October 3, 2018—High supply growth during the past five years has placed pressure on hotel performance in sub-Saharan Africa, but the outlook in the medium term is positive, with a more sustainable pipeline and stronger demand fundamentals.
Xander Nijnens, the Executive Vice-President, Hotels and Hospitality Group, JLL sub-Saharan Africa was on Tuesday speaking at the African Hotel and Investment Forum (2018 AHIF) being held in Nairobi much of this week.
Nijnens said investors in the hotel sector in sub-Saharan Africa are positive about the outlook for the sector, yet they also acknowledge that finding suitably yielding opportunities is more difficult today. Investors are increasingly looking at niche segments, new secondary markets and value-add acquisitions to reach their return targets.
Regional markets are increasingly diverse and out of sync, and the prospects and risks across the region vary immensely. In 2018, hotel performance has been mixed across the region, largely due to the impact of new supply entering the markets, as well as external demand pressures. West Africa has seen the most improvement in performance with commodity pricing on the up and many economies thriving.
East Africa has experienced good demand growth, yet occupancy has been under pressure due to recent supply growth. Performance in Southern Africa is stagnant as a result of the economic slowdown in South Africa, as well as the impact of the drought in Cape Town. Indian Ocean performance continues to be very strong with an excellent outlook.
Basing his remarks on a report published by their Group, Nijnens said despite a muted trading environment in many markets, there is evidence that well placed, distributed, branded, and developed products can consistently outperform the market.
“New segments such as serviced apartments and branded economy hotels hold strong returns prospects. For investors looking at the market, the wide spectrum of market prospects and asset performance brings both opportunities and challenges,” he said.
JLL forecasts annual investment into hotel development of $1.7 billion in 2019, with investment sales in 2018 of $350 million and increasing to $400 million in 2019.
Nijnens said, “We expect liquidity and trading of hotel assets to continue and this will improve pricing transparency in the market and reduce ownership risk. Value add strategies will be the most successful approach to acquisitions as there is a lack of well-priced quality assets available for trade.”
Development returns are highest when focused on disrupting the sector or when addressing emerging demand and differentiating projects. Brand conversions present strong revenue upside prospects and they are well supported by the international brands in the current climate.
The report also looks at lending on hotel developments in sub-Saharan Africa, identifying that banks have continued to be prudent in their lending and conservative in their leveraging. Nijnens said, “They are however becoming increasingly savvy, with more of a dedicated focus towards the asset class and are showing positive intent to get to grips with the sector. As lenders become increasingly knowledgeable, it will result in the most feasible projects receiving funding.”
Another trend is the number of new lenders entering the sector through their existing relationships with diverse real estate players, which is deepening the lender pool. With a clear market opportunity, Nijnens said the next few years will be interesting to watch to see whether alternative and mezzanine lenders will enter the sector.