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By Tshepo B Makhudu

There is no doubt hosting a major sporting event boosts the profile of the country and city.  Who does not want to visit Rio after the recent FIFA World Cup and Olympics?  However, these events are only for a few weeks and even allowing for a year of visits from sponsors and managers in the lead up to the event and the boost to demand once the curtain comes down and the television cameras depart, does hosting an international sporting event justify building new hotels?

In this article, we review the possible impact of hosting the Commonwealth Games on the city of Durban and provide some advice for would be hotel investors.  We also share some of the lessons from the 2010 World Cup in South Africa, the London Olympics 2012, the 2014 World Cup and the Rio Olympics. 

The Commonwealth Games and Durban

In a BBC article two years ago, the last Commonwealth Games in Glasgow in 2014 was listed as the fifth largest global sporting event.  They attracted 1,300,000 spectators to watch 4,820 athletes from 71 nations.  Television coverage was taken to 90 countries.  The next edition of the ‘friendly games’, as they are known is in Gold Coast Australia in 2018.

The Commonwealth Games 2022 have been awarded to Durban, South Africa. However, there are rumours that the city is facing the real prospect of losing the right to host the Games. This instability is not good news for investors who had been readying themselves to enter the Durban landscape with new hotel developments since the hosting announcement was made.  We assume this insecurity will soon be lifted and all parties can plan for a successful event.

Durban has many high-quality hotels, swimming beaches, stadia and wonderful weather all year round. Hotel performance has not been stellar in the past couple of years however, with the city still having to work off the oversupply from the 2010 FIFA World Cup.  As things stand, the event will coincide with the countrywide Municipal and Local elections in 2022, and this may or may not interfere with the city's ability to host a successful event.

Percentage Change In Hotel Value Per Room

The HVS Hotel Valuation Index 2016 graph below illustrates the trend in hotel values since 2010, and it can be seen how these have suffered between 2010 and 2016. This can be attributed to the bedroom oversupply that affected all the major centres in South Africa.  Values are reported in US$. The weakness of the Rand against the Dollar also contributed to the poor performance. Over the seven-year period from 2010 to 2016 the CAGR for value is -6.1% for Durban, which compares to -2.2% for Johannesburg and 4% for Cape Town.

What Can We Learn from Past Events?

In 2010 FIFA was reported to have block-booked more than 450,000 bed-nights long before the start of the event in an effort to regulate room rates prior to the Games. This was also done before the devastating financial crisis of 2008 and 2009 and due to this, many prospective sports followers cancelled their planned trips into South Africa. However, since many new hotel development projects were kick-started shortly after the hosting announcement and before the financial crisis, a hotel room oversupply resulted. With this oversupply in mind, South Africa saw sharp declines in occupancy before the start of the World Cup, and an increase in average daily rate growth did not help matters either. According to STR South Africa achieved a 63.7% occupancy rate during the 2010 World Cup, which indicates a 10.3% increase from the previous year. The year-on-year increase could be expected for the period during the games, however it should be borne in mind that the base had already been significantly impaired by the financial crisis. Average room rates achieved a whopping 121.7% increase from the previous year. 

London is a mature tourism market with a stable tourism flow. Wary that this stability would be disrupted, the organising committee block-booked hotel rooms prior to the Summer Olympics of 2012 and released them to the market closer to the start of the event. Average Daily Room Rate during the Games was up 86.1% compared to the same days the prior year, whilst occupancy was recorded at 88,5% for London hotels. RevPAR also increased during the same period, according to data from STR. So how did London manage to host such a successful event for the hotel industry? The answer lay in how the city kept a lid on building new hotels, and rather worked on adjusting the room rate to increase performance.

Leading up to the start of the 2014 FIFA World Cup, tour operators who had years before bought blocks of rooms, were desperately offloading their spare capacity. Discount rates of more than 40% were not unheard of. As in the case South Africa in 2010, FIFA's accommodation partner, Match Hospitality, prior to the event, released unsold rooms it had previously block-booked. The unfortunate result was that some World Cup hotel room prices dropped to half of the levels the hoteliers were achieving two years before. Overall, hotels in Brazil saw a 50.1% ADR increase in June and a 36.1% ADR increase in July; occupancy levels across all host cities decreased when compared to 2013; Brazil saw a two percent supply increase in June 2014 on a 12-month-moving-average basis, according to reported STR statistics.

On the other hand, the 2016 Olympic Games in Rio de Janeiro were successful not only on the sporting front, but on the hotel performance side as well. Media reports leading up to the Games were dominated by the devastating impact of the Zika virus, with the resultant withdrawal of some athletes from across the world, and the political turmoil involving the Brazilian president. Despite these hurdles, Rio hotels achieved good performance ratings during the games. STR has reported a 199.2% surge in average daily rate for Rio hotels during the games. The combination of this growth in rate and a 26.6% increase in occupancy to 76%, brought about a 278.6% increase in Revenue per available room. These are glowing statistics and it is generally held that Rio hotels outperformed London hotels during the previous Olympic Games of 2012. The key point to note however is that Rio was oversupplied with hotel rooms leading up to the games and this supply overhang is likely to negatively impact occupancies in the future. STR has estimated this bedroom oversupply at 23% more than a year earlier.    

How Are Other Host Cities Preparing for Future Games?

The FIFA World Cup 2018 will be hosted by Russia; Tokyo will be receiving visitors to Japan for the Summer Olympics in 2020, and the FIFA World Cup 2022 will be held in Qatar. With prospects of many thousands of visitors, hoteliers are hoping to make significant profits from hosting the Games. Hotel investors are also eyeing superior returns from new properties that are entering these markets. These countries' and cities' organizers would do well to heed the lessons from previous international events.

Russia's foreign political landscape, the exclusion of its top athletes from the Rio Olympics and the FIFA corruption scandals relating to how Russia won the rights to host the 2018 World Cup do not bode well for the country's prospects to host an untainted event. On the other hand, Hotel News Now has recently reported that "the end of uncertainty in the Russian economy coupled with growth of occupancy and other performance indicators might increase the number of new hotel projects in Moscow and Saint Petersburg between 2016 and 2018".

STR has previously reported that the Tokyo hotel industry is a high performer, with "some of the highest occupancy levels globally and with rates continuing to rise – all against the back drop of limited supply in the pipeline". This situation could be an indication that the hotel market in Tokyo will be lucrative for hotel investors as large numbers of visitors are expected to flock to the city for the Games in 2020. The proviso however is that the delicate balance between supply and demand should be respected always.  

Conclusion

Hotel investments are by nature very cyclical, therefore a delicate balance needs to be struck between the variables of supply and demand. International events can throw this balance out, and market players that can skilfully navigate these events can extract maximum benefit. To ensure that Durban hotels derive maximum benefit from hosting the Commonwealth Games in 2022, it is essential that hotel supply is kept at reasonable levels. A six-week event does not justify a $20 million investment in a new hotel, however to time the opening of a new hotel with such an event can massively help with cash flow management in the tricky first year of operation.  Durban hotels may not enjoy a 280% increase in RevPAR that Rio managed for the Olympic Games last year, but a substantial increase should be achievable.

However, perhaps the biggest bonus for all current and future hotels in the city is four years of international marketing reminding people of all the attractions Durban has to offer. The hotel industry can have a huge impact on the success of the games.  It is therefore imperative that the hotel industry is properly represented in the organising committee to ensure both the success of the games and the long-term success of the hotel industry learn from recent events. 

About Tshepo B Makhudu

Tshepo Makhudu is senior consultant in our Cape Town office. He has many years of property industry experience in development, management, finance and strategic consulting. He has held employment at leading property, banking and telecommunications multi-national institutions. Most notably he worked in the hospitality industry during the most vibrant era of the industry in South Africa, with a responsibility for the efficient delivery of hotel and casino development projects. Tshepo studied commerce and property development at the leading universities in South Africa and received leadership training in the USA. 

Contact: Tshepo B Makhudu

tmakhudu@hvs.com

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