THE Cape Town hotel industry has taken enormous strain during the prolonged Covid-19 pandemic, and the recovery is likely to be challenging for a number of operators.
But some property owners are managing to find some inventive solutions to manage the risks still prevalent in the convalescing hospitality sector.
Take local property group Spear, which is looking to squeeze better returns at lower risk from its 15-on-Orange hotel – a plush property located close to the parliamentary and law precincts in central Cape Town.
Last month Spear – which is mainly centred on retail, commercial and industrial real estate – exercised its right to terminate 15-on-Orange’s lease agreement with Luxury Hotels International South Africa – a subsidiary of hotel giant Marriott.
Spear said the global pandemic had weighed heavily on the hospitality sector, and that South Africa as a travel destination remained precluded by numerous feeder markets. This meant the near-term prospects for an improved recovery remained challenging, which informed Spear’s decision to terminate the lease with Marriott.
The hotel will be handed back to Spear by no later than June 2021.
Spear has subsequently clinched an agreement with The Capital Apartments and Hotels Proprietary Limited (CAH) for a fixed income lease. While clearly borne out of necessity, the new lease is at least in line with Spear’s stated strategy of transitioning to fixed income assets only.
The lease period will be for seven years from August this year with an option to renew for another seven years.
The basic monthly net rental (excluding municipal and utility charges, which are recoverable from the new tenant) to Spear will be around R1.92 million for the first two years. After that, the monthly rental payable for the remaining years of the lease will escalate at a fixed rate of 5% a year (compounded annually).
Now here is the interesting bit. CAH will invest no less than R15m of its own capital into various upgrades – establishing ‘aparthotel’ rooms and related accommodation. CAH will also be responsible for the up-keep and on-going refurbishment costs for the hotel.
The bottom line is that landlord Spear will have zero involvement in the running or managing of the hotel for the envisaged lease period.
Spear, which must be greatly relieved at this arrangement, will secure net rental income of around R20 million a year. In this regard, one must remember, only R1.8 million was received from Marriott for financial 2021 as a result of the residual impact of the Covid-19 pandemic.
Progress at 15-on-Orange – which was developed at exorbitant cost by Quantum Property Group in 2010 – will be keenly watched by property pundits.
CAH’s portfolio is one of the fastest growing owner operated hotel and luxury apartment providers – its current hospitality portfolio consists of over 1 400 rooms, apartments and conference centres across 10 hotels in South Africa.
Arguably the most interesting part of the new lease agreement is the option agreement offered to CAH, to acquire 15-on-Orange for R265 million. This option must be exercised within the first two years of the lease agreement.
For CAH, that is a very nifty option which banks on a fast recovery in Cape Town’s tourism and leisure sectors.
