The hotel sector in Sub-Saharan Africa has evolved during the past decade due to high demand growth, entrance of new global brands and increasing supply in major markets. This is the overview presented by Xander Nijnens, Executive Vice-President, Hotels & Hospitality Group, JLL Sub-Saharan Africa at the forum attended by leading local and international hotel investors in Africa. Nijnens said, “This evolution is resulting in increasingly experienced investors developing products that are better suited to address demand, which is providing a clear shift in focus to the domestically driven midscale and budget segments.”
The report confirms hotel operating performance in Sub-Saharan Africa in 2016 and 2017 has been challenging. There is little doubt that the long-term investment case is strong, yet the economic slowdown has impacted demand at a time when new supply growth has been strong in many markets. Nijnens said that while this may be the case, the region is incredibly diverse and opportunities in new markets and new segments are constantly presenting themselves. Supply growth in the sector is continuing, ownership structures are evolving, liquidity is increasing, and many new prospects are becoming apparent in both alternative markets, secondary cities as well as product diversification.
Commenting on insight from the sector report, Tom Mundy, Head of Sub-Saharan Africa Research for JLL said, “Sub-Sahara Africa economies are far from mature, but some are further down the road to maturity than others and as a region we are turning increasingly optimistic on the outlook for the next 12-18 months. While we acknowledge the lack of homogeneity across the region and that some countries will grow at a faster pace than others, we believe that the region has turned a corner after the recent commodity driven slump. Yes, some markets have suffered from fluctuating exchange rates and slumping inward investment, yet others have benefited from more balanced economies, less political intrigue and a lower reliance on commodity cycle than others.”
Nijnens added, “When we asked leading investors what their intended short and long-term exposure is to hotel assets in Africa, none indicated that they plan to decrease their exposure. Quite the contrary, investors plan to increase their short and long-term exposure to hotels.” He said that most of these investors have invested in the sector in recent years and clearly it has been rewarding. As the sector matures these investors are looking to recycle their capital into new projects through sales and this will in turn bring fresh equity into the sector. So long as the right supply and demand balance in key markets can be maintained, this will provide continued investment and improving liquidity.
With saturation in key markets, investors are getting shrewder about understanding demand and developing product that best caters to this. In this regard, JLL sees high growth in the budget and midscale space which has been overlooked whilst investors focused on the more prestigious segments. Investment is driven by local entrepreneurs and diversified corporates, with foreign capital being deployed into the sector at a lesser rate. These local investors price risk differently in their home markets than global investors and this is creating a gap in value expectations between these investor groups. With an expected increase in liquidity, this gap should narrow.
Nijnens said the reality is that effective lending on hotel assets remains challenging in Sub-Saharan Africa and this is reducing transactional liquidity and supply growth. “At the same time – lenders are right to be wary of certain markets and there is a higher volatility in lending to hotels with management contracts compared to other asset classes with leases in place. As the hotel sector matures and there is a larger volume of successful developments and exits, more evidence of fully repaid loans, more experienced promoters, and increasing institutional capital entering the sector, we will see the lending space evolve.” There is an opportunity for sensible hotel lending by commercial lenders who invest time and resources to understanding the sector and can better manage and price risk.
The Sub-Saharan African hotel sector continues to be an exciting investment prospect for those who seek to understand demand fundamentals and appreciate the cyclical nature of emerging markets. Sensible capital structures, supporting lender relationships and optimal alignment with operators will go a long way in reducing investment risk. “If you can get these fundamentals right, it is a great time to be looking at the final frontier in hotel investment”, says Nijnens.
Read the report here: JLL Hotels and Hospitality – Spotlight on Africa 2017