The Fund’s investment strategy is to sustainably grow its property base through acquisitions and developments which enhance longterms unitholders’ returns. The Fund will dispose of selected properties that no longer meet its long-term investment criteria and will recycle the capital into assets which enhance longterm unitholders’ returns. The aim is to continue diversifying the portfolio in South Africa by geographic location, patronage and star grading but with a particular focus on large, well located properties in major metropolitan areas with a diverse patronage base.

Despite the challenging domestic operating environment, Hospitality’s investment focus will remain in South Africa for the foreseeable future. Although offshore markets present some good potential long-term investment opportunities, there is sufficient scope in the domestic market for the Fund to meet its current objective of delivering sustained distribution growth. From an earnings perspective, South Africa still offers higher yields with a lower risk than most offshore markets. Any decision to expand internationally would require a highly compelling investment proposition.

Photograph: Champagne Sports Resort, Drakensberg

Hospitality management is of the view that a number of the hotels which were developed in anticipation of heightened demand during the World Cup will not trade profitably, even under conditions of normal economic growth. As it stands, a number are now trading in a distressed state with high gearing that cannot be serviced from current earnings. During the year, Hospitality evaluated a number of proposals to acquire good quality assets, several of them being marketed at significant discounts to intrinsic value. However, given the current dynamics of the hotel and leisure sector, these would most likely have been earnings dilutive in the short term, even though the longer-term prospects were attractive. Accordingly, they did not meet the Fund’s criteria to sustain earnings and distribution growth.