International hotel chains wake up to African potential

International hotel chains wake up to African potential

Trevor Ward

In terms of the number of hotel chains currently present in Africa, the continent is still very much behind other regions. However, as Trevor Ward, the managing director of the W Hospitality Group, based in Lagos, Nigeria, explains, the international chains have at long last woken up to Africa’s potential and the scramble could begin soon.

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If you look at the world map, with all the little lights representing an international hotel chain property, Africa is still ‘The Dark Continent’. There are exceptions of course, namely Egypt and South Africa, but even in the latter there are not many, and of late the number has reduced with the re-branding of several hotels from international to ‘home-grown’ brands.

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But this situation is changing. Whilst there is no let-up in the efforts to populate other developing regions–particularly Asia, and the giants of India and China–the international chains are turning their attention to sub-Saharan Africa in a big way.

There are two main sectors driving the economies of Africa, and therefore hotel development–oil and tourism. The continent is beset by problems, both natural and manmade, but at the same time it is blessed with an abundance of natural resources. And the world needs those resources, particularly the oil and gas. Fully 15% of the US’s oil requirements are imported from West Africa, and many billions of dollars continue to be invested in increasing the production of oil and gas on the continent. Ghana has just reported a major oil find–watch them grow!

In North and East Africa, tourism predominates as the reason for hotel development. Morocco and Tunisia are experiencing major development whilst Mombasa in Kenya is rising again as an exotic destination, often twinning with a safari; InterContinental are looking to re-enter that market after several years’ absence. Currently Serena is the only international chain there. Presenting serious potential competition to Mombasa is Zanzibar, in my opinion one of the best destinations on the coast, with a fabulous tourism product. Kempinski and Serena both have great hotels there, with Movenpick due to enter the market shortly.

Says Kristin Thorsteinsdottir of Radisson SAS: “Zanzibar is on our wish list but barriers to entry seem to be quite high; there is a shortage of sites in good locations. It is my hope that the island will achieve room rates similar or higher to the ones currently achieved in locations such as Mauritius.”

But ask many, if not most international chains, and they will tell you that South Africa is the main target for their expansion, not least because it is so much easier to develop there than most other places in Africa.

But commercial considerations, of course, predominate. According to Thorsteinsdottir, “Johannesburg, Cape Town and Durban all experienced double digit growth in RevPar last year. There is still room for growth in those locations and the 2010 Football World Cup will provide exposure globally, giving the country a showcase opportunity across the sporting, business and general tourism markets”.

Intercontinental’s man in Africa

Having previously relied on partners to push out their brands on the continent, Inter-Continental have appointed a development director purely for Africa, based in Cape Town. This is a first–Africa has always, in all the brands, been lumped in together either with Europe, or with the Middle East, or with both. Now Africa gets its own man. Expect to see more of those ubiquitous Holiday Inn flags flying soon.

Rezidor, the Belgium-based operator of Radisson SAS and Park Inn hotels in Europe, the Middle East and Africa, have also appointed a South Africa-based developer, and other chains are also looking for developers to be based in Africa, realising that, if they are to have competitive advantage, they cannot ‘do’ Africa from the comfort of a European office.

Brands like Hilton, Kempinski, Marriott and Starwood are all seeking opportunities, particularly in the oil-rich nations, and whilst they have yet to move their executives there, the increased attention they are paying is to be welcomed.

Expansion of the chains out of South Africa is also a new phenomenon, with Protea now operating around 25 hotels in five other countries in sub-Saharan Africa, and also in Egypt, the UK and Reunion. They have been particularly successful in penetrating the Nigerian market, with 10 hotels now operating in that West African country.

Southern Sun, currently with just one eponymous-branded hotel outside South Africa in the Seychelles–they also own and operate hotels under other brands, including Holiday Inn, in Tanzania and elsewhere–are also seriously looking at Nigeria, with deals in Lagos, Abuja and Calabar on the books.

Who has been the most successful in Africa? Accor, by far, with 54 hotels and almost 6,500 rooms in 17 countries in sub-Saharan Africa. Add in North Africa and that goes up to 124 hotels, almost 21,000 rooms and 21 countries. The other chains must be looking at that enviously, and wondering how they will ever catch up!

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What does this mean for African economies? A great deal. Any traveller will know that finding quality hotel accommodation can be a challenge, even in some of the capital cities, so the march of the brands will surely mean that more business travellers and tourists will venture forth. And that means more jobs for Africans.

So if there is so much increase in hotel development, why isn’t the map of Africa covered in hotel flags? Progress is slow and, with the best will in the world, is likely to continue to be so. Why? There are many reasons, which all meet at the same place–lack of finance.

Hotels need long-term funding–they need equity investors who will wait up to 10 years to get their money back, and they need lenders who will offer terms which match the payment of interest and principal to the cash flows which hotels generate. In general terms neither of these are available. Home-grown investors tend to want short-term returns, domestic lenders do not have long-term deposits to lend and overseas investors and lenders see too much risk.

In the past, many hotels, particularly those in capital cities, have been built by governments–name any capital city from Abuja to Yaounde and you 11 find government-owned hotels there. But they were built in the days when government investment in private sector activities was considered acceptable, and that is not the case today, rightly so, with more fundamental social requirements needing those funds. Investment in new hotel construction today comes mainly from three sources–domestic equity investors, ‘special’ international equity investors and from bilateral and multilateral ‘special’ lenders. Domestic equity investment predominates–majority stakes in the three main government-owned hotels in Nigeria’s capital Abuja–the Hilton, the Sheraton and the Meridien–were all sold to domestic investors.

Gulf investors such as Kingdom Hotels Group and Albawardy Investments fall into the category of ‘special’ investors who, whilst primarily interested in the commercial returns from their hotels, also have a non-commercial reason for investing, i.e. promoting national development and social welfare. Kingdom’s African portfolio includes several hotels in Kenya, and the $100m Movenpick project in Accra, Ghana. Albawardy have invested in two Kempinski hotels in Tanzania, and are planning more projects there.

Other special investors include the various Libyan government investment vehicles, with hotels under whole or partial ownership in Ghana, Togo, Gambia and others, and investments in management companies such as Corinthia and Legacy.

And then there are the special lenders, who have contributed so much to the development of hotels in Africa. Notable amongst these are the International Finance Corporation (IFC) and the European Investment Bank (EIB).

In 2006, IFC alone had over $100m committed to the hotel sector in Africa in 14 countries–a tiny sum compared to other sectors, but still far more than any other lender. In recent years, its largest commitments have been in Nigeria ($11m towards the development of the 430-room Novotel Hotel) and in Kenya ($20m for the refurbishment of Kingdom’s Fairmont portfolio). Notably, both of these investments have been alongside blue-chip local or overseas investors–UAC Property Development and Kingdom Hotels respectively.

EIB’s portfolio is smaller, totaling just over 40m, but this excludes several small loans extended through lines of credit to local banks.

In my experience, financing for hotel development, especially in Africa, is almost always sourced locally. African investors need therefore to understand that, although the returns from hotel investments come later than they are used to, those returns are long-term and sustainable.

COPYRIGHT 2007 IC Publications Ltd.

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