The outlook for the hotel sector in Sub-Saharan Africa remains positive, with strong underlying long term economic and demographic fundamentals, despite the current slowdown in economies in the region. Many markets remain fundamentally undersupplied in the medium term, and several markets are heading into a new supply cycle. In 2016 we expect a moderate year for demand growth in the region, with a continued growth in the supply pipeline and an increase in transactions.
Following a strong recent period of economic expansion in Sub-Saharan Africa, we saw a slowdown in growth in 2015 to 3.4% with an outlook of 4.2% in 2016 and 4.7% in both 2017 and 2018, according to the latest World Bank forecasts. Pressure is coming from lower commodity prices, reduced consumption by trading partners, tightening of borrowing conditions, electricity shortages and select political instability. Currency fluctuation and currency access, as well as interest rate volatility, have increased investment risk.
Despite this slowdown, the current economic growth forecast of 4.2% for 2016 Sub-Saharan Africa is still well ahead of the global average of 2.9%. Numerous markets are expected to show high economic growth, including Ethiopia (10.2%), Cote d’Ivoire (8.4%), DRC (8.0%), Rwanda (7.4%) and Tanzania (7.2%). Economic growth has a direct and amplified impact on demand for hotel accommodation and consequently hotel profitability and supply growth. Air access continues to improve through global carriers like Emirates, Turkish Airlines and Qatar Airways and regional carriers like Kenya Airways and Ethiopian Airlines. Global corporate entry remains on a generally positive trajectory. Intra-regional trade is growing regional demand, whilst leisure demand is increasingly captured by the formal hotel sector.
East Africa will see the further maturation of the hotel sector, with substantial new supply coming online in Nairobi and with Dar es Salaam, Addis Ababa and Kigali all showing strong demand growth. Southern Africa continues to be dominated by South Africa, and we are at the start of a new, more moderate, supply growth cycle which will be led by Cape Town. Demand growth in South Africa should be strong in 2016, with the rebound of tourist arrivals following the lifting of restrictive visa regulations and the positive impact on global competitiveness following the devaluation of the Rand.
West Africa continues to be impacted by lower commodity prices, which have put pressure on hotel demand from resources-related industries and the public sector. However, opportunities continue to exist in various market segments in the region. In the Indian Ocean, Mauritius is coming out of a depressed trading climate, and has seen strong demand growth which should start to result in stronger room rates, and in the medium term, new supply. Demand growth is buoyed by the safe destination status of Mauritius, yet new air access and tourism promotion should ensure that this growth is sustainable. Several countries in the Sub-Saharan region including Zambia, Ghana and DRC have national elections in 2016, which will result in a slowdown in investment flows and hotel demand.
On the whole, we forecast demand growth in the region in excess of GDP growth at 5.0%-6.0%. Despite economic headwinds in 2016, the fundamentals remain strong and investment sentiment is generally buoyant. Interest from global real estate capital into Sub-Saharan Africa is growing, yet the majority of investment remains local and regional. Investment-grade assets continue to remain tightly held and consequently investment opportunities are development focused. In the medium term we see an improvement in liquidity and transparency, and a reduction in development cost and risk as the sector matures. In these times it is critical to take a long term view of demand fundamentals, and to have a good understanding of where the supply cycle is as markets remain thin. Significant risk-adjusted investment returns are on offer in the Sub-Saharan Africa hotel real estate sector, but doing your homework is crucial.