This growth has continued into 2004; however recent occupancy declines indicate that some of the traditional international source markets might be deterred by the higher price of accommodation.
To set the performance of South Africa's hotel industry into context, two key issues need to be addressed. Firstly, the relative performance of average room rates compared to other international destinations. Secondly, the volatility of the South African Rand against the currencies of its main source markets the UK, Europe and the USA.
After demand from the domestic market and from other African countries, the UK represents South Africa's largest overseas inbound source market, with 456,000 visitors travelling to the country in 2003. The number of UK arrivals is around 40% greater than the number of visitors from Germany (the second largest overseas source market) and over 60% larger than the number of visitors from the USA. Given the exchange rate fluctuations between the Rand and these countries' currencies some travellers have been left with the unreasonable impression that South African hotels, especially in the 5 star market, are becoming too expensive. In this article we put South Africa's hotel performance into perspective.
Does South Africa continue to offer value for money?
During 2001 and 2002, average room rates in South African hotels fell significantly in US dollar terms as the Rand weakened. During this time word spread quickly of the country's considerable value for money. While many international destinations suffered a decline in visitor arrivals post the events of 9/11 and the global economic slow down, South Africa was one of the few markets to record positive growth in tourist numbers.
In 2003 international visitor arrivals (excluding other African countries) grew by 4.2%. Much of this growth was driven by a 5.3% increase in visitor arrivals from Europe. Growing demand for accommodation helped hoteliers increase average room rates, while a strengthening Rand improved prices in US dollars. Recovering some of the rate loss incurred during 2001 and 2002.
Despite ongoing average room rate growth in almost all South African hotel markets, accommodation remains competitively priced compared to other international destinations. The following graph compares the distance travelled from South Africa's largest source market, the UK, against the average room rate achieved in key competitive long and short haul travel destinations.
Distance from UK vs. international destination's average room rates
Source: HotelBenchmark Survey by Deloitte
Clearly, South Africa's most popular visited cities Cape Town, Durban and Johannesburg, are notably less expensive than the long haul destinations of Sydney, Hong Kong and Tokyo. Moreover, the average room rate achieved in South African hotels is less than half that commanded in the key European destinations of Paris and Rome. In terms of long haul travel, South Africa offers a competitive alternative to the South American destinations of Sao Paulo and Buenos Aires.
Despite South Africa's current price competitive position, occupancy levels are falling. Moving forward, concern exists that declining occupancies will threaten to place unwarranted pressure on average room rates. During the first six months of 2004, South African Tourism reported the number of international visitors from Europe has fallen by 2.5%. Given the relative significance of the European market to South Africa, this decline has more than likely, contributed to falls in accommodation demand.
What caused an increase in South Africa's hotel room rates?
The South African Rand has strengthened considerably against the currencies of its major source markets over the past two years. The annualised exchange rates of the Rand relative to the UKú, Euro and US$ is displayed in the following table.
Currency exchange - US$ vs. Rand, Euro vs. Rand and UKú vs. Rand
2000 to year-to-October 2004
Source: Financial Times
As the table clearly illustrates, each of the major inbound source markets to South Africa are currently getting less Rand for their money. This has begun to have an adverse effect on hotel performance as accommodation is commonly perceived to be more expensive. For example, in 2001 the average room rate achieved by hotels in South Africa was US$44 per room. Today the same accommodation costs US$77, an increase of over 75%. In Rand terms however the average room rate has increased by less than 30%. While accommodation appears more expensive to South Africa's key inbound source markets, our earlier global rate comparison demonstrates the country offers value for money.
The following graph compares currency movements of the US dollar to the Rand since January 2000 against average room rates (in US$). It can be seen that as the US dollar appreciated against the Rand during 2001 and 2002 average room rates fell whilst the converse occurred in 2003 and 2004. Consequently occupancy started to fall as average room rates increased and have remained in decline for virtually every month since February 2003.
South Africa's average room rate vs. exchange rate
Source: HotelBenchmark Survey by Deloitte and Financial Times
Year-to-date occupancy in all South African hotels has decreased by 1.4%, however, encouragingly average room rates have improved by 5.1% to reach R499. These results forced revenue per available room (revPAR) to move ahead by 3.5% in local currency and 20.4% in US dollars.
South Africa's 5 star hotels feel the squeeze
Not all South African hotel categories are performing at the same level. The latest performance results reveal the country's 5 star hotel market recorded a 4.1% fall in occupancy to 63.9% during the first ten months of 2004. This decline, nearly three times the country average, has placed pressure on average room rates which remain static at R893. It appears that having spent almost 70% less on 5 star accommodation little over two years ago, many source markets are reluctant to pay the current room rates for the same product offering.
It is in Cape Town that 5 star hotel performance has really felt the pinch. The addition of new supply in the form of the ArabellaSheraton has resulted in a marked increase in the city's room night availability. Whilst new accommodation sources in the form of upgraded bed and breakfasts are also luring away traditional repeat visitors to the Cape. Additionally a number of European travellers have decided to purchase their own holiday homes in areas such as Camps Bay, thereby reducing their demand for hotel accommodation.
Consequently 5 star hotels in Cape Town averaged just 56.4% occupancy year-to-October 2004. The lowest of all markets tracked by the South African edition of the HotelBenchmark Survey by Deloitte, this result marked a fall of 13% against the same period last year. The increasingly competitive Cape Town market has seen local hoteliers turn to discounting rates in an attempt to increase market share. Accordingly, in local currency terms, average room rates in Cape Town's 5 star market plummeted 15.2% to R1,161, the first negative result in four years. In US dollar terms, average room rates have stagnated at approximately US$177 potentially signifying a premature end to the industry's recovery effort.
In local currency terms, the 5 star hotel market has also suffered in Durban City, albeit not to the same extent recorded in Cape Town. Durban hotel occupancy has fallen by 5% while rate declined marginally to rest at R631 year-to-October 2004. Johannesburg's 5 star hotel market recorded a slight improvement in performance, with average room rates increasing by 5.6% to R831. The following graph illustrates these results.
South Africa's 5 star market hotel revPAR performance
Source: HotelBenchmark Survey by Deloitte
The outlook rests on resilience
Moving forward, ongoing discounting within South Africa's 5 star hotel market threatens to generate a domino effect crushing the strong performing 3 and 4 star sectors. Should demand for hotel accommodation in South Africa continue to soften in the short term, concern exists that hoteliers will be distracted, impulsively discounting to try and secure market share.
South African hoteliers are in a strong position to fight to secure rate integrity and firmly fix their position within the international market. Particularly due to the optimistic outlook for the country's economic growth, its re-established currency stability and South Africa's potential to increase visitor arrivals, particularly from new source markets such as Asia. Despite this, ongoing fluctuations in hotel prices might confuse prospective travellers leading them to unreasonably question the value of the country's hotel product. Accordingly, South Africa faces the risk of losing global market share should holiday makers turn to alternative long haul locations, such as South America, as a preferred holiday destination.
Notes: All analysis in Rand and US dollars
For further information on the South African edition of the HotelBenchmark Survey please contact the HotelBenchmark team on +44 20 7007 3974 or contact Rob O'Hanlon on +27 21 670 1519.
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