“Risk comes from not knowing what you are doing – asset management somewhat mitigates that risk in the African hospitality market.”
“Africa is not for wimps” was one of the most memorable quotes I heard when I first went travelling around Africa as a backpacker many years ago. This is particularly true for hotel investment, where the lure of exceptionally high potential profits has led to a rush of new investment. Some investors have been very successful. Others have failed spectacularly, often due to poor advice. The hotel asset manager, around the world, is a useful tool to mitigate the risks for the hotel investor.
When a hotel investor employs a third-party management team to run their hotel, they will often employ an asset manager to look after their interests. The investor typically has limited experience in the hotel market and the asset manager will provide a link with the hotel management, to ensure the owner fully understands all the factors impacting the performance of the hotel, so they can make the right decisions to enhance the return on investment.
The asset manager will usually be tasked with maximising the owner’s income, maximising the hotel’s long-term value, assessing sales strategies, examining the annual budget, analysing capital expenditure proposals, as well as preparing for the eventual exit strategy for the owner.
Asset management is arguably more important in Africa than most places, as some of the operational markets and conditions are extremely challenging. Without good asset management it can be difficult for the owner and an operator to be working in harmony and thereby optimising the hotel’s profitability.
However, it is not all plain sailing for the professional hotel asset manager working in Africa, with many unusual challenges and difficulties, resulting in a limited number of quality asset managers willing (or able) to work in many locations around Africa.
The challenges of working in Africa
Effective asset management typically requires good data. If we know that four-star hotels in Khartoum are typically running at 60% occupancy and US$120 ADR, then we can assess the performance of the hotel being asset managed against the wider market. Unfortunately, there is very little data available in many African markets, limiting the ability of the asset manager to benchmark hotel performance. There are 98 cities in Africa with over 500,000 residents and yet benchmark data can only be provided on 22 of these cities. In Nigeria for example, there are 87 cities with over 100,000 residents, yet STR (the biggest and possibly best-known benchmarking company) can only provide data for Lagos and Abuja.
The asset manager sometimes must rely upon anecdotal evidence when assessing average performance in the local market, and in Africa that can be fraught with danger. Often the data provided is wildly inaccurate, with ADRs reported including taxes or breakfast, items that really should be stripped out. Often mangers report 100% occupancy when I fact they had many empty rooms. I asset manage one hotel in a city where no published data exists. Talking with various owners and managers I was able to ascertain that one hotel provided accurate information to me, while three others completely overstated their trading levels. It is difficult to make “demonstrably” sensible operational decisions based on information that is only 25% reliable.
Even government level data is not immune to endemic inaccuracies. Travel statistics are often inaccurate, hotel supply data is out of date, and often it cannot be accessed without “good connections” with the relevant departments within government.
The asset manager’s first point of call when reviewing a hotel is often the general manager. Unfortunately, Africa is rarely seen as a luxury posting (Seychelles, Mauritius and possibly Cape Town aside) and therefore some postings, like Port Gentil or Monrovia for example, might not always attract the highest quality hotel managers. A poor manager is the biggest hindrance to generating good returns on a hotel investment, and so take up much more time for the asset manager if they are to effectively fulfil their role.
The asset manager will typically be working for the owner of a hotel. Often in Africa that will be the person who built the hotel, or a family unit, rather than an institutional investor who tend to be more focused on simple financial returns. The sometimes limited level of hospitality (or even property) knowledge of the owner, along with a personal investment in the building tend to mean the asset manager can have a more difficult time getting the optimum decisions taken, sometimes to the detriment of hotel trading and values.
One of the most under-estimated challenges of working in Africa is the logistics involved. Travel around the continent can be very time consuming, with difficult and badly timed connecting flights adding days to the time required for an asset management visit. Lack of flights or reliable road transport, fear of internal issues or insurgency, security issues surrounding even minor public elections all add to the complications for a hotel asset manager on the continent.
Understanding the local market
Africa is not one market.
The continent is made up of 54 (or 56 depending on how you count) countries, all of which have markedly different market conditions, customs, and supply and demand factors. But the market differences do not stop there. For example in Kenya, the factors influencing hotel performance in the strongest market, Nairobi, with its strong mix of local, national and international corporate business, topped up by conference business are not the same as those influencing trading in Mombasa, the second strongest market in Kenya, where trading is mainly linked to international and national leisure business and a small amount of local corporate business. The asset manager needs to understand the local market in great detail if they are to be able to help maximise investment returns.
The asset manager will need to accurately review likely new supply in a developing market, and this means understanding fully all the specific barriers to entry in a new location. An inexperienced asset manager might look at the pipeline for new hotels in a city and make inaccurate assessments on the likely timeframe for new hotels to come online. Africa often has unique challenges in this regard. The average delay in opening a new hotel in Kampala, for example, is over 9 years, one of the highest on the continent, and something that will often positively impact on the trading of existing hotels in the city, with the effective barriers to entry allowing them to trade at higher levels than an efficient market would usually allow.
The asset manger will also need to understand local business practices that often differ from even neighbouring towns. In Massawa, on the Red Sea coast of Eritrea for example, all bookings require consent from the local police, effectively meaning the police have an undue influence on the performance of local hotels, with them having the ability to guide customers to one particular hotel if they wish. There are no such operational complications for hoteliers in the capital, Asmara, only 70 miles away.
The relative scarcity of booking channels and the inefficient rate controls in some African cities are also factors that the asset manager needs to take into account and overcome, if profits are to be maximised.
Possibly the most significant learning curve for the asset manager in Africa is the requirements of the different customer bases, and what appeals to potential customers (and different segments) in different locations. For example, when advising on a new hotel development in Lagos, Hotel Partners Africa advised the owners to redesign the project so that 25% of the total room stock were suites, a much higher than usual percentage of room stock. This was to take into account the nature of the local leisure and business customer, who typically want to “publicly” upgrade their room choice (at full rack rate) when entering the hotel lobby. Being “seen” to be successful is culturally very important, so having the opportunity to upsell rooms was a vital tool for the hotel to maximise its trading potential, and the owner’s investment returns.
Typically, hotel asset managers look at revenue per square foot, to help maximise trading. That does not always work well in certain African hotel locations, certainly not on a stand-alone basis. The sofas located on upper floor lobby spaces that asset managers in European markets lament as a waste of space and a drain on profitability, could well have been first designed just for west African customers. Having adequate seating on the same level of your room where you can meet and chat with your colleagues or friends, away from the bar, restaurant or reception is highly prized in Ghana. On a revenue per square foot basis it might look like wasted space, but it can often be a reason for return bookings.
Conclusion
Many “normal asset management” strategies simply do not apply to hotel markets in Africa. A deep understanding of the market, the culture and the wider business environment is essential if a hotel investor is to make the most of this exciting frontier in the hospitality world. There is no doubt that many markets are dramatically undersupplied with quality hotel rooms, but there is also no doubt that the potential pitfalls are also legion.
The challenges of the continent, whether simply the logistics, or the complexities of such a wide variety of markets mean there are few companies offering continent-wide asset management services, which makes Hotel Partners Africa rather unique. The difference between markets mean that employing an asset manager that knows each market in detail is vitally important if returns and values are to be enhanced.
David Harper is head of property services, Hotel Partners Africa