South Africa hosted more than 10 million foreign travellers in 2019. Upon arrival, they had their pick of roughly 63,000 hotel beds, and collectively spent just shy of R17 billion to secure nights in their home away from home.
Less than 3 million visitors entered the country in 2020, most of them from our neighbouring countries.
It comes as no surprise that our hospitality sector has suffered a great deal off the back of that contraction. But as is often the case, times of severe stress present rare investment opportunities.
Joe Bester, a portfolio manager at Fairtree, shared his views on the prospects for SA’s hospitality sector and whether investors should consider the asset class.
Fairtree: Hi Joe. Before we discuss today’s topic, could you give us some background on the Fairtree Capital Hospitality business?
Joe Bester: Sure thing. We form part of Fairtree, a leading investment house that manages alternative and long-only investment portfolios, across the global asset class spectrum, for institutional clients and high net worth individuals. We are based in Cape Town, South Africa.
Our business makes investments into the South African hotel industry, with a specific focus on the leisure component of the market. In conjunction with our hotel management affiliate, Providence Hospitality, we restructure and reposition hospitality assets to achieve better occupancy rates and financial returns.
F: Thank you for that introduction. COVID-19 was obviously a hammer blow for the hospitality industry. How did your portfolio of properties perform over the past 12 months?
JB: It’s been an extremely challenging time for our sector, no doubt about it. But our team did well to control expenditure and leverage the various government-sponsored support schemes to soften the impact of the pandemic. Although significantly down on budgeted figures, the portfolio was profitable for the 2020/21 financial year. As things stand today, we think it’s well positioned to benefit from a gradual recovery in tourism.
F: Could you give us some insight into what that recovery might look like?
JB: As a whole, hospitality will take longer to recover than other industries, with each segment rebounding at different rates. For example, business and leisure travel are unlikely to return in a synchronized manner. The same can be said for domestic and international travel.
A rebound in the number of international travellers to South Africa is not yet foreseeable because the risk of infection in our country remains unchecked. Domestic leisure travel has thankfully been quite strong, and we expect that supportive trend to continue. On the other hand, domestic business travel will return sporadically, with conferencing and events probably the last hospitality legs to re-enter the fray.
We ‘re optimistic that some level of international travel will return by the summer of 2021/22, and that the market will be close to a full recovery by the summer of 2022/23. With some anticipation, we note that in geographies where international travel has been allowed, pent-up demand for leisure travel has resulted in strong recoveries in their respective hospitality sectors.
F: Are there opportunities to invest in the South African hospitality industry at the moment?
JB: To put it succinctly, we believe the current market presents a once-in-a-generation opportunity to acquire assets significantly below pre-pandemic levels. And while the timing of the recovery in tourism remains uncertain, those discounted assets will benefit once it inevitably arrives.
As a business, we expect to come across more of these opportunities in the coming winter as hotel operators, already running on low and efficient cost structures, struggle to navigate these lean months. To make matters worse, the financial relief schemes that many of them have relied upon to keep operating are slowly being withdrawn. The reality is that some of these assets will become distressed or fail. We’re optimistic that our existing portfolio is positioned to withstand current conditions, and we’ll continue to look for attractive opportunities to add to our mix.
F: How risky are these investments?
JB: As a real estate private equity vehicle, we invest in established hospitality assets that were profitable pre-COVID. Given the underlying value attached to these properties, investors essentially own a tangible asset with a relatively stable intrinsic value. At the moment, these properties are selling at historic lows which gives investors a margin of safety. Obviously, any return-generating investment carries risk, but our team has an excellent track record of identifying the right assets and maximising investor returns while maintaining an emphasis on capital preservation.
It’s also worth noting that because there’s a 5-year lock-in period for investments made into our vehicle, investor capital is afforded the time necessary to unlock the valuation that exists inside the portfolio of hospitality assets.
F: How do investors exit their investments?
JB: Investors are able to sell their shares to a third party or, alternatively, the fund acquires the shares from the investor using the proceeds from the disposal of the underlying investments following the lock-in period.
F: How and when can one invest?