,  a division of the City Lodge Family of Hotels located close to the Randburg Sports Complex.

“We are very positive and believe this would be a good year for us in terms of occupancy and demand levels,” says Rheeder. 

The Greenwood Manor Guest House & Conferencing property features a chapel, bar – a perfect setting for sundowners, small gym area, pool table and a swimming pool.

While not dismissing the fact that the hotel market is not exactly doing great, she says they are lucky to have conferencing facilities which include six facilities catering for between 10 and up to 130 maximum.

The hotel is open to the public wanting to have lunch, dinner or sundowners.

She says the hotel now offers wellness treatments including among others, reflexology, hot stone massage, facial zones and the new ear acupuncture detox.

“For a hotel that has been operational for just over a year, we haven’t done badly.

Meanwhile, the chief executive officer of Pam Golding Hospitality Joop Demes said earlier last month that the outlook for the 5 Star hotel market in South Africa is looking brighter when viewed against the backdrop of global uncertainty.

Demes said December 2011 hotel occupancy throughout South Africa grew by 11.5 percent compared to December 2010 and the consensus among industry leaders is that business and event travel will also fare better during 2012.

Read the article here.

Other hotels in the Randburg area include The Fairway Hotel & Spa 5 Star Boutique Hotel, owned by the Guvon Group of Hotels located on the Randpark Golf Club, Apollo Hotel located on 158 Bram Fischer Drive in Randburg and Mercure Johannesburg, a 3 Star hotel next to the Bright Water Commons Shopping & Entertainment Centre.

Guest Houses and bed & beakfast sector in Randburg

Abdul-Karrim says with reference to the guest house and bed & breakfast sector in Randburg, it must be appreciated that the barrier to entry is considerably lower.

Add to that, the ability to introduce new stock in the sector in the high demand period, effectively picking up the business displaced by the hotel sector due to lack of optimal inventory levels.

“Opportunistic new entrants and existing owners in the guest house and bed & breakfast saw the FIFA World Cup in 2010 as a compelling opportunity and created a new wave of unchecked increase in inventory,” he says.

He explains that there is no Benchmark Analysis of this sector and the current self-prognosis by owners that ‘business is bad’ is more than likely aligned to an oversupply of establishments in a recovering market.

Furthermore, guest houses and bed & breakfasts complimented the hotel industry during the high demand period and the related lower than optimum level of hotel room inventory which could not fully service the demand at the time, he says.

However, he says with the increase of hotel room inventory over the past four years and the stabilising demand levels, they find that hotel room inventory is moving towards being at an optimum level and able to absorb the recovery in demand.

“There is no displaced demand that is available to the guest house and bed & breakfast sector currently and with the recent growth in hotel room inventory, it will take some time before that circumstance emerges again.”

Hotels in the Greater Johannesburg region are of a very good standard and quality, given all the new developments as well the level of refurbishment undertaken over the past few years, creating a preferred option relative to the guest house and bed & breakfast sector, he notes.

Guest houses to check-out

Three years ago, Henry Beath bought a 6 000 square metre property on two stands (dilapidated homes), which had been turned into flats, for R4 million for the property site. 

The Tip Ton Guest House is located on West Avenue in a residential area and measures 2 300 square metres and the property site was bought for R2.5 million then turned it into 15 cosy rooms which speaks of African heritage in its decor and paintings.

Beath, who lives in Pretoria came upon the site while working on a client’s project and saw an opportunity of creating a cosy home away from home accommodation located on 6 Keith Road in Linden, Pine Park.

Greenwood Manor Guest House & Conferencing is a 3 star graded establishment aspiring for 4 stars targeting corporate travellers.

Although located within a residential area, Beath says he had to speak to his neighbours to ascertain that he was not encroaching on their privacy.

So far, all has worked just fine. The guest house hosts a lot of conference events and wedding functions, but they stop all loud music after 11pm and, where possible, they avoid loud events, he says.

If anything, he says having a guest house has made for happier neighbours as regular guest movements in and out of the guest house create a heightened sense of security and neighbourly community.

He concurs with Abdul-Karrim that Randburg as perhaps other locations saw a massive build of leisure properties ahead of the World Cup and many are battling to sell these establishments.

In an interview with Property24.com on the property market in Ferndale Randburg, Tony Ketcher, managing director of Seeff Properties in Randburg noted that estate agents expressed concerns about significant numbers of property listings, which were not selling in Ferndale.

At the time, he said his agency had 70 bed and breakfast establishments available for sale and supply exceeded demand in this instance.

Click here to read the article.

According to Chris Hajeck, sales manager at Seeff Commercial Randburg currently has approximately 14 hospitality properties on its books, ranging in price from R2.5 million to R30 million.

“Our portfolio of hospitality properties is the largest in Gauteng because of our strong commercial division which specialises in this niche market.”

Hajeck says some of the hospitality properties in the Randburg area can be found in Melville, Auckland Park, Robin Hills, Ferndale, Northcliff, Fairland and outside Randburg in Florida, Muldersdrift, Bryanston, Rivonia, Houghton and Magaliesburg.

Ferndale Lodge, a 3 Star bed & breakfast property, is currently on the market with an asking price of R6.5 million.

Sellers are selling for a myriad of reasons that reflect the circumstances of the general population as a whole.

“There are many guest house owners who have paid their dues and tucked in their fair share of guests and are tired of the often times intense hands-on management necessary to make many of these concerns a success,.”

Hajeck says sometimes property owners sell due to retirement, change in family circumstances or other business opportunities.  

Sellers are also willing to be more flexible on price and looking for more creative means to assist in the facilitation of the transfer, including partial owner finance, deed of sale scenarios, partnerships and even rentals.

This is a direct result of a bottleneck of available properties and the time some properties have had to stay on the market, he says.

Beath admits that business is bad and their competitive advantage is conferencing facilities, still, the costs of running an establishment such as this one are high in any case.

As an example, he says he spends in excess of R20 000 a month on water, lights and municipal taxes to run the guest house.

This excludes salary payments to a staff compliment of 15 people, saying it is expensive to operate a guest house when occupancy and demand levels are down.

The guest house offering a traditional English charm with an African flair feel in each of its 25 rooms has conferencing facilities accommodating up to 240 people.

General manager Bennie Burger says they get a lot of business and foreign guests and the guest house is generally busy during the week.

Property prices vary in this establishment from R300 to R600 per night per person sharing on a bed & breakfast basis.

Burger feels they charge market-related prices and regular guests love the value for money when it comes to accommodation.

The guest house features a chapel, bar – a perfect setting for sundowners, small gym area, pool table and a swimming pool.

Commenting on the leisure property market, Beath says it appears guests are now more than ever looking for value, they will still travel albeit cut on days and they are seeing a noticeabe decline in entertainment costs particularly for corporate travellers.

Further afield in Ferndale, is another guest house that opened its doors in April 2010.

The Tip Ton Guest House is located on West Avenue in a residential area and measures 2 300 square metres. 

From a property location point of view, he says The Tip Ton guest house is far removed from the traffic enhancing peace and quiet for its guests.

Its owner, Fortune Ngombe is also a hot shot property investor who says buying property is a long-term investment and so, to respond to Property24.com, he did not buy it to take advantage of the World Cup but to build on his existing property portfolio.

A civil engineer by training, Ngombe was bitten by the property bug quite early in his career.

Without disclosing details of his property investments, Ngombe has invested heavily in residential and commercial property in South Africa.

He has advice for would-be buyers: “Property is a good asset any day and the time to buy is now when the market is down.”

Two years ago, he bought the property site for R2.5 million then turned it into 15 cosy rooms, which speaks of African heritage in its decor and paintings.

The guest house even has what he dubs the ‘Freedom Corridor’ where local South African paintings hang telling of the many stories this country and the continent have endured.

Offering the ultimate in African hospitality according to Ngombe, the guest house mainly targets business travellers and African visitors to South Africa.

He says 30 percent of their guests are from other African countries while 70 percent are local South African guests.

As with other establishments targeting business travellers, the Tip Ton is busy on weekdays and leisure travellers make up the majority of guests over the weekend.

From a property location point of view, he says the guest house is far removed from the traffic enhancing peace and quiet for its guests.

The property also offers ample safe parking at R350 per night, he says this is absolute good value for money.

On property running costs, he says at one point, he ran a bill of up to R57 000 but costs to service the property have come down to between R10 000 and R15 000 per month.

The guest house uses solar panels and gas for cooking to cut down on electricity costs.

Ngombe says occupancy levels are currently between 10 and 30 percent.

While not satisfied with these figures, he is not in a hurry to sell this property.

“I am prepared to sit the market and with time, it would get better yields.” 

Abdul-Karrim says hotels in the main centres remain preferred due to convenience, quality and comprehensive service levels and the need to choose alternative accommodation is not being driven by limited capacity anymore.

He notes that there is an oversupply of leisure properties in the greater Randburg area following the economic crisis.

This has led to a difficult property market as many corporate travellers have cut travelling budgets significantly and the market is likely to normalise in 2013, he says.

As a property investor, he says it is never too early to start buying property although he notes banks are still wary of lending money.

“To better your chances of getting a loan, save for a deposit and with lots of bargains around, buyers are spoilt for choice.”

Some guest houses around the area include The Inn on Pine (4 Star), Idwala Boutique Guest House (5 Star) in Darrenwood, Cresta, Silverstone Guest House (3 Star) on Oak Avenue, Twin Waters and 354 on York Avenue in Ferndale.

Abdul-Karrim says hotels in the main centres remain preferred due to convenience, quality and comprehensive service levels and the need to choose alternative accommodation is not being driven by limited capacity anymore.

He adds that a further telling question remains in the effectiveness of the marketing of the guest house and bed & breakfast sector.

“This had to a great extent become accustomed to guests searching them out in a high demand market and now need to implement serious marketing spend if they want to maintain access to the market.” –Denise Mhlanga

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