Most of these developers are selling sectional title hotel suites and buy-to-let apartments with a guaranteed income return of between 6% and 10% of the buying price in the first year or two after transfer.
The developer of the new Radisson SAS Hotel in Port Elizabeth has upped the stakes in the guaranteed return game considerably, stretching its pledge period to an unprecedented 15 years. Radisson is part of the Stockholm-listed Rezidor Hotel Group and one of a number of international hotel operators claiming its stake in South Africa's hospitality industry in the run-up to the 2010 Soccer World Cup. Hotel suites in the Radisson - Mandela Bay's first five-star hotel - are being sold on a sectional title basis.
The 173 rooms cost between R2,05m and R3,65m and are sized from 30sq m to 90sq m. The Port Elizabeth-based developer - Aumwe Property Developers - guarantees a minimum return on investment of 8% for the first two years and 7,5% for years three to 15. Owners will be entitled to 28 days/year free usage of their unit. Some 20% of the gross hotel revenue - including revenues generated by the hotel's spa, conference facilities, restaurants and shops - will be paid out to investors.
Surprisingly, owners won't be charged any of the usual costs associated with property ownership, such as levies, rates and taxes or maintenance. The attractive terms of the Radisson offer do raise questions concerning how viable guaranteed return products are, particularly given that some previous developments of this nature never came to fruition.
A case in point is The Lincoln at trendy, mixed-use precinct Melrose Arch in the northern suburbs of Johannesburg, which was canned earlier this year. The luxury development was brought to the market off-plan 18 months ago, offering buyers a 10% guaranteed rental income for the first year after completion. Construction was due to start early this year but the project flopped.
The development is now being "re-engineered" - sans the guaranteed rental clause. The 10% guaranteed return, coupled to rapidly rising building costs, would no doubt have made it near impossible for the developer to earn a decent profit had The Lincoln gone ahead in its original guise. Joop Demes, MD of Golding Hotel Investment Consultants (GHIC), says though guaranteed returns are a growing international trend used to churn stock, he's nervous about the Port Elizabeth model.
Not only is the 15-year guarantee period unheard of, but Demes says there's added risk in that hotel occupancies and room rates in Port Elizabeth aren't yet on a par with those of Cape Town, Durban or Johannesburg. Another commentator doubts whether the developer will earn enough revenue to cover the promised returns, particularly as only 20% of the Radisson's income will be paid out to investors.
"The sums don't add up." An added concern is that buyers are overpaying for units, as developers often build guaranteed returns into asking prices. But Aumwe Property Developers MD Ben Nyaumwe says that suggestion is ridiculous. "Published statistics show that it costs on average between R1,75m and R2,5m to build one five-star hotel room. The Radisson is being built to international standards so it's at the top end of that scale."
Nyaumwe maintains that the minimum guaranteed return of 8% in the first two years is based on projections of a relatively low occupancy level of 55%. He believes those calculations are conservative and likely to exceed 16%/year, given the Eastern Cape's tourism growth potential and limited supply of hotel rooms.
However, Nyaumwe admits that there's a chance that the hotel revenue alone may not be sufficient to meet obligations to investors in the first two years. "But we have sufficient cash reserves in the business to cover any shortfall." Nyaumwe is apparently also in the process of negotiating performance insurance with a financial institution to take risk away from investors. That means that the developer will effectively pay insurance premiums to guarantee payouts if targeted revenues aren't achieved. Meanwhile, latest results from Deloitte's Hotel Benchmark Survey show that the performance of SA hotels continues to improve.
Hotel revenue per available room throughout SA was up 16,7% in the first six months of 2007 (year-on-year), while average occupancies have increased 2,1% to 70,4% over the same time. It's uncertain to what extent, if any, Port Elizabeth's hotels have shared in those performance stakes because it isn't one of the cities tracked by Deloitte's hotel survey.
Publisher: Finweek
Source: Finweek
