Tax breaks could spur economic growth in South Africa

Investors buy into the rise of ‘aparthotels’

Easy living: Latitude, in Sea Point, is one of Cape Town's new aparthotel developments. Picture: Latitude Aparthotel

Easy living: Latitude, in Sea Point, is one of Cape Town's new aparthotel developments. Picture: Latitude Aparthotel

It’s no secret that SA real estate as an asset class has performed relatively poorly over the past two years in terms of capital and income growth. But a few specialist subsectors of the market are still worth a punt, most notably student accommodation, logistics and self-storage. There’s also renewed investor demand for serviced apartments — self-catering units typically linked to a hotel offering and often referred to as "aparthotels".

That is particularly true for Cape Town, where a tentative revival in tourism is supporting the investment case for short-term, serviced accommodation. Latest figures from global hospitality database STR show that average occupancies for all graded hotels in Cape Town rose by 1.5 percentage points last year, to 65% (January to November, year on year).

Demand for luxury accommodation rose more sharply, with five-star hotel occupancies in the Mother City reaching 67.8%, up 3.5 percentage points from a multiyear low of 64.3% in 2018, when tourism slumped due to drought. Five-star room rates simultaneously rose by 2.3% last year, to an average R3,128 a night.

Wayne Troughton, CEO of hospitality group HTI Consulting, says Cape Town hotel occupancies are still below the 71% peak reached in 2017. But last year’s uptick is encouraging, given that the city’s hotel inventory grew by at least 10% over the past 18 months — about 1,200-1,400 hotel rooms. In addition, about 700 rooms are in the development pipeline.

Though Airbnb rooms add more capacity to Cape Town’s accommodation offering, Troughton is confident that new hotel supply will be mopped up relatively quickly as the recovery gains momentum.

The addition of new international flight routes to Cape Town, such as United Airlines’ nonstop flight from New York, will no doubt further support the influx of visitors.

According to a December report by Wesgro, the official tourism, trade and investment promotion agency for Cape Town and the Western Cape, 21 flight route expansions and 15 new routes have been introduced since 2015. This has doubled the seat capacity of the city’s flight network.

The expected increase in tourist arrivals has already prompted developers to bring more short-term accommodation to the city— and aparthotels are an increasingly popular option.

New aparthotel developments include Romney Park Luxury Apartments in Green Point, Latitude Aparthotel in Sea Point, Radisson Blu Hotel & Residence on the foreshore, The Onyx near Cape Town International Convention Centre, and The Capital Mirage in De Waterkant.

[Investors can] offset the full capital amount invested against their taxable income

Francois van Zyl

Francois van Zyl, a partner at 12Cape, which owns the newly opened Latitude, says aparthotels constitute one of the fastest-growing tourist sectors in Europe and the US. He expects the trend to be mirrored in Cape Town, given the convenience offered to holidaymakers and business travellers alike.

"Aparthotels offer guests the flexibility of a self-catering apartment with the comfort of hotel-like amenities," Van Zyl says.

It is also an attractive asset class for investors. Besides income and capital growth potential, aparthotels offer tax benefits to buyers.

Van Zyl explains that the section 12J tax incentive in the Income Tax Act aims to promote direct investment in small and medium-sized businesses in sectors that drive job creation and economic growth.

Tourism is a particularly important growth sector for the government. As a result, investors who buy apartments from approved 12J funds that operate as hotels or guest houses qualify for a tax rebate.

Investors who buy into approved developments may "offset the full capital amount invested against their taxable income in the year in which they make the investment, thereby reducing their tax liability significantly", says Van Zyl.

Following a multimillion-rand redevelopment of former five-star hotel Romney Park in 2018, more than half of the 26 fully furnished apartments have been sold and leased back to on-site hospitality management company The Stay Collection. It operates the units as self-contained hotel apartments.

Prices for one-, two-and three-bedroom self-catering apartments range from about R3m to R14.5m. All have large balconies, while some have a private splash pool, Jacuzzi and rooftop garden.

The Stay Collection director Heino Reuling says besides the 12J tax incentive, buyers are earning income returns that typically exceed those of more traditional real estate sectors.

For instance, owners of one-bedroom apartments at the Romney have achieved average occupancy of 77.1% over the past 12 months, and average monthly revenue of R34,026. Two-bedroom apartments have an occupancy rate of 75.9% and monthly revenue of R45,170. That equates to an attractive average rental/income yield of between 9% and 12% a year.

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