JLL's Spotlight on Africa report paints rosy picture

(Angola's Luanda Bay Area)

In spite of economic headwinds in key markets, investor sentiment for hotels in Sub-Saharan Africa remains positive, according to the latest JLL research into the sector. The Spotlight on Africa report calls the long-term outlook for the market “strong,” citing positive economic, demographic and tourism trends. All indicators, the report claims, point to continued hotel demand growth as the region’s economy and hotel sector continue to mature.

“JLL forecasts demand growth of 3 percent to 5 percent per annum during the coming three years," Xander Nijnens, SVP, Hotels and Hospitality Group, JLL Sub-Saharan Africa, said at the Africa Hotel Investment Forum in Kigali, Rwanda. "From an investment perspective, we forecast $1.7 billion to be invested in hotels in Sub-Saharan Africa in 2017 and a further $1.9 billion in 2018. The new supply pipeline continues to grow with greater efficiency in realizing new developments as the sector matures.”

Looking Ahead

For 2016, JLL reported seeing global transaction volumes decline from a high of $85 billion in 2015, with investors demonstrating a “more measured approach” to the sector. Cross-border capital is expected to remain steady year-on-year, after some $30 billion in capital was deployed into hotels across national borders during 2015. 

As such, while overall transaction volumes are anticipated to taper, cross-border investment will be more resilient. Private equity funds still have large amounts of cash and “a need to deploy,” a trend that is driving continued momentum in the sector. 

A “large pool of global capital” is looking for new hotel frontiers, the report claims, and at the moment, Sub-Saharan Africa has a very limited share of this global capital. This is largely driven by the perceived higher risk of investing in the region and subsequent higher return requirements, as well as the lack of liquidity and access to investment grade hotel assets. Even in South Africa, Kenya and Mauritius, which are some of the most mature markets in the region, assets remain tightly held. “As liquidity improves during the coming years, we should see an increasing appetite from global capital for the region.”

In the medium-term, hotel investment in Sub-Saharan Africa will continue to be driven by local and regional private capital. With the exception of a few regional owner operators, the majority of investment is driven by first-time hotel investors with diverse portfolios of other business interest. Over time, JLL predicts that this will result in increased liquidity, consolidation and further sector specialization with certain markets already seeing this maturation in hotel investment.


The hotel sector is not, however, without its challenges, Nijnens added. "We are seeing an increasing divergence of the performance and outlook for key markets. The region offers a broad range of challenges and opportunities, as well as risk and reward. From the perspective of global capital searching for investment opportunities, the region can be a challenging one to navigate. Investors and lenders alike are recognizing this and, while regional players continue to leverage their first mover advantage to entrench their presence in the sector, global capital will increasingly flow into the region as markets mature and transparency increases.”

Hotel developers and operators are learning how to tap into this demand, however, and are offering greater options that are best-suited for each market and client base. This demand growth, paired with more effective matching of supply to demand, sets a good foundation for investment. Nijnens noted that “long-term investment fundamentals for the region remain positive despite the short-term challenges that have impacted the hotel sector in Sub-Saharan Africa in the past two years. Macro-economic development and government policy towards tourism, investment and economic growth remain critical in a corporate demand-led sector.”

The main barrier to entry in Sub-Saharan Africa, according to the research, is finding projects that meet the minimum return threshold. The capital is available, but investors are seeking the right leveraging to achieve their equity returns. Lack of foreign currency ranked higher this year as investors struggle to deal with various currency factors. Improvements in political, economic and currency stability will see a reduction in the risk premium placed on hotel investment in the region, which will in turn increase capital flows. Development costs should reduce in the medium-term as development professionals, owners and lenders gain experience in the region. As the pipeline of new projects is more effectively implemented, liquidity will increase and exit options will improve.

Lenders in the region are more cautious towards the hotel sector than their clients, particularly with regard to underwriting operational cash flows in what is seen as an emerging sector. “For the foreseeable future, we can expect commercial bank lending to be determined on the basis of recourse to the sponsor, while the development banks will play a critical role in pioneering new frontiers," Nijnens said. "As institutional investment increases, lending is expected to become more readily available at improved terms, which will in turn provide better leverage returns on equity.”

The diverse set of fundamentals in each market is becoming integral to the way in which investors and lenders approach the sector, with a region-wide approach becoming increasingly challenging. The research promotes the view that investors should embrace the diversity that these markets bring, but should also seek to understand the variety and nuances of these markets.

Want the inside scoop on how Africa's hotel industry is growing? The Africa Hotel Investment Forum runs from October 4-6 at the Radisson Blu Hotel & Convention Center in Kigali, Rwanda. Click here for more information.