May 2013: South Africa’s days of building hotels without equity are over, Protea Hospitality Group CEO Arthur Gillis has told the Hospitality Investment Conference Africa (HICA) in Durban.

He has warned delegates attending the conference that in Protea Hotels’ experience a minimum of 50% equity will be needed from investors to finance hotels for the foreseeable future – and that is only on the assumption that all other development success factors are already in place.

“The hype about the recovery of the hospitality industry is right,” says Gillis. “A study of the STR figures for the past few months clearly shows that the green shoots of a meaningful recovery are starting to grow, with ADR (average daily rate) slowly beginning to reflect a more realistic value.

“Since mid-2011 we’ve been seeing increasing occupancy figures in several regions, but those figures were essentially meaningless without a significant recovery of ADR as well.

“As an industry we shoulder much of the blame for the damage hospitality has suffered in recent years, because panic discounting put revenue growth back at least five years and probably closer to 10.”

Gillis says this has created an environment in South Africa of artificially low rates at a time when input costs have never been higher.

“We’ve shot ourselves in the foot; plain and simple. Now we have to grow an industry in which development costs are prohibitive and the old rules no longer apply.

“When it comes to gearing, developers cannot rely on expensive mezzanine financing. From here on out its senior debt or nothing – plus 50% equity already down on the table – otherwise we have a development model doomed to failure.”

Gillis cites sobering numbers for investors looking at hospitality development today, assuming all the development success factors are already in place such as the optimum location, planning permission, a liquor licence, etc, and the hotel is built within budget.

“As it stands in 2013, you would need an occupancy rate 10% higher than the aggregate currently being achieved nationwide and a 35% higher ADR to give your investors a reasonable return.”

Gillis assert that now, more than ever, building hotels must be regarded in the marathon rather than sprint category. “It needs to be regarded as a 25-year investment and those of us putting up the equity must understand the new rules of engagement,” he says.

“It makes sense in this climate that institutional investors will favour local brands. We have been around for as long as it takes to realise a decent return on a new hotel, and we have a thorough understanding of the African business model we’ll be working within for the next 25 years.

“I don’t envy the international groups that are currently trying to find a foothold in Africa without bringing investment money to the table. Like the hare they’ve sped into a market in which we have to change all the rules of investor engagement and in this case the home-grown hospitality brands’ tortoise-like marathon abilities will see institutional investors knocking on their doors ahead of any others.”