Allan Wantenaar, Associate at JLL’s Hotels & Hospitality Group, shares learnings from the 2017 Spotlight on Africa – Hotels Overview report that are driving a deeper understanding and more moderate approach to hospitality investment on the continent.
A decade of change
Was Sub-Saharan Africa ready for the past supply cycle? Ten years ago, the positive outlook for economic growth and political stability in Sub-Saharan Africa prompted a significant increase in supply across the region, with demand keeping pace for the first several years of this period. The slowdown in several economies between 2014 and 2017 has however lead to supply growth outpacing demand growth in recent years. Several core nodes and key African cities have seen saturation point and further supply increases have tapered – which is evident in the realisation of the hotel pipeline planned in the region. Prior to 2007, occupancy across SSA was above 70%, but a decade later levels have declined by some 10% -15%.
The result has been tough trading in a number of markets, particularly those exposed to demand from specific sectors, whilst markets exposed to more diverse sources of demand have been insulated. This weaker trading has caused some investors to reduce their expectation on target returns. Others are disposing of assets to recycle capital in order to re-balance their hotel portfolios line with demand. This is the key learning from the cycle: the process of maturation. Investors are not slowing down. They have had a taste of hospitality on the continent and are keen to continue; this time with a more balanced approach from a positioning and product perspective.
The maturing of the sector
These trends are shaping the next supply cycle. The steep learning curve has enhanced professionalism, knowledge and strategy. Going forward, the investment decisions will be more moderate, balanced (in terms of product and quantity of supply) with a deeper understanding of the underlying fundamentals, a slightly more cautious approach and better structured / financed projects.
There are still barriers to entry but our research confirms investors are not planning on reducing their exposure. Quite the contrary, investors plan to increase their exposure to hotel assets. As the sector matures, they are looking to recycle their capital into new projects through sales and this will in turn bring fresh equity into the sector.
It’s certainly an environment to capitalise on new prospects and learnings:
- A clearer understanding of demand is allowing alignment with more suitable product developments. For instance, higher growth in the budget and midscale space, or serviced apartments, previously overlooked whilst investors focused on upscale segments.
- Interest in secondary cities and alternative nodes.
- Acquisition opportunities for distressed properties.
- More direct control of assets, with more investors being comfortable with outright ownership.
- International operators have learnt to navigate risks associated with African hotel operations on the continent. This contribution of institutional knowledge of the industry has improved professionalism on the continent and impacted positively on regional brands.
- Local and regional capital perceives country risk differently to international capital.
- This intelligence plays out in confident and realistic target setting, with appropriately aligned expectations measured against existing benchmarks.
- With a larger volume of successful developments and exits, more evidence of repaid loans, more experienced promoters, and evidence of increasing institutional capital entering the sector, the debt market is evolving to the benefit of the investor.
It’s been a challenging decade but one that has prepared the sector for the next supply cycle. The industry is more knowledgeable, investors are savvier, products have evolved and alternative markets are being explored. Of particular importance is that banks and private equity partners are grasping the intricacies of this sector. A more strategic approach to supply and demand will empower a new decade of continued investment and improving liquidity.