By Joan Muller

Senior writer

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IF YOU’VE always wanted a cottage by the sea but you’re not prepared to devote time, money and trouble to owning your own holiday home, ownership of a sectional title hotel suite may be just the thing.

Sectional title hotels such as the Peninsula, President, Bantry Bay Luxury Suite Hotel, Victoria Junction and the Days Inn in Cape Town made their appearance in SA in the mid-Nineties. Though they attracted a great deal of attention at the time, many investors burnt their fingers because developers were overly optimistic about future returns. An investment in a sectional title hotel works as follows: individual investors buy a furnished suite, in a particular hotel for a fixed price in exchange for free use of it for a fixed number of days.

When the unit isn’t being used by the owner, it’s put into a leasing pool and let to ordinary guests. Owners are entitled to a portion of this rental, with the rest going to the hotel to cover marketing, management and maintenance costs.

Most sectional title hotels were originally marketed on the assumption that investors would earn a return of 14% to 16%/year (after mortgage repayments and other costs) from the first year and that the figure would increase to 25% to 30%/year within five years.

These favourable estimates were based partly on the expectation that SA would be successful in its bid for the Olympic Games and that hotel occupancies would therefore rise sharply. As we all know, the bid failed, and hotel occupancy figures consequently never reached the estimated levels.

In addition, interest rates suddenly climbed by six percentage points in 1998/1999. Investors who bought their sectional title hotel suites with borrowed money were therefore squeezed from two sides: a lower than expected income return and higher monthly mortgage repayments.

However, the picture has since changed and today there are again a number of hotels being financed on a sectional title basis. Joop Demes, MD of Golding Hotel Investment Consortiums in the Pam Golding Properties stable, says that the new generation of sectional title hotels is less risky than before. He says that the financing model being used for these projects is more investor-friendly as, unlike previously, buyers are seldom responsible for monthly levies and management and maintenance costs. So after the purchase price has been paid, the investor should have no further expenses. Owners are therefore not saddled with financing the admin and maintenance of their units, he says. A further benefit is that some hotels now guarantee a fixed annual income return from the hotel rental, regardless of the actual income and occupancy enjoyed by the hotel. In these cases investors therefore know in advance exactly how much they’ll earn from their hotel suite and no longer have to rely on estimates that may never materialise.

Demes says that sectional title hotel prices per square metre are also more competitive now than they were in the past as they compare favourably with the prices of residential property in a specific area. He says for example that a furnished four- or five-star hotel suite in a popular tourist destination such as Cape Town or Knysna is now trading for an average of R15 000 to R22 000 while luxury, unfurnished units in Cape Town’s Waterfront area are reaching about R30 000/sq m.

SA’s successful bid for the 2010 Soccer World Cup also means that higher hotel occupancy rates can realistically be expected over the next few years. Capital growth also looks certain. In addition, developers’ estimated returns are more conservative these days. The figure averages between 5% and 8%/year.

Demes says investors who want to play safe and protect themselves against possible interest rate changes should pay at least 50% of the purchase price of a sectional title suite in cash. Since a hotel is regarded as a commercial business, buyers can save by claiming back the VAT (14% on new projects) or transfer costs (about 8% on existing projects) paid for a unit.

Just how popular investments in sectional title hotels have suddenly become is shown by the success recently achieved at the luxury Pezula golf estate at Knysna. The Pezula Hotel is currently under construction and will be managed by Southern Sun. All 60 hotel units that were made available to investors were sold within 10 weeks for between R1,5m and R2,5m. In Pezula’s case, owners get free use of their unit for 30 days/year and the unit is then let for the rest of the year. Owners are entitled to 25% of that income.

Other sectional title hotels currently being marketed include the Island Club Hotel in Cape Town (adjacent to the Canal Walk shopping mall at Century City), Lake Pleasant Luxury Suite Hotel (outside Knysna on the Garden Route) and The Vines (Durbanville, Cape Town). Self-catering units in the new four-star Island Club Hotel, which will be managed by Protea Hotels, cost between R745 000 and R1,59m and vary in size from 39sq m to 93sq m. Investors will earn a guaranteed rental of 5%/year (net) for the first three years, regardless of what the hotel’s actual occupancy is over that period. Owners get four weeks/year free accommodation.

Hotel suites at the five-star Lake Pleasant cost between R872 000 and R1,295m. An income of 5%/year is also guaranteed for three years.

The sectional title hotel market is expected to flourish in the next 12 to 24 months as hotel owners and developers follow this financing route. This should include a number of cheaper, three-star projects, where entry-level prices should start at about R650 000.