Blog (30)

Economic shift to information age necessitates a review of corporate real estate strategy, positioning and perhaps a debate on the buy/let decision by companies.

Property as an investment asset provides owners with numerous financing options such as mortgage bond, sale and leaseback transactions and getting an equity investor. It does however require huge down payments and cash outflows in the process, which represents an opportunity cost of capital. The cash could be used for furtherance of the business objective.

There is a need for real estate to remain flexible to complement business strategies. Owning may potentially lock an owner long term even where mismatches between property and business objectives arise. Letting does provide companies with some degree of flexibility on lease durations and avoids complexities of financing a property.

Leases however are engineered for profit by the lessor and can be expensive in the long run.

The primary mission of directors is to utilise scarce capital to increase shareholder value and perhaps no one solution exists to corporate real estate with each having pros and cons? Perhaps the type of entity and stage in the life cycle of the business determine what strategy would suit the business?

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According to Catalyst Fund Managers Report, The SA Listed Property Index (J253) recorded a total return of -3.27% in September 2012. The Property Loan Stock Index (J256) and Property Unit Trust Index (J255) recorded returns of -3.78% and -1.41% respectively over the same period. Capital Markets firmed during the month with the yield to maturity (YTM) on the Long Term Government Bond Index ending the month at 6.86% (6.97% - 31st August 2012). The historic 12 month rolled yield of the SA listed property sector de-rated relative to the 10 year government bond YTM and ended the month weaker at 6.49% (6.20% - 31st August 2012).

For the last 12 months SA Listed Property, as an asset class, has recorded the highest total return (37.71%), followed by SA Equities (24.43%), SA Bonds (16.99%) and Cash (5.61%).

 

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According to Savills UK, Hotel market performance figures showed that the 2012 Olympic Games delivered a gold medal winning performance for the London full-service hotel market as Gross Operating Profit per Available Room (GOPPAR) increased by a staggering 90%, underpinned by Revenue per Available Room (RevPAR) growth of 41%.

After a turbulent June and July which saw market wide RevPAR decline, the phenomenal performance for August, compared to the same month last year, was a timely boost for the London hotel market which, until then, experienced relatively weak revenue growth and no gross operating profit growth over the seven month period to July.Year to date performance (to August) has seen GOPPAR growth of 7% when compared to the same period last year.

Despite some of the negative press and cynicism in the build up to the Olympics regarding reduced levels of demand and over priced hotel rooms over the Olympic period, London hoteliers achieved unprecedented profit growth.

More in-depth analysis shows that the five-star/luxury hotel market and West End hotels were the real winners. Five-star and luxury hotels achieved an incredible 171% increase in GOPPAR in August 2012 over 2011 on the back of class leading growth in RevPAR and Total Revenue per Available Room (TRevPAR) of 64% and 65% respectively (see Graph 1).

Outer London and three-star hotels achieved the lowest GOPPAR growth of all market categories although the level of growth was still impressive at 30%.

The UK's movement back into recession in Q2 12 and the worsening of the Eurozone debt crisis has meant that operating conditions over the first eight months of this year have, on the whole, been challenging.

This, combined with significant increases in supply in the budget and full-service hotel market, has resulted in a significant reduction in growth in TRevPAR and GOPPAR in all hotel market segments. Apart from the respite offered by the Olympics, revenue and profit levels have been relatively fl at since September 2011.

The South African hotel market also needs a boost what with questions raised as to pricing, occupancy and oversupply in the sector. Not withstanding an encouraging growth forecast of 14% plus RevPAR in 2012. 

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