State of hotel investment in Africa: headwinds and opportunities
11 Jul 2016
Xander Nijnens, Senior Vice President, JLL Hotels and Hospitality Group, Sub-Saharan Africa
Hotel performance and investment sentiment across Africa has been mixed so far in 2016, with global uncertainty and resource price volatility impacting regional markets. There continue to be many high growth markets, yet the pace of demand growth is disparate across the continent. East Africa and South Africa have good demand fundamentals, while North Africa and West Africa have been impacted by instability and economic slowdown. As we meet for the Africa Hotel Investment Forum in West Africa, the outlook for hotel investment on the continent remains positive, yet volatile.
Sub-Saharan Africa is home to some of the fastest growing economies globally, with Ethiopia, Democratic Republic of Congo, Cote D’Ivoire, Rwanda and Ghana at the head of the pack. East Africa in particular is seeing a maturation of the hotel sector with a high level of new supply coming into the market, introducing higher quality assets and new brands. This increased level of new supply in markets like Nairobi and Addis Ababa will cause short term oversupply and may lead to some distress of over-leveraged assets.
In the short term, we forecast improving liquidity of existing assets and for investment into new developments above $2 billion per annum. Capitalisation rates in Sub-Saharan Africa tend to range from 8% to 11%, while this increases to 12% and above in North Africa. With growing transaction volumes both in hotels and other real estate asset classes, we are likely to see a clearer market indication of pricing during the coming years. Target return on equity from hotel developments continue to range from 15% to 25%.
STR Global’s latest pipeline report (May 2016) shows a 34% increase in rooms under construction in Africa at 30,737. Development continues to be challenging with the pipeline realisation rate across the continent continuing to be poor, yet we are seeing an improvement in this with numerous operators opening new hotels in 2016. As hotel development experience improves in the region we will see a reduction in the associated risk premium being sought by investors. High currency volatility across the region has caused challenges to investors in terms of inflation, rising lending rates and uncertainty in investment underwriting.
Of the hotel investment markets in Africa, we favour South Africa, Mauritius and primary cities in East Africa. From a sector perspective, we favour the mid-market, budget and serviced apartment segments over luxury and upper upscale. Despite the recent slowdown in Africa due to the cooling of the resource cycle, we are still seeing an increase in investors looking at the region for the first time. Many are still in a discovery phase and looking to make the numbers stack up, while others like Minor International and Quantum Global are actively transacting. Local private capital continues to be the primary driver of investment and we do not see this changing for the foreseeable future.
The completion of new developments, an increasing number of open market transactions, and the establishment of new investment platforms will see a further maturation of the African hotel sector in the short term. The long term fundamentals for hotel demand remain strong and the low levels of current supply should fuel investment appetite. So while there are regional headwinds, the momentum for hotel investment in Africa continues to be heading in the right direction.