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Weak economy hits Hospitality

Posted On Thursday, 18 August 2011 02:00 Published by eProp Commercial Property News
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Loan stock company Hospitality Property Fund yesterday reported a disappointing set of results for the year ended June, blaming an embattled hotel market, which is reeling from a weak economy

Gerald NelsonIn an interview with Business Day, CEO Gerald Nelson said conditions in the market remained "extremely constrained with no sign of improvement".

"We don’t expect a dramatic turnaround, which is putting pressure on earnings. The results are in line with what we expected and relative to our competitors we have done OK, although not inspiring for shareholders," he said.

Mr Nelson said occupancies in the hotel sector needed to improve as there was an oversupply of rooms.

According to STR Global, which provides market data to the hotel sector, the industry reported a 6,6% drop in occupancy to 53,9% and a decrease in average room rates of 3,4% to R866 for the year to June.

The pressure experienced by hotel owners across the country is mainly as a result of the significant excess in room stock that came onto the market in the run-up to the Soccer World Cup last year.

Mr Nelson said the abnormal increase in supply had led to aggressive price competition among hotel owners.

"Coupled with the subdued trading conditions, hotel owners are being forced to absorb increases in overhead costs, which are currently significantly ahead of inflation."

In contrast to commercial property-owning entities that are able to pass this additional cost on to tenants, the heavily competitive trading environment precludes hotels from increasing room rates to absorb cost increases. As a result, the fund has experienced a direct reduction in its variable rentals.

Mr Nelson said the focus for the group was continuing to reduce overhead costs and increase revenue. "We will do what we can."

However, trading conditions were telling in Hospitality’s results for the year ended June, with distributions per combined linked unit dropping 11,4% compared with the previous financial year.

The A linked units distribution of 122,11c grew 5%, in line with the fund’s distribution structure, resulting in the distribution on the B linked unit decreasing 33,1% to 58,90c.

Stanlib head of property funds Keillen Ndlovu said the negative result and the negative outlook did not come as a surprise.

"Hotels are in a tough period. This is also reflected by Hyprop ’s recent announcement of the closure of The Grace Hotel in Rosebank and the poor results from City Lodge last week," Mr Ndlovu said.

Neither of the declines comes as a surprise. Imara SP Reid analyst Steve Meintj es says WBHO’s management advised the market at its interim results announcement that the remainder of the financial year, as well as the 2012 year, was a concern.

Aveng and Murray & Roberts will report results for the year to June within the next month. They have also indicated that it will take at least another year before conditions improve.

The industry-wide probe into anticompetitive behaviour has been another cloud hovering over contractors. The competition commission is slapping penalties on misbehaving firms.

Both Basil Read and WBHO have opted not to make provision for a possible administrative penalty arising from the probe, saying that the outcome of the process will be known only next year. Meintj es has pulled back his recommendation on WBHO’s share from “add” to “hold”, citing the possible penalty and difficult trading environment.

Group Five, on the other hand, says it signed an agreement with the commission, which may not result in a penalty. Though it is subject to the completion of the industry-wide probe, the company’s early engagement with the commission appears to have paid off.

Either way, investors have to contend with a lot more bad news before industry conditions improve.

Last modified on Thursday, 24 April 2014 13:33

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