RESEARCH by a Witwatersrand University master of science student has found that investors prefer commercial and industrial property to hotel developments, because of the greater risks involved in investing in hotels.
Tshepo Makhudu, whose recent study was entitled Tourism Planning and Development in SA: Implications for New Hotel Development, says respondents to his survey included company executives involved in the formal hotel industry, capital funders and investors in commercial, industrial and hotel property.
Generally, respondents felt the operational risks associated with hotel property investments were higher than those in commercial and industrial property. Hotel properties were also regarded as too specialised, and therefore difficult to convert to alternative uses if things went wrong.
However, although analysts tend to agree with Makhudu's findings, they say it is very difficult to compare hotel properties to other development projects. "It's like comparing apples with oranges," says one.
Makhudu questioned a total of 47 respondents in the survey. He says 63% of them said they invested in commercial and industrial property, while 36% invested in both hotel and commercial and industrial property. Those who had hotels in their property portfolios said these investments did not constitute a large portion of their overall portfolios.
Makhudu says there is a significant indication of an oversupply of hotel beds in SA.
Some respondents said they would invest in a hotel development if the returns were guaranteed by an investment contract. The favoured form of contract is a leasehold contract with a hotel operator, followed by a securitisation agreement.
Makhudu says leasehold contracts are secure in that they guarantee a steady flow of cash over the duration of the lease, regardless of the hazards of the operational environment.
Some respondents indicated they would invest in hotel property if tourism was growing at a rapid rate, but almost as many said they would not invest in hotel property even in a growing tourism market. They regarded the hospitality industry as too volatile for their risk levels.
It was also felt that returns from investments in hotel property were not comparable to those derived from commercial and industrial property. Makhudu says this seemed to be confirmed by the ratio of commercial and industrial property holdings to those in hotel property.
SCMB property analyst Len van Niekerk says there is a difference between commercial and industrial property and hotel property.
"You need to look at it from the hotel's point of view. The building is its core operation. In other cases, the building is not the core part of the business it's just from where the companies operate.
"If a hotel is going up in Cape Town or Johannesburg or any major metropolitan area, it will be the hotel itself that builds the building."
Although Van Niekerk agrees that the average investor would look more to investing in the commercial and industrial property market, he feels this is because investing in a hotel property is not an option. Hotels are never placed in the market because hoteliers build them for the express purpose of running a hotel operation.
However, if an investor was able to enter into a lease agreement, it could be a great investment "because you've got a tenant who will be there for the next 20 to 30 years.
"The question is, how do you structure rentals over that period? It can be very difficult, and there could be risk."
Property economist Francois Viruly, of Viruly Consulting, says hotels are very specialised property investments. "When you invest in a hotel, you are not investing in bricks and mortar. You can't differentiate the property from the business."
Viruly says a hotel building without a hotel business operation is not worth much, because it is difficult to find an alternative use for buildings.
"If I were investing in a property to diversity my interests purely from a property perspective I would look at a mixed-use development for example, a building with a mix of offices and retail.
"Hotel investments from a property perspective have a high risk attached to them."
Jun 25 2003 08:22:24:000AM Nick Wilson Business Day 1st Edition
Publisher: Business Day
Source: Business Day
