/* This button was generated using CSSButtonGenerator.com */
Home / Articles / Business & Finance / Are South Africa’s Room Rates Sustainable?

Are South Africa’s Room Rates Sustainable?

Room rates for South African hotels and lodges increased dramatically between 2016 to 2017, specifically in the 4-star and 5-star markets.

Despite the rand having strengthened over the past 12 months, some properties are posting even higher rate increases for 2018, which creates massive problems for booking agents. Are these rate increases sustainable? By Des Langkilde.

Looking at South African hotel room rate increases for 2018, some hotels seem to think that current high occupancy levels are going to last forever. However, factors that contribute to hotel room rate increases can be complicated, so to simplify the debate and arrive at a logical conclusion, let’s take a look at the question from different perspectives.

Room Rates from an Economics / Currency Perspective

The current high occupancies are really attributable to bookings that were made 12 months ago when the rand was a lot weaker. The recent strength of the rand is a factor that seems to have been completely ignored by properties that have imposed some incredible rate increases.

From a booking agent’s perspective, this creates a massive problem as they not only have to contend with room rate increases but with foreign currency exchange rate fluctuations as well.

Based on average room rate increases from 2016 to 2017, a typical R5,000 room in 2016 has increased to R5,900 in 2017.

But how do these room rate increases and currency fluctuations translate in terms of foreign visitors? For the same room, UK, USA and European visitors would have paid:

• UK visitor: approximately £227 in 2016 and £347 in 2017,

• USA visitor: approximately $312 in 2016 and $437 in 2017,

• European visitor: approximately €303 in 2016 and €437 in 2017.

Room Rates from a Hotel Statistics Perspective

According to STR, formerly known as Smith Travel Research – an American company that tracks supply and demand data for the global hotel industry – hotel performance for Q1 2017 saw occupancy levels rise 5% to 56%, ADR increase 9.8% to $111.15 and RevPAR increased 15.3% to $62.19 across the African continent. In stark contrast, the Middle East reported year-on-year performance declines in the first quarter of 2017. Occupancy fell 1.4% to 70.5%, ADR dropped 6.8% to $173.06 and RevPAR decreased 8.2% to $122.07.

In South Africa, average room occupancy (ARO) levels increased by 8% for all hotel star grades over the past five years (2012-2016), while room occupancy has remained reasonably consistent at an average of 62.6%. Average room rates (ARR) over the same period increased by close to 25%, while revenue per available room (RevPar) increased by nearly 31%. The biggest hotel room rate increases came from the 5-Star sector at 27.3% with average revenue increasing from R917 to R1432 per available room – an increase of 36%.

Looking to the future of hotel rates, Martin van Vuuren, Strategic Development & Planning Director at Grant Thornton says “Growth in average room rates in South Africa over the past five years has been driven by increased demand (particularly from the international market) and a limited increase in the supply of hotel rooms.  I expect that this trend will slow in the next five years with growth in the international market slowing to a global average of around 5% with the opening of new hotels currently under construction absorbing some of this growth.  Changes in the exchange rate may result in short-term fluctuations but the long term trend should still hold.”

Room Rates from an Agents Perspective

Travel Agents, DMCs and Tour Operators deal with a wide variety of accommodation types and are in tune with rate increases and the impact that these have on hotel bookings. Compounding the rates issue for agents is that many hotels are imposing unrealistic cancellation and payment/deposit policies – but that’s another story.

Illana Clayton, CEO of TravelSmartCrew* with an annual spend of  R1.6 billion in South and Southern Africa in 2016, says: “There is no single factor that impacts on inbound demand. We have seen an exceptionally strong 18 months, attributable to a number of positive contributing factors. Even with a weak exchange rate, South African hotel prices generally are no longer cheap, and many of the tariffs we are seeing now are definitely unsustainable. In a strong demand environment, the temptation to apply large increases is a risky consideration if a long term trade-partnered strategy is desired.

“First support from DMC’s and Tour Operators is to the more realistically priced product, and only when those offerings are full, are the higher priced products sold. When demand drops or available stock of rooms increases (i.e. Cape Town in 2018), those who have had a more realistic and long-term view on sustainable rate increases will reap the benefit. We are still seeing some ZAR accommodation units applying 20-50% increases for 2018, while many USD based product in Southern Africa are either decreasing their rates or holding them for 2018. We are in for an interesting 2018.”

Room Rates from a Property Owner’s Perspective

And last, but certainly not least, the perspective of an accommodation property owner is important to consider seeing as the buck stops here and what better place to ask for an opinion than a safari lodge.

Vernon Wait, Marketing Director at Lalibela Private Game Reserve says: “Whilst Lalibela has enjoyed an absolutely bumper 2016 and the first quarter of 2017, we have looked at the macroeconomic environment when deciding on our rates for 2018. The recent strength of the rand weighed very heavily on our decision and we have taken the view to hold rates for 2018 steady. The new owners feel very strongly that this is a long-term project that requires long-term relationships with suppliers.

“Even with us holding rates steady 2018, we are mindful that in USD, Euro and UK pound terms it will cost more to send clients to Lalibela in 2018. A rate increase for 2018 was simply not an option,” concludes Wait.
(Read more on ‘The Role of Tour Operators in Safari Bookings).

Conclusion

According to leading industry experts then, it would seem that South African hotels should take the lead shown by Lalibela and by USD based hotels in neighbouring countries and adopt a cautious approach to room rate increases, looking for long-term sustainability in terms of room occupancy levels and RevPar, specifically over the next five years.

Anecdotal evidence certainly shows that some (not all) properties have posted massive increases for 2018 – some as high as 45% but with 20% increases not being at all uncommon. With no-one knowing what’s going to happen to the rand, there is a serious risk that South Africa is in the process of out-pricing itself relative to other markets.

*TravelSmartCrew shareholders include African Pride Tours, Africapass, Africa Travel Group, Cedarberg African Travel, Egoli African Destinations, Giltedge Travel, Highline Tours & Travel, Ilanga Travel, Inspirations ITT, Pembury Tours, Personal Africa, Safari365, Southern Destinations, SW Africa, Tour d’Afrique and XO Africa.