Southern Sun Hotels, the hotel component of hotel and gaming group Tsogo Sun, is expanding internationally in a move to increase the number of its hotel rooms by a third over the next five years and offset slower growth in its SA operations.

The group has concluded talks to take over the management of two hotels in the prestigious Burj Dubai development in the United Arab Emirates. These hotels are due to open in 2006.

In addition Southern Sun, in partnership with an unnamed Middle Eastern property group, will build a new hotel in Dubai over the next two years.

The combined number of rooms in these three hotels will be 650. Two further developments in the pipeline could add another 550 rooms, taking the total to 1 200 . Longer-term, says Tsogo Sun CEO Ron Stringfellow, the group could increase the number by up to 5 000 over the next few years. It's a sizeable expansion of its existing portfolio of 13 000 rooms in 80 hotels.

The expansion plans have been accompanied by the restructuring of Tsogo's hotel operations into two operating divisions, which will report to Stringfellow. The SA operations continue to be led by Helder Pereira and the operations in the rest of Africa, the Indian Ocean islands and the Middle East will be headed by Richard Weilers, previously the COO of Southern Sun.

Funding for Southern Sun's Middle East developments will come from its own cash resources and from debt.

During the past few years, as Tsogo's casinos have matured, gaming revenues have generated huge amounts of cash, which is now looking for a home. Though Tsogo Sun isn't listed and therefore its accounts aren't public, it's estimated that gaming probably accounts for about 75% of revenue and income .

Though many analysts have suggested a JSE listing for Tsogo Sun, Stringfellow says that won't be necessary for capital-raising and will occur only when "our shareholders deem it to be necessary. Southern Sun can easily cope with investing R200m/year in growth areas like Dubai over the next five years."

But access to cash and debt isn't enough for hotel development in the Middle East. Companies require local partners or sponsors for regulatory reasons and that's why Southern Sun teamed up with a local partner.

Stringfellow won't reveal the identity of the firm and describes it as "a consortium of well-connected and wealthy Arab businessmen with existing interests in construction, real estate, oil and hotels". It has established a joint venture company with them called Southern Sun Middle East (SSME).

Building hotels in the booming city-state of Dubai isn't cheap. A good five-star hotel in SA will cost more than R1,5m/room to construct and in Dubai about double that. Land prices in Dubai are soaring and so are hotel construction costs, so it makes sense to secure as many deals as possible in this rapidly growing economy.

Though Dubai's government is moderate and pro-Western and allows alcohol consumption by foreigners, it adheres strictly to the Muslim policy of prohibiting gambling.

Southern Sun's management contract will be for the hotels in Burj Dubai complex, which will incorporate residential, office, hotel and retail outlets. It is getting international exposure as it will include the world's tallest building, with a height of 750 m.

The site is owned by Emaar, one of three large property development companies in Dubai. On completion in 2008, the Burj Dubai will contain 30 000 residential units, 90 000 m² of office space, a 365 000 m² shopping centre (about three times the size of Sandton City) and seven hotels.

Emaar's main expertise lies in residential property development; it has limited experience in the hotel industry.

Emaar executive director Dave Richmond says the group took a view to expand beyond purely residential and bring in expertise in the hotel industry. "Our philosophy is to take land and turn it into a lifestyle community - hotels, offices, schools, residential," he says.

Stringfellow is under no illusions about the challenge in Dubai . "We have to prove that we can compete on a world stage in Dubai and key to that is providing great quality at the right price."

At end-2003, the total number of hotel rooms in Dubai was just over 25 000 and growing rapidly. Almost half of those rooms are in the 5-star-and-above category, with many of them on the Dubai beachfront. These tend to be lavish buildings, epitomised by the ultra-luxurious Burj-Al-Arab hotel.

Against this background the 3- or 4-star hotels in Dubai aren't nearly as nice and that's one of the reasons that Southern Sun is pitching its offering in these categories and away from the beachfront districts. In SA Southern Sun has always offered a wide variety of hotel rooms and does not confine itself to the upper market niche .

Stringfellow describes the two hotels in Burj Dubai as "boutique" hotels, offering businessmen "high quality and comfortable accommodation". Rooms will be smaller than in conventional 5-star hotels , which will keep initial capital costs down and allow the group to offer more affordable accommodation.

As opposed to the managed hotel, Southern Sun's planned hotels will probably be pitched at a slightly lower level to appeal to business travellers. It's all part of a two-pronged approach by Southern Sun of managing upper-market hotels and owning more middle market operations, says Stringfellow. "We'll manage the top end, and invest in the lower and middle ends of the market," he explains.

The overseas expansion comes at a time when the SA hotel market has reached saturation. Though the group has opened a number of hotels recently and still has three hotels with a combined 435 rooms in the pipeline, Stringfellow says there are clear signals that the strong rand has had a dampening effect on foreign tourism.

"As long as the rand remains strong, foreign tourists will be lured away to other destinations with weaker currencies. And though the 2010 soccer World Cup may well bring many new tourists to the country, that will be a temporary phenomenon," he says.

Southern Sun's international strategy is to establish nodes in other parts of Africa and the Middle East and expand from there. In this regard, the Dubai expansion is crucial as the African operations, which though successful, " don't hold out much promise for further growth. Where we will expand in Africa we will focus on oil-rich countries like Angola and Nigeria," says Stringfellow. Southern Sun is already looking at other opportunities in the Middle East. Qatar, Cairo and Khartoum in Sudan are mentioned by the group as potential long-term investments. Beyond that, the logical next step would be the Indian sub continent.

Financial Mail