Vijay Jainundh, Head of Paragon Debt Advisory
Entrepreneurs, investors, and property owners should act on current opportunities in hospitality. The market is improving and renewed activity by operators in the sector and the willingness of funders to lend, means the timing is right to acquire an asset, build, or finance a development intended for hospitality, because prices are still relatively low. By no means are hotel assets out of the woods as the fight for occupancy continues, competition thrives, and tourists and businesspeople slowly start to trickle in. But there are certainly opportunities, and it’s best not to wait for all the signs of recovery before taking the plunge to invest.
Next year will see higher demand for these assets, driving up their values and prices. The market is not necessarily overflowing with tourists and businesspeople just yet, but the return-to-office model is catching flame and soon will be wildfire, and largely life will return to normal. This will mean more in-person meetings and travelling to see clients. The Global Business Travel Association predicts that the global business travel industry will be worth US$1.7 trillion by the end of 2022.
What are funders looking for in the hospitality sector?
Funders are considering financing of hospitality assets a lot more openly as activity increases, whereas for quite some time, they’ve had a ‘wait and see’ approach. The December holiday period may be the litmus test on just how much better things are since the early days of the pandemic but in the interim, if you can market something new and a property that combines work, entertainment, and leisure, you are likely to gain funding interest.
Funders will look at location and the usual principles such as who the hospitality operator is and what the property would offer but what is most appealing right now, is the opportunity to invest in something fresh, more so than refinancing assets. There is still appetite for leasing and refinancing hotels, but the destination has become increasingly important to the funding outcome.
One example is a property called the Plett Quarter (developed by DCCD Property Developers & Edge Properties), which Paragon Debt Advisory recently secured funding for, of approximately R160 million. This mixed-use development is perfectly positioned for the semigration trend, where many city executives looked to live a quieter life out of the main cities when the pandemic hit. Plettenberg Bay has been one of the towns that has significantly benefited from this trend. The area hasn’t been fully developed for high densification, but it does have a corporate market to cater to.
Plett Quarter will feature mixed-use retail including a restaurant and coffee bar, luxury apartments priced between R4- and R10 million, and a boutique hotel among other world-class features and a lagoon view. There isn’t anything comparable in the local market and the units are selling fast, even with a hefty price tag in today’s economy.
Location really matters in determining the type of development that will attract property owners – and funding attention to bring the physical property to market. Luxury apartments in established regions of Johannesburg or Cape Town to a large extent wouldn’t get the same demand as they would in undeveloped markets like Plettenberg Bay and some regions of the Eastern Cape, or the emerging business market in Mpumalanga, for example. Despite economic woes, there is still an appetite for luxury living and developments like Plett Quarter fall directly into this category. Many people are seeking an alternative lifestyle away from the bustle, even if it’s only for the weekend.
In areas such as Johannesburg, the work-from-home revolution sprung out of the pandemic has meant an emergence of ‘the aparthotel model’ transforming hospitality space into apartments. According to Lew Geffen Sotheby’s International, flexible, and alternative solutions are on trend and ‘Bleisure’ is another commonality, combining holiday and business travel in one. Many families have relocated to coastal towns, but the head of the household still commutes to the city for work.
The current constraints on both local and international travel such as limited flight operators and delays for reasons including lost luggage or insufficient ground staff at airports may be an irritating niggle, but once ironed out, business traveller occupancy will increase, and tourism will follow naturally.
There are alternative lenders who are willing to consider hotel development and hotel acquisition finance with the right deal structure, so the time to act is now.