We at JLL Sub-Saharan Africa forecast an improved hotel performance and investment climate in Sub-Saharan Africa for 2018, with the budget and midmarket segments showing the strongest demand fundamentals. Global investor interest is likely to increase with a search for yield in a long global real estate cycle, as well as demand for platform investments in Sub-Saharan Africa. Despite high global debt liquidity, it is expected that financial leveraging will remain challenging in the region, while transaction volumes are expected to continue their upward momentum.
Hotel sector trends for 2018:
Acceleration of RevPAR growth
2017 was a challenging year for hotel performance, with subdued economic growth in key markets, oversupply biting in many primary cities and select political instability. We estimate occupancy for 2017 at 58% to 60% which was in line with 2016, with ADR and RevPAR effectively flat year-on-year. In 2018, as GDP growth in Sub-Saharan Africa recovers to 3.2% (YoY), we expect stronger occupancy growth with RevPAR growth of between 3% and 5%, as occupancy picks up to above 60%.
Midmarket segment to drive growth
Investment returns in the budget to midmarket segments are the highest in Sub-Saharan Africa due to the more stable local and regional demand base, as well as more sensible development and operating costs. We predict higher investor interest and supply growth in these segments than in any other supply segment in the region for 2018 and beyond.
Indian Ocean to remain top performing destination
Hotel performance in the Indian Ocean has been excellent since 2014, and investor demand for assets in Mauritius, Seychelles and Zanzibar is strong. Investment returns have been driven by a combination of increased demand due to safety concerns and instability in competing resort destinations, improved airlift, and limited supply growth. The Indian Ocean expected to retain its position as the top performing region in Sub-Saharan Africa in 2018, with aggregate occupancy rates remaining north of 75% and ADR growth of 6% to 8%.
Global brands to increase conversion focus
As competition grows, owners are increasingly seeking out global brands to improve their distribution capabilities and market visibility. Many brands are now making key money and operator loans available to assist owners in meeting property improvement plans to allow them to meet global brand standards. We expect to see more conversions and franchising in 2018 in key cities for the global brands.
Platforms increase in value
Developing out a portfolio of hotels in Africa to reach scale is tough, and this is driving interest from real estate investors, institutional investors, and global brands to acquire existing portfolios and platforms. As investors and operators seek scale in Africa, we expect to see demand for platforms to grow. In 2018, we should see a couple of platform deals supported by global M&A trends.
Effective financial leveraging to remain challenging
2017 was a very strong year for African Eurobond issuance. However, with the spread over US Treasuries now at a three-year low, the enthusiasm for sovereign issuance has not flowed through into real estate debt capital markets. Lenders into the continent remain conservative and continue to favour international branding and a strong track record. We do not anticipate that sentiment will improve considerably in the short term and 2018 will be another tough year for hotel lending, with the availability of debt limited and often expensive.
USD500 million forecasted in hotel investment volumes
Transaction volumes have increased during the past five years, yet open market transaction volumes remain low compared to the broader growth in hotels as an asset class within the real estate sector. Nonetheless, transaction volumes are expected to continue their upward momentum with around USD500 million in transactions in 2018, an increase of 10% to 20% on 2017. We predict that the maturation of hotel ownership will see an increasing number of owners recycling their capital into new hotel developments and in turn creating an opportunity for new capital to acquire existing assets in the hotel sector.
Fresh global capital to assess opportunities
With the global search for yield in a long real estate cycle and the current mid-cycle rotation in mature markets, global capital is increasingly assessing opportunities in Africa. Growing Chinese influence in Africa and new politically motivated investors coming to the region should result in fresh capital looking at opportunities in the hotel sector.