Cape Town sees spike in upmarket hotel demand

CAPE TOWN The upmarket hotel segment in South Africa’s legislative capital experienced what one analyst is calling “a phenomenal increase” in occupancy levels in November.

Joop Demes, CEO of Pam Golding Hospitality, a Cape Town-based investor consulting firm, says hoteliers in the city—particularly those in the 4- and 5-star segments—are building demand despite increased inventory.

“They are, in fact, hard at work closing the gap between supply and demand. The sales director of a large hotel group recently indicated that business had changed drastically and they, as he put it, needed to beef up their resources to proactively find and fetch the business, as opposed to waiting for guests to make reservations,” Demes says.

Over the last 10 years, Cape Town’s 5-star segment has increased its supply of guestrooms from about 2,000 to about 3,400, an increase of 69%, while 4-star inventory increased about 30% to more than 4,700 guestrooms.

“Both the Cape Grace and One&Only hotels increased occupancies by over 45% compared to November 2009,” Demes says. “Furthermore, the Cape Grace’s November 2010 occupancy was the highest for any month since the year 2002, a notable achievement in an economy which is still in an early phase of recovery. Both these hotels report strong traction for the season ahead.

“During the past month, both 15 on Orange and Crystal Towers traded at occupancy levels which are very respectable for hotels within their first year of trading in a competitive urban location. The Cape Royale Hotel opened its doors in 2008 and traded at close to 80% occupancy in November 2010, barely two years after opening. While these achievements beg the question as to whether these new hotels are drawing demand from other hotels in this sector of the market, the answer is no. At the Radisson Blu Hotel, occupancy during this same period was in the upper 80% bracket—considerably ahead of November last year, while the Westin Grand had occupancy close to 80% and very similar to the good occupancy recorded during November 2009. All these hotels showed revenue growth this year compared to last year.

“Given the above statistics, I estimate that the demand for 5-star rooms in Cape Town in the month of November 2010 grew by at least 17,000 bed nights compared to November 2009. It also clearly illustrates the point that the increased supply of quality accommodation has led the demand and continues to increase demand as long as the destination is good and appealing,” he says.

On the other hand, in the 3-star hotel market, the number of rooms increased only marginally, from 2,564 to 2,696 rooms, or 5%, while there was no increase in rooms whatsoever in the 2-star and 1-star market, Demes says. “This raises the view that an opportunity exists for the development of additional rooms to cater for the 1- to 3-star market. The budget and economy hotel market in Cape Town has seen no new supply in the last 10 years, and as a result the demand has simply been stagnating and in some instances declining.

“In our opinion, it is the supply that will grow demand in a destination, with the proviso that the destination is quality, and remains so. To illustrate this, consider the fact that Sol Kerzner built Sun City in the middle of nowhere—it was not the area that showed demand; it was quality supply which created the demand,” Demes says.

Demes says the weakening of the dollar, the pound and now the euro against the rand is concerning for those hoteliers in Cape Town who are much more dependent on international business compared to, for instance, Gauteng and Durban, and this will continue to place pressure on hotel rates.

“It’s true that a gap between supply and demand in any hotel market in the world results in specials; Cape Town is no exception, and the good news this season for South Africans and neighboring countries is that there are some really exciting offers here, from luxury 5-star down to economy hotels,” Demes says. “However, one is advised to make good use of this opportunity as it may well be a different story towards the end of 2011.

“The season ahead is by no means showing 100% occupancy, but is, however, looking substantially better overall when compared to the same period last year—despite the increased inventory,” Demes says. “In my opinion, the trend of increasing demand will therefore continue, and directly as a result of the fantastic soccer World Cup 2010 which was hosted by South Africa. Demand is building in Cape Town, and particularly at the 5-star level, where we have seen inventory increase by 51% since 2007.”