Tips for investing in the hospitality sector

BusinessesForSale: What should you look out for when appraising hotels for sale?

Peter Bruil: Mr Hilton stated that three factors were important in the hospitality industry, namely: Location, location and location.

South Africa is no different from other parts of the world when it comes to common sense in business decision-making. Apart from the obvious choice of location, one should research the parameters that go hand in hand with the location.

Good marketing is the key to good occupancy and thus good profits

Areas that require research are:

• Which markets are serviced from, or attracted by, that location
• Then research what occupancies and room rates can be achieved
• What future developments are envisaged for the environment of the location
• What cultural aspects arise from:

1. The clients
2. The staff
3. The authorities
4. Any other stakeholders

From a business point of view the most important factors are:

Location 

Ideally the guest house is close to tourist attractions or business areas if one caters for the corporate traveler. A good location is in general important for property as it will protect your investment in the future.

Also look at potential for development. You may want to increase your capacity at a later stage as your business becomes more successful.

Size

It makes little difference whether you have four or seven or 10 rooms in terms of management. Another point to consider is that with 10 rooms you obviously have much more income to cover the same costs, as costs in the guesthouse business are largely fixed (wages, bond, insurances, marketing, maintenance etc).

Marketing

Good marketing is the key to good occupancy and thus good profits. Points to consider are: a good website with links to search engines, advertising in the right booklets/tourist guides and contacts with tour operators and travel agents.

Make sure you know what type of market you are going for and advertise accordingly. It’s easy to spend a fortune on marketing and not get anywhere, so make sure you target the right audience!

There are many other areas that should be investigated and are typically part of any business plan. A reliable and knowledgeable broker/broking company can add considerable value to this process and provide insights and local information.

It goes without saying that Pam Golding Lodges and Guesthouses is the right partner for any buyer who wishes to make an investment in the hospitality industry in South Africa if one looks for game lodges, guesthouses and boutique hotels up to 45 rooms in size. For larger hotel transactions our mother company, Pam Golding Hotels, can also assist. 

Pam Golding Hospitality further has a separate company dealing with consulting to the hospitality industry, carrying out feasibility and viability studies, procurement and research assignments.

BFS: How hard is it for an overseas buyer get into the sector?

PB: We have always found that non-residents are interested and succeed well in hospitality ventures. Not only is the general level of expertise quite high, but often owners are well-educated with contacts overseas.

Hospitality is a labour-intensive industry, so the need to employ five South African citizens can quite quickly be met. Hospitality means dealing with people and that is in itself also attractive.

BFS: What should buyers look for in a potential investment within this sector?

PB: Every investment cannot be seen in isolation from the associated risk inherent to the location. Investment should be considered in its broadest terms, hence not only in financial returns but certainly also in quality of life.

The hospitality sector is not rocket science. Common sense combined with a healthy work appetite and a good idea of how guests would like to be treated (just reflect on this yourself) - all this will get you through operational issues successfully. 

If your location is well thought off, your corresponding marketing and approaching of client groups will automatically follow. Our company can assist ‘starters’ with the operational and marketing related positioning of a guest house/hotel.

Every investor should always consider the return and the associated risk. The more demand there is for a location, the lower the risk, but the relatively higher the price will be.

If return on investment is key for an investor, you will most likely end up in a location that isn't sought-after locations characterized by  less demand. This will give you a high return, but will also be high risk. I believe a business buyer should always consider the location and how established the business is.

BFS: How recession-proof is the sector?

PB: I would like to refer to the location aspect and target market again. If you have a strong and diverse base with legs into the local and overseas leisure market, combined with the corporate and conference market, you can diversify and spread the risks.

In times of recession you might lose some overseas leisure, but it also means that more South African clients choose to have a holiday in their own country. Businesses and organisations will always have a need to travel and are less seasonally-bound than tourists, and will provide business all-year round.