Hotels as an Alternative Property Investment Asset Class and its Funding Challenges in South Africa

Abstract

Institutional investors and corporates constantly strive for above-inflation yields in relation to investments in traditional real estate assets. This study set out to determine how hotels perform compared to traditional property investment asset classes in terms of investment yields and whether investors (property developers and institutional investment funds) consider the hospitality sector for investment or diversification of current portfolios. Furthermore, to determine how aligned the commercial banks, Development Funding Institutions (DFI), and Section 12J funds are with funding single hotel assets versus portfolio lending, and what their requirements are.Interviews were conducted to obtain in-depth and rich information from purposively selected respondents with experience in the sector after completing a preparatory questionnaire. Respondents included property developers, investors, financiers, tour operators, and hotel operators. Historically, hotel investors were very specific in their investment asset classes and usually solely focused on hospitality assets (specialist investors). This has changed with an increase in generalist investors coming to the market with exposure in a diversity of asset classes including the hospitality sector, and other alternative asset classes.Funding challenges, due to the operational risk associated with Hotel Management Agreements (HMA) is perceived by both financiers and developers or investors. Leases are the preferred income model but are seldom available in the hospitality sector, and often those that are made available, may not provide strong covenants required by financiers and developers or investors. Alternative funding is available in the form of Section 12J Venture Capital Companies (VCC) or from DFI’s, but both have their limitations. Recommendations for further research include funding challenges for a development or acquisition strategy at a single asset and portfolio level and expansion to Sub-Saharan Africa as it impacts many investors and international hotels brands with exposure in these regions.

Keywords: hospitality assets, hotel funding, hotel management agreements, hotel franchise agreements, section 12J

DOI: 10.54941/ahfe1002242