If effective management of the COVID-19 pandemic is not achieved, more distressed hotels are likely to come on the market soon and, with so few buyers, pricing will be driven down even further.

This is the belief of Kamil Abdul-Karrim, MD Pam Golding Tourism & Hospitality Consulting, who spoke with Tourism Update about the formal hotel sector from his perspective.

“With the current state of the hospitality sector, traditional buyers and investors are adopting a wait-and-see approach and there are not many buyers jumping in to take up opportunities. If the pandemic management improves, the market will gradually improve to value-based pricing levels and bargains will only be placed on extremely distressed hotels.”

While it was difficult to quantify the number of establishments on the market due to confidential mandates, he said there were currently few or no ‘Fire-Sale’ opportunities out there, as sellers were still holding out for reasonable offers instead of heavily discounted prices.

“Those owners who are in dire straits are indeed going to extremes to dispose of their assets, but these hotels are not currently moving, as the risk related to these assets is high. Often it is the case that these hotels were already performing poorly before the pandemic.”

He said the big unknown in the current environment was when the sector could be expected to revert to a level of normality, which was keeping it challenging to reach common ground in terms of value-based offers between buyers and sellers.

Fedhasa National Chair, Rosemary Anderson, agreed that uncertainty was a problem in addition to current restrictions that made it impossible for any business in hospitality to be financially viable. “Everyone is bleeding. Already there has been so much blood loss and many will no longer be able to hold on.”

She said it was still a risk for those absorbing additional fixed assets/hotels since no one knew how long it was going to take for international tourism to return to SA. “While there is significant uncertainty, source markets like the UK are bouncing back with restrictions being lifted, which gives us hope. Unfortunately, international business in SA depends almost entirely on the government’s ability to roll out the vaccine programme urgently and to align ourselves with our key source markets. We have to catch up to them.”

Cash is king

Peter Bruil, MD of Pam Golding Lodges and Guesthouses (PGLAG), a division within the Pam Golding Properties group that exclusively facilitates broking services to the boutique hotel, game lodge and guesthouse sector, also anticipates that more hospitality establishments will come up for sale in the next few months.

“Many establishments have had (some) reserves and were able to cut costs to a minimum and delay capital outlays; and, after all of that, they still held some further reserves for that rainy day. However, it has become ever so clear that the timing of a reasonable recovery is still uncertain. It could be another two years or more before we experience foreign arrival numbers similar to what we were used to, so cases of real distress are becoming more apparent.”

After SA entered its first lockdown status, PGLAG noticed a growing number of owners of hospitality establishments approaching the company to dispose of their businesses. This was evident around April/May in 2020, as many owners were disappointed with the high season behind them and concerned about the slow pace of vaccinations, the absence of any meaningful forward bookings of local and foreign FITs and a new belief that conferencing could also happen online, Bruil said. Furthermore, business interruption insurance not paying out, additional lockdowns and restrictions, as well as the current looting and political unrest had not assisted in restoring confidence in the hospitality market and SA in general, he said.

If we had learnt anything in the past year, added Anderson, it was that cash was king. “Hotels that were cash strong have been able to weather this unprecedented environment. Conversely, those that weren’t have felt the brunt of this pandemic year with their survival being severely compromised.”

Cash-strong groups had been able to take advantage of the opportunities presented to them, some of which had arisen as a result of disposing of assets to secure their very survival, she said.

In Bruil’s experience, potential buyers have included local and overseas investors with cash. “They do, however, all share one common denominator in that the establishments must come at a seriously reduced price. We are doing transactions at an average discount of 25% to 35% of the values we were able to achieve before COVID-19 became a part of our lives. Serious sellers are more aware and appreciative of this new reality, however unwelcome that may be for them.”

Harder-hit regions

Prior to the current political unrest, in Abdul-Karrim’s experience, the difficult circumstances have been more accentuated in secondary and remote leisure locations.

“This is a somewhat anecdotal view as opposed to hard evidence-based, but KwaZulu Natal’s Drakensberg-Midlands region continues to perform above prevailing levels of other regions in South Africa thanks to domestic tourism. Regions like the Western Cape have been harder hit because of the historic focus on international tourism.”

Bruil agreed that while properties across the board had been affected by the pandemic, those hotels, lodges and guesthouses predominantly servicing the foreign leisure travellers had been more severely impacted than those servicing the local market.

“Areas that have seen fewer sales are those where the foreign individual (and group) traveller has traditionally visited, i.e. Cape Town, the Garden Route, R62 and game parks. Popular areas for local travellers such as the Cape Winelands (Franschhoek mainly) and coastal destinations (e.g. Hermanus) have been able to ‘tick over’, albeit at lesser levels compared with the levels achieved before the pandemic hit the world.”

Bruil said, traditionally – even in the good times – it would easily take six months to a year, or even longer, to sell a small hotel or guesthouse. “This has not changed. The market is niche and funding has always been and remains a challenge. With this having been said, in the current market conditions, investors are mostly only showing interest if it looks like they may be able to acquire a property at a significant discount compared to pre-pandemic values.”