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AFRICA’S HOSPITALITY INDUSTRY BOOMS

Africa’s hospitality industry booms

June 2016

Home to some of the world’s fastest growing cities and fast-expanding economies, Africa’s high-growth hotel industry is emerging as an attractive investment magnet.

 

 

 

Over the past four years, we’ve regularly been covering emerging real estate opportunities across the African continent as the potential the region holds is unquestionable.

This month it’s time to take a closer look at the African hotel sector once again which is one of the fastest growing industries in the continent.

Growing at a sharp rate of 25 percent in 2015, Africa’s hospitality industry was among the best performers globally. Outshining its own numbers, the continent’s hotel industry is not only tipped to grow at an impressive 30 percent this year, but also the momentum is expected to continue over the next few years, making Africa a bright spot in the global hospitality market.

“Though the growth is on a smaller base compared to other developed markets, the huge pipeline of signed deals and entry of top global chains in fertile territories across the continent puts Africa in an unparalleled position,” says Trevor Ward, Managing Director, W Hospitality Group, a Lagos-based consultancy, adding that the biggest potential lies in Nigeria, Ethiopia, Kenya, Tanzania and Mozambique.

Sub-Saharan Africa (SSA) is home to some of the fastest growing cities in the world, with the populations of Abidjan, Lagos, Kinshasa, Nairobi and Dar Es Salaam tipped to double between 2010 and 2025, according to an UN Habitat Report. Waking to this new potential, leading chains like Hilton, Starwood, Marriott, Accor and Carlson Rezidor are taking their bouquet of brands to Africa, even as local chains like Azalai, Onomo, Mangalis and City Lodge are on an expansion spree.

Turning of the tide

For years Africa, particularly SSA, was written off as an investment destination. Corruption and political instability, combined with environmental disasters and economic turmoil, meant that only the bravest investors were prepared to consider Africa for investment. “Africa gained independence in the 1960s, had some adjustment issues for the next 30-40 years, and since 2000 has seen strong growth, averaging 5 percent annually, whilst SSA has been closer to 6 percent per annum,” says David Harper, Head of Property Services at Hotel Partners Africa consultancy, adding that SSA is poised to take off on a whole new trajectory of sustained growth in the years to come.

While historically, Africa’s economic growth was primarily driven by extraction industries, in the past decade success from manufacturing, agriculture and natural resources has led to diversified growth, driving corporate demand for hotels in an increasing number of countries. “International, national, regional and local corporate demand for hotel rooms and meeting spaces is driving occupancy levels upwards,” says Harper.

 

The limited number of hotel rooms are proving to be the biggest opportunity for Africa. While North America has 3.6 million branded rooms and 6,754 rooms per 1 million people and Europe has 1.8m rooms at 2,432 rooms per million, North Africa has only 76,000 rooms at the rate of 435 rooms per million and SSA has just 84,000 rooms, with a mere 76 rooms for every million of its population. Nine countries in Africa have no branded hotels at all, whilst a further eight are represented by only one brand, indicative of the strong potential for expansion.

Places with potential

Despite the decline in oil prices and currency fluctuations in the past 18 months, the industrial power houses of Angola, Nigeria and Ghana are all featuring in the eight top value destinations for hotels on the continent, driven mainly by corporate demand. In the last two years, 13 countries have seen hotel values grow by over 20 percent per annum, including Uganda, Zambia, Zimbabwe and Cameroon.

Considered over the last six years, hotel investments have outperformed other property investments like retail, offices, industrial and residential in 76 percent of countries in Africa. “The growth in the hotel sector in Africa is coming off a low supply growth base, with strong demand due to high economic growth. The macro fundamentals are very positive, with high population growth, increasing urbanisation, a growing middle class and increasing tourist arrivals,” says Xander Nijnens, Senior Vice President – Hotels & Hospitality Group for SSA at JLL. He says that the main focus continues to be on corporate hotels in capital cities with highest level of demand growth. “These continue to provide some of the highest returns on investment and capital markets liquidity,” he comments.

In terms of regions, while North Africa has seen weakening demand during the past five years due to political instability and civil unrest, East Africa has been the most positive growth story, with hotel demand growing by double digits. “While West Africa is a diverse region and countries like Côte d’Ivoire and Ghana are showing good growth, Southern Africa is looking positive, particularly South Africa, where a weakening Rand has improved its competitiveness to other long-haul destinations,” says JLL’s Nijnens, adding that the Indian Ocean region also continues to be attractive, benefiting from improved air access and being seen as a safe destination.

Look before you leap

As much as Africa has opportunities, it is also a tough market to mine. “As a foreign investor looking for hotel development opportunities, a well-connected local partner is critical to get any project off the ground,” says Harmen De Jong, Partner at Knight Frank. Among the foreign investors currently active in Africa, private offices and real estate developers from the Middle East are the big players. “Institutional investors are not ready for Africa as yet and would seek more established and mature markets,” says De Jong.

International capital is increasingly flowing into hotels in Africa and there is more capital available for deployment. “There is currently a scarcity of investment grade hotels available for sale on the continent which is limiting the amount of foreign capital flowing into the region. Most opportunities are thus in development rather than investment, which generally favours local investors rather than foreign capital,” explains JLL’s Nijnens.

However, the overall atmosphere for foreign investors remains optimistic. “Continent wide, hotel ownership is a very good investment. Certain areas have seen larger increases in values than others, and in the majority of the locations, the growth achievable is comparable or higher than other real estate investments,” says Harper of Hotel Partners Africa.

“It’s easy to be negative about Africa, but a good investor does not generalise. There are 54 countries and while some of them are growing extremely fast, even those in a tight economic situation – like Nigeria and Zambia – will eventually bounce back, as they have done in the past,” says W Group’s Ward, adding that entering the African hotel market at the right time with the right partner can reap huge dividends for investors.

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