JLL cites mixed-use development for profitability

Just outside of Cape Town, Century City includes several hotels, a convention center, restaurants, shopping, a health club and a spa. Photo credit: Century City

New hotel projects in Africa are more likely to achieve success if they are part of a mixed-use development, according to a new report from JLL.

The global real estate industry reported a 42 percent increase in the value of mixed-use property transactions in the first half of the year, while office transactions were down 4 percent, industrial down 6 percent, retail down 20 percent, standalone hotel down 18 percent and alternatives down 40 percent.

JLL Global transaction volumes by sector
Image credit: JLL

Xander Nijnens, EVP/JLL Sub-Saharan Africa, explained the trend is driven by lenders’ approach to risk. “Diversifying risk by including alternative types of property—commercial, retail, hotel and branded residences—in one development provides comfort to financiers due to the diverse and more-consistent income streams generated,” he said. “Branded residences are also increasing in prevalence because they provide up-front cash inflows and a more predictable source of revenue than one gets from a hotel alone.”

In Africa, the leading funders of hospitality construction projects are government-backed development finance institutions like the International Finance Corp., Overseas Private Investment Corp., the CDC Group, Proparco and the German Investment Corp.. They are motivated by economic development, skills development and job creation and have a lower requirement for the predictable, consistent loan repayments required by a commercial bank. DFIs are also able to stomach more risk, the report noted.

A driving factor for this trend is that hotels rent their rooms in euros and U.S. dollars rather than in local currency which, from a financing perspective, reduces the risk to the lender and lowers the interest rate paid by the borrower, according to JLL.

JLL also shared its prime lending rates for select African markets. Ghana was at the top of the list at 27.8 percent, while South Africa had the lowest rate at 10 percent. Most of the others hovered between 12.47 percent and 17.5 percent. For comparison, most American loans from JLL were between 6.2 percent and 8.2 percent.

JLL Lending Rates for Africa
Image credit: JLL