James Nathan, Associate: Capital Markets, Hotel & Hospitality Group, JLL has identified that the majority of active lenders in Sub-Saharan Africa have shown an improved understanding of the fundamentals and operating structures that impact overall hotel performance. Prominent commercial, development and alternative lenders were interviewed with the aim of providing a holistic and accurate outlook of the region’s debt markets. This gradual but exciting paradigm shift will assist developers, investors and operators in closing the ever-present capital deficit and will help realise envisaged pipelines within realistic timeframes. Through extensive and in-depth research, he has highlighted some key observations to share on Sub-Saharan Africa’s evolving debt markets.
Access to debt has always been a contentious issue on the continent. Whilst sentiment remains somewhat fragmented amongst lenders, several developments have taken place in the region over the past year which certainly point to a greater awareness of transaction volumes and capital flows. As we continue on the road to maturity, this enhanced education will do much to assist the growth of the hospitality sector in Sub-Saharan Africa.
The following pointers provide a good overview of the opportunities and challenges in funding hospitality ventures in the region.
- A key takeaway is that financiers are now encouraging investors and developers to engage with them in the initial stages of their pursuits. Input on construction methods and timelines, management agreements, and operating structures all impact the availability and cost of debt.
- Many banks are still grappling with the concept of management agreements, unless the accountability can be correctly aligned between operators and promoters. Security, performance guarantees, subordination of incentive fees and key money are tools used to distribute operational risk and provide banks with an element of comfort. Franchise agreements seem to carry a similar stigma as the real estate owner must still bear the operational risk.
- Most lenders have an appetite for lending against properties with lease agreements in place, backed by credible covenants. We have recently seen an increase in sale and leaseback activity in the Indian Ocean with operators looking to free up capital, while retaining management to realise the operational upside. This is largely testament to the strength of the markets in which these deals originate and satisfactory rent coverage which provides all parties with comfort.
- Opportunities that have an international operator in place (regardless of the operational structure) tend to attract favourable attention from lenders.
- Loan lengths average approximately 7 years, with banks being far more creative with grace periods, interest only loans, and adjusting interest coverage ration’s during ramp up periods post development. Development banks tend to provide longer loans at 10-12 years, where certain commercial banks are only competitive in the 3-year loan space due to capital requirements imposed by Basel III. LTV ratio’s range between 40% to 65% for stabilised operational assets, whereby LTC ratios are more conservative unless rationalised by forward sales, leases, or promoters that are utilising cash flow from other assets. In-country internal lending limits also govern the size of the loans issued.
- ICR coverage ratio’s range between 1.2 to 1.4 for ramp up, and 1.4 to 2.4 for stabilised assets.
- When lenders assess risk, they tend to assess any macroeconomic concerns of the country as well as the microeconomic factors affecting trading potential. Local currency exposure and monetary policy continue to plague the appetite of banks that are active across the continent.
- Delivery risk is one of the largest concerns when financing hotel developments. Healthy contingency allowances, technical compliance guarantees, and ensuring the initial drawdown on equity are a few keys measures that lenders put in place for development loans. Construction cost have been seen to fluctuate by up to 20%.
- Many lenders say they are quite deal specific in terms of preferred jurisdictions. That being said, Ghana, Botswana, Mauritius, Tanzania, South Africa and Zambia seem to be where they are most active. Nigeria, Angola, Kenya, Ethiopia, and Mozambique are all regions with potential but unfortunately not on the top of the agenda due to their various adversities.
- Lending still predominantly takes place in USD or EUR, and in a few circumstances local currency. It is important to lend in the currency in which the underlying cash flows are denominated in.
- Due to the tempestuous nature of each submarket, it is difficult to clearly identify where the largest gap between the average cost of debt and average total return is present. It is very much on a case by case basis whereby the Alpha is found, rather than identifying clear Beta trends.
- While alternative lenders are becoming more of a talking point as they enter the hospitality sector, they have yet to make an impact due to noncompetitive terms and a lack of understanding of the sector.