Download Spotlight on Africa: A Diverse Frontier

October 2016
Spotlight on Africa:
A Diverse Frontier
An Overview of Hotel Real Estate in Sub-Saharan Africa
2
Spotlight on Africa: A Diverse Frontier
Contents
Introduction3
Macro-economic context
4
Global and regional capital flows
8
Hotel market overview
10
Emerging hotel markets
12
Regional investor focus
14
Investment hotspots
16
Barriers to investment
18
Transparency watch
20
Evolving debt markets
22
Looking forward 26
Kigali, Rwanda
JLL
Introduction
The long-term outlook for hotel investment in Sub-Saharan Africa remains
positive despite the recent slowdown in many of the region’s economies.
The investment case is set by fundamentals such as comparatively high
economic growth, increasing economic and political stability, favourable
demographic trends, diversification of export revenues and infrastructure
investment. This in turn underpins growth in demand for hotels. There is,
however, no doubt that the slowdown in numerous economies dependent on
resource revenue has reduced hotel trading performance and, consequently,
investors and lenders are more cautious about investing in the region.
The emergence of new markets and the saturation of others are leading to
an increased divergence in investment opportunities in hotel markets across
the region. In this changing environment, which is largely driven by local and
regional capital, it is critical to have a deep understanding of what investors
and lenders seek to achieve in Sub-Saharan Africa. Recent global market
uncertainty and currency fluctuation have placed local and regional capital in
a better position to capitalise on hotel investment opportunities. The gradual
upturn in the global commodity cycle in 2016 will undoubtedly translate into
improved investment conditions in these resource intensive markets.
Given the corporate centric nature of hotel demand in Sub-Saharan Africa,
there is a clear link between economic growth, capital investment and foreign
corporate entry to demand for hotel beds. The medium-term outlook for
acceleration in growth is positive and we forecast demand growth of 3% to
5% during the coming three years.
From an investment perspective, we forecast USD1.7 billion to be invested
in hotels in Sub-Saharan Africa in 2017 and a further acceleration to USD1.9
billion in 2018. The supply pipeline will continue to grow as a result, with
increasing efficiencies in realising new developments.
This 2016 Sub-Saharan Africa hotel investment overview aims to reflect the
current investor and lender sentiment for the region. The aim of the research
is to map out these fundamentals and to highlight trends facing the hotel
real estate sector in Sub-Saharan Africa. The diverse set of fundamentals in
each market is becoming integral to the way in which investors and lenders
approach the sector, with a region-wide approach becoming increasingly
challenging. The hope is that this research will assist in bringing further
transparency to the hotel sector and promote the view that investors should
embrace the diversity that these markets bring, but most importantly to
understand the variety and nuances of these markets.
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Spotlight on Africa: A Diverse Frontier
Macro-economic context
The reduction in global commodity prices has led to a slowdown in the regional economic growth rate from 2014.
Certain economies overexposed to commodity income for foreign exchange earnings and government income
have been particularly hard hit.
For 2016, the GDP growth forecast for the region has slowed to 3.0% from an average between 2010 to 2015
of 6.0%. This is expected to accelerate to 4.1% in 2017 and 2018 driven by the large regional markets. The
challenging economic climate in West Africa led by the challenges in Nigeria and Angola have shifted the
economic growth center towards East Africa. The top three markets for economic growth between 2016 and 2018
are expected to be Côte d’Ivoire,Tanzania and Senegal which shows the geographic diversity of growth within
the region.
Demand in the hotel sector is driven by economic activity in each market as hotels are largely dependent on
corporate guests. Aside from base economic growth, other key factors in increasing hotel demand are economic
participation, regional integration, foreign direct investment, infrastructure investment and corporate entry. The
medium-term outlook for all of these factors is positive, yet their impact on each hotel market varies significantly.
Currency volatility and access to foreign currency has been a major challenge in the region in the recent past and
it is clear from discussions with lenders and investors that this is seen as a key risk area for them. The fact that
most hotel markets in Sub-Saharan Africa continue to trade in US Dollars provides a significant currency hedge
and a competitive advantage for the hotel sector over other real estate asset classes.
JLL
5
Sub-Saharan Africa Resilience Index
High growth, low resilience
Three - y e a r a v e r a g e GD P g r o w t h 2 0 1 6 –2018
9%
High growth, high resilience
Cote d'Ivoire
Niger
7%
Liberia
Guinea
Central African Republic
5%
GuineaBissau
Mozambique
Chad
3%
Burkina Faso
Burundi
Angola
Zambia
Mali
Sierra Madagascar
Leone
Congo (DRC)
Mauritania
Ethiopia
Rwanda
Togo
Tanzania
Cameroon
Gabon
Malawi
Gambia
Ghana
Comoros
Uganda
Namibia
Benin
Lesotho
Eritrea
Congo
Sao Tome and Principe
Seychelles
Botswana
Cape
Verde
Nigeria
South Africa
Swaziland
1%
Senegal
Kenya
Zimbabwe
-1%
-3%
Equatorial Guinea
Low growth, low resilience
30
35
Low growth, high resilience
40
45
50
55
Resilience to external shocks
60
65
70
75
80
Bubble size = 2018 nominal GDP, US $ billions
Note: Nominal GDP forecasts for Liberia are estimated because of data shortages. Sierra Leone has been excluded from the chart given its
highly unusual economic dynamics following an economic collapse causedby the Ebola pandemic
© 2016 Frontier Strategy Group | www.frontierstrategygroup.com | Sub-Saharan Africa Regional Outlook for 2017 | August 2016
66 Spotlight
Spotlight on
on Africa:
Africa: AA Diverse
Diverse Frontier
Frontier
Africa growth fundamentals
High population growth
1.2 bn
1.5 bn
20152025
Urbanisation
40% 44%
20152025
High GDP growth
$1.4 T
$2.2 T
20152025
Demographic dividend
18 Years
42 Years
median age (Africa)
median age (Europe)
Low supply base
2,000
160
people per room (Africa) people per room (Europe)
High tourism growth
38 m
Tourist arrivals 2015
58 m
Tourist arrivals 2025
Short-term challenges
Lower oil and other commodity prices
Regional political and social instability
Global economic and political uncertainty
Emerging nature of capital markets
JLL
Abidjan, Ivory Coast
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Spotlight on Africa: A Diverse Frontier
Global and regional capital flows
In 2016 we are seeing global transaction volumes decline from their high of USD85 billion in 2015, with investors
demonstrating a more measured approach to the sector. Cross-border capital is expected to remain steady yearon-year, after some USD30 billion in capital was deployed into hotels across national borders during 2015. So
while overall transaction volumes are anticipated to taper, cross-border investment will be more resilient.
Private equity funds still have large amounts of cash and have a need to deploy, a trend motivating the continued
momentum in the sector. For funds raised prior to the current cycle, there will be an increase in pressure for the
capital to be spent during the funds’ investment horizon. Private equity groups in the US and Western Europe
are expected to lead this trend, with assets in secondary markets in the US, UK, Germany, Spain, and Japan the
primary targets.
There is a large pool of global capital looking for new hotel frontiers and at the moment Sub-Saharan Africa has a
very limited share of this global capital. This is largely driven by the perceived higher risk of investing in the region
and subsequent higher return requirements, as well as the lack of liquidity and access to investment grade hotel
assets. Even in South Africa, Kenya and Mauritius, which are some of the most mature markets in the region,
assets remain tightly held. As liquidity improves during the coming years we should see an increasing appetite
from global capital for the region.
In the medium-term, hotel investment in Sub-Saharan Africa will continue to be driven by local and regional
private capital. With the exception of a few regional owner operators, the majority of investment is driven by
first-time hotel investors with diverse portfolios of other business interest. Over time, we expect that this will result
in increased liquidity, consolidation and further sector specialisation with certain markets already seeing this
maturation in hotel investment
Global hotel transactions rose nearly 50% to USD85 billion in 2015 the second-highest year ever.
We also saw the highest ever volume of single asset transactions at USD47 billion
in 2015 and the highest ever levels of cross border investment (USD30 billion).
We expect to see more mergers and acquisitions in 2016.
Consolidation is set to continue, with single assets and secondary markets to
be the big stories.
Cross-border activity will remain relatively strong in 2016 and the big targets
will be assets in Japan and across Western Europe.
JLL
Johannesburg, South Africa
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10 Spotlight on Africa: A Diverse Frontier
Hotel market overview
Similar to the macro-economic picture for the continent,
the hotel sector is characterised by diverse factors in each
underlying market. In 2016, we have seen a number of markets
such as Mauritius and Cape Town perform well, while other
markets like Luanda and Lagos have been very challenging
from a trading perspective. Countries that have been most
exposed to the decline in commodity prices have seen demand
slow or even decline. These markets have often had to deal
with the acute lack of foreign currency, increasing interest
rates and a slowdown in public sector spending. While these
have seen depressed hotel demand, there is a sense in many
markets that this has now bottomed out.
Infrastructure projects are an important demand driver for the
hotel sector, both as an economic diversification and growth
enabler, as well as the short-term impact of the demand from
contractors and specialists during construction. Key markets
reduced public infrastructure expenditure in 2016 due to
low foreign currency reserves and higher sovereign bond
yields making these projects more expensive. Despite the
short-term slowdown in investment, infrastructure is a key
feature of almost every country in the region’s economic plans
and policies and the overall positive trend in infrastructure
development will benefit the hotel sector.
Over the past 12 months, we have seen more resilient and
diversified economies enjoying stronger demand fundamentals.
Markets such as Addis Ababa, Mauritius, Cape Town, Nairobi,
Dar es Salaam and Johannesburg are some of the major
hotel markets recording improved demand. Hotel trading
performance is, however, a function of both supply and
demand trends with the supply side of the equation becoming
increasingly varied. Not only is each country in the region at a
different point in the supply cycle, but sub-markets within each
country are also at different stages of their own respective
supply cycles.
Markets such as Nairobi, Addis Ababa and Gaborone are
approaching saturation despite demand growth. These markets
have the ability to overcome this saturation relatively quickly,
while other markets such as Maputo, Luanda and Libreville
will take a little longer and are often dependent on specific
economic sectors.
Economy 9%
14% Luxury
Midscale 11%
18%
Upper
Midscale
Supply by
Segmentation
28%
Upper
Upscale
20% Upscale
South Africa 31%
Other 38%
Supply by
Location
8% Kenya
2% Cape Verde
3% Uganda
3% Tanzania
5% Mauritius
5% Ghana
5% Nigeria
Sub-Saharan Africa
existing rooms:
257,000
Annual Forecasted Hotel
Investment for 2017:
USD1.7 billion
Supply growth forecast in
Sub-Saharan Africa for 2016 to 2018:
3.5%
JLL
> 30,000 keys
> 30,000 keys
10,000 - 30,000 keys
10,000 - 30,000 keys
5,000keys
- 10,000 keys
5,000 - 10,000
0 - 5,0000keys
- 5,000 keys
In 2015, we reported that there were 250,000 hotel rooms in Sub-Saharan Africa. This is estimated to grow to
257,000 in 2016, with room supply expected to increase by 2.8% over the period. A number of investors and
operators are however looking to the midscale segment for opportunities, particularly to attract domestic demand.
We estimate that USD1.4 billion was invested in hotel real estate in Sub-Saharan Africa in 2015. In 2016, we
forecast that the recovery in the region’s economy will see this increase to USD1.7 billion in 2017 and USD1.9
billion in 2018. Further to this, we expect an improvement in liquidity in the region which should exceed USD500
million in 2016 depending on some high value transactions in South Africa.
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12 Spotlight on Africa: A Diverse Frontier
Emerging hotel markets
The past decade has seen the emergence of a number of new hotel markets in Sub-Saharan Africa. This supply
growth was largely necessitated by the growth demand from the business segment, followed by government,
diplomats, NGOs and leisure. High supply growth markets in 2016 included Nairobi, Addis Ababa and Kigali.
South Africa remains the largest hotel market in Sub-Saharan Africa and accounts for 30% of the room supply in
the region. The market is particularly mature in a regional context and key nodes such as Johannesburg, Cape
Town and Durban are again entering their Hotel development supply cycles subsequent to the saturation of 2009
and 2010. The following maps give some perspective to the relative supply growth per country since 2008. Off a
low base, West and Central Africa have experienced the largest room supply growth of 8% and 9% per annum
respectively since 2008, while East and Southern Africa have grown at 5% and 4% respectively.
Africa Room Supply 2008
Note: Bubble size represents size of country room supply.
Source: JLL & STR Global, 2016
Africa Room Supply 2016
JLL
Antananarivo, Madagascar
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14 Spotlight on Africa: A Diverse Frontier
Regional investor focus
To assess the current appetite for hotel investment in the region, we interviewed a broad range of local, regional
and global hotel investors with a focus on Sub-Saharan Africa. The predominant focus of these investors remains
on development (43% of primary focus), with 36% of respondents considering acquisition, and 21% targeting both.
A larger portion of investors are considering both acquisitions and development compared to 2015 (17%), with a
slight shift from either acquisition or development activity into a combination of the two. Given the challenges in
completing developments on time and on budget, we are seeing an increasing number of investors looking for
value-add acquisitions instead.
The minimum property size that investors would consider is between 100 and 150 keys, or a minimum value
of between USD10 million and USD15 million. Regional respondents tended to prefer smaller hotels, while
international respondents generally have an appetite for larger assets to achieve scale and justify asset
management resources. Maximum investment varied significantly, with most investors noting that a high amount
of capital could be mobilised if the investment fundamentals stacked up.
The majority of respondents cited that their target gearing at a project level would be between 40% and 75%
depending on the gearing capacity of the investment and the marginal increased cost for increased leveraging.
On the whole, the investors noted a tightening of lending terms with US Dollar debt in particular becoming more
challenging to obtain. The quality of the recourse to the guarantor of a development loan is more the focus of the
lenders rather than the specific project.
Focus of Investment
Target Operating Structure
100%
17%
90%
80%
90%
36%
70%
60%
60%
50%
50%
40%
46%
30%
30%
20%
10%
10%
2015
Development
Source: JLL, 2016
0
2016
Acquisition
9%
29%
40%
43%
20%
0
30%
37%
80%
37%
70%
100%
21%
Both
31%
2015
11%
26%
26%
2016
Outright Ownership
JV Majority
JV Minority
Various
JLL
JLL
Investors are taking an increasingly flexible approach to the target grading level of assets
to invest in, with an increasing portion of investors looking at the midscale and serviced
apartment sectors over the upscale and upper upscale sectors. The interest from investors
in certain market segments or grading levels appears to be increasingly market driven rather
than mandate or brand preference driven.
Hotel management agreements remained the strongest preference for most investors (28%),
a trend borne out of the strong preference for these from operators in the region.
Investment Interest in the Short and Long-term
Real Estate Investment Trust
17%
Fixed Lease
17%
Owner Operate
High-Net-Worth
17%
Franchise
Developer
Target
Tenure Types
Owner Operator
28%
Management
Agreement
Investment Fund
0
10
Long-term
Short-term
Source: JLL, 2016
22%
Variable
Lease
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Spotlight on Africa: A Diverse Frontier
Investment hotspots
As the transparency of real estate in Sub-Saharan Africa improves, investors are better equipped to understand
(and price) risks, and are able to adjust their investment hurdles accordingly. Investors that we interviewed
targeted leveraged IRRs of between 14% and 18% in mature markets like South Africa and Mauritius, while
emerging markets such as Kenya, Tanzania and Ghana require a return of between 16% and 22%. Higher risk
markets are still actively being pursued by investors, yet return expectations consistently exceed 20%. It should
be noted that beyond these professional investors there are projects that will be funded for other reasons, often
strategic or emotional, where investors will be comfortable with lower returns. Further to this, local investors are
often better able to assess the local risk (or have less cross-border risk) and therefore accept lower returns.
The JLL Property ClockTM presents our view on the relative position of a number of regional markets within their
supply cycle. As liquidity increases in Sub-Saharan Africa during the next five years, there will be increasing
transactional evidence to support the development of the investment cycle in different markets. We currently see
the highest investor interest in Cape Town, Abidjan, Dar es Salaam and Seychelles.
Kinshasa
Gaborone
Inte
ts or
I n ve
sto
r
re s t
Lagos
allin
g
Dar es Salaam
Property
clock
Kampala
ere
st
e
re
es
t
or
I nt
Mauritius
In t
tor
Durban
st
Inves
Abidjan
G ro
wing
Lo
nv
wI
Accra
Johannesburg
Antananarivo
Source: JLL, 2016
Int
tF
g In
ve
Maputo
es
er
Addis Ababa
Kigali
Seychelles
Cape Town
Nairobi
Stro
n
16 Luanda
JLL
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18 Spotlight on Africa: A Diverse Frontier
Barriers to investment
Projects not
meeting my
returns
Lack of foreign
currency
Lack of
investment
grade
properties
Lack of political
stability
4
7
3
2
1
Lack of clear exit
opportunities at the
end of my assetholding period
Lack of access
to quality
development
professionals
High
development
costs
5
8
Lack of
suitable
local equity
partners
Opportunity
cost of my
land against
other uses
6
9
The higher yielding opportunities that are presented in the region carry inherently challenges
for investors to navigate, due to the emerging nature of the sector. The extent to which these
challenges exist vary from market-to-market, yet an overarching trend emerges when we look
at the broader region.
The primary challenge that investors are facing is finding projects that meet their minimum
return threshold and this remains in pole position as it was in 2015. It appears that there is
a high amount of capital available, yet investors search for projects with the right level of
returns. This is not to say that projects in the market are incorrectly configured or priced, but
investors may be finding that there is a lack of suitable leveraging in the market to achieve
their required equity returns, or they may be pricing in excessive risk.
Lack of political stability again ranked second in 2016, with this clearly being an important risk
factor in long-term investments such as real estate. There appears to be a continued positive
shift towards inclusive and democratic rule, yet investors need to take into account that
changes in political power can impact on economic policy and economic alignment.
JLL
Lack of foreign currency was ranked the same as 2015,
remaining at fourth place, as investors are struggling to
deal with currency pricing uncertainty and access to hard
currency. Certainty of delivery was anecdotally cited as
improving, due to the development and construction sector
becoming more experienced in delivering projects.
High development costs remain a key challenge for
investors in the region, ranking third on the list of
concerns. High development costs for new builds
when compared to mature markets are driven by a
longer development period, less experienced building
professionals and contractors, increasing land prices,
high development finance costs, and higher import duties
and taxes in certain countries. This barrier in turn has a
significant impact on the ability for investors to secure
projects with suitable investment returns.
The reduction of these barriers of entry in markets in the
region will see an increase in the flow of capital into new
projects and existing assets. When looking at the current
primary hotel investment markets in the region (such
as South Africa and Kenya), they will rank significantly
lower in terms of each of these barriers than most frontier
markets and be in a better position to attract capital.
Goree Island, Senegal
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20 Spotlight on Africa: A Diverse Frontier
Transparency watch
Transparency levels remain a focus for hotel investors in Sub-Saharan Africa, as is the case
with real estate investors across the region. JLL’s 2016 Global Real Estate Transparency Index
reveals that Sub-Saharan Africa has continued to make advances in real estate transparency
over the last several years, although progress has been mixed.
Of the 12 markets in the region included in the 2014 index, six (Botswana, Zambia, Ethiopia,
Nigeria, Angola and Ghana) have recorded progress in transparency with the remaining
six either stagnating or regressing. Advances in the ”Market Fundamentals”, ”Performance
Measurement” and ”Governance of Listed Vehicles” sub-indices have supported the overall
regional improvement, as greater involvement by international real estate consultancies and
local data providers elevates the level of access to information about real estate markets.
South Africa remains the only country ranked as “Transparent”, while Botswana, Zambia,
Mauritius and Kenya are all now classified as “Semi Transparent”.
JLL
Global Real Estate Transparency Index, 2016
Sub-Saharan Africa
EG
EG
SD
SN
SN
GH
CI
SD
NG
ET
CI
NG
GH
UG
RW
ET
KE
UG
RW
TZ
TZ
AO
ZM
Highly Transparent
Transparent
Semi-Transparent
KE
MZ
AO
ZM
Highly Transparent
MZ
BW
Transparent
Low Transparency
Semi-Transparent
Opaque
Low Transparency
MU
BW
MU
ZA
Opaque
ZA
Source: JLL, LaSalle Investment Management
Real Estate Transparency in Sub-Saharan Africa
Transparency
Level
Transparent
Semi
Low
Opaque
2016 Composite Market
Rank
2016 Composite
Score
25
South Africa
2.23
41
Botswana
2.66
57
Zambia
3.14
58
Mauritius
3.16
61
Kenya
3.27
80
Rwanda
3.79
83
Nigeria
3.82
85
Ghana
3.86
90
Uganda
4.05
94
Ethiopia
4.16
97
Angola
4.19
99
Tanzania
4.26
101
Mozambique
4.39
104
Ivory Coast
4.51
106
Senegal
4.54
Source: JLL, LaSalle Investment Management
Zambia advances to
‘Semi-Transparent’
Rwanda – top new joiner to GRETI
Nigeria and Ghana nudge into
‘Low Transparency’
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22 Spotlight on Africa: A Diverse Frontier
Evolving debt markets
Given the critical role of debt in completing the capital stack and providing leveraged return on equity, we
extended the research into hotel debt markets in Sub-Saharan Africa. For analysis purposes, we interviewed the
leading hotel lenders focused on the region to understand their lending strategy and where they see opportunities
and challenges.
Lender Overview
Debt funding in Sub-Saharan Africa’s hotel sector remains in its infancy across the region, primarily due to the
perceived risks surrounding the variability of underlying cash flow of hotel operations. The majority of bankers
interviewed are proceeding with caution in the sector, with a select few respondents steering clear of lending for
hotels entirely. This confirms the sentiment expressed by investors that the ease of access to funding remains a
challenge.
The higher level of uncertainty of the underlying cash flows for hotels in Sub-Saharan Africa, paired with the banks
not having specific hotel lending teams, results in a hesitation of the commercial banks to take on development
lending or single asset finance. The broader balance sheet of the project or deal sponsor and the recourse to
other cash flows is generally the deciding factor in lending in many of the markets in the region. The added
complexity to this is that certain markets like Kenya, South Africa and Mauritius have competitive local debt
markets while others such as Ethiopia and Angola do not.
In the region, management agreements are the primary form of operating contracts and by their nature, the
operating risk remains with the real estate owner rather than the operator in the case of leases. Our interviews
confirmed an overwhelming preference for leases from lenders, with a number of respondents citing that it is the
deciding factor as to whether they would consider hospitality lending. In addition to this, the opaque nature of a
number of markets means that there is also a lack of information to access risks, meaning that without external
recourse, direct owner surety or an operator performance guarantee, it is challenging for lending institutions to
commit to hotel projects.
That being said, selective local, regional and international banks are discerningly lending to developers and
long-term investors in the hotel sector, including both commercial and development banks. Each jurisdiction
poses unique obstacles for lenders in terms of country risk, capital allocation, country lending limits and their
house views for the sector. Development banks expressed less sensitivity to short-term economic and political
adjustments, with an appetite for longer terms where a developmental agenda was in play. In this context, hotels
are seen as an enabler of economic activity and as an employment creator in frontier markets, which is an
important feature for development funding institutions.
Local banks throughout the region tend to have more limited access to capital, due to their balance sheets often
being constrained by central bank regulations, particularly when it comes to providing foreign currency loans. This
is challenging for hotel real estate as the sector tends to be capital intensive and driven by hard currency. Most of
the large international banking groups remain very cautious when considering opportunities in the region as their
experience in these local real estate markets is more limited. This often results in them being uncompetitive with
risk adjusted lending terms.
JLL
The South Africa banking groups also have an ever increasing presence in Sub-Saharan Africa, supported by the
establishment of regional hubs in East and West Africa, a clear sign of their intention to move strongly into these
markets. A few South African banks have adopted the alternative strategy of expanding organically by following
their South African client base into the region, yet their real estate lending continues to be focused on retail and
commercial asset classes with underlying leases.
Lending criteria
The track record of the investor and the operator are key considerations in a bank’s lending criteria. Banks
will typically require security in the form of a registered first mortgage bond over the asset or require a pledge
of shares in the special purpose vehicle. Unless the hotel has a lease agreement in place, or has reached
stabilisation with a strong track record, most banks will require additional external recourse in the form of direct
owner surety or by way of a performance guarantee from the operator. This external security can be reduced as
the loan to asset value (LTV) decreases and cash flows strengthen after stabilisation. Respondents indicated that
they take more comfort when the hotel operator has real skin in the game and is further aligned with the capital
contributors through providing guarantees, equity participation or key money.
40%
Operator fixed
lease/guarantee
Preferred Form
of Operator
Guarantee
60%
Direct ownership
surety
40%
No
Hotel Loans
Required
to be Fully
Amortizing
60%
Yes
Source: JLL, 2016
Loans terms
The majority of commercial and development banks alike have a maximum threshold on income-producing assets
of 50% LTV, whereas development projects come in at a similar level, albeit that these are assessed on a loan
to cost (LTC) basis. There are certain exceptions to this rule, for example, the presence of a lease with strong
covenants or external security can increase the LTV to 60% and above. South African respondents expressed
comfort with increasing their exposure on occasions within South Africa based on the covenant of the borrower.
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24 Spotlight on Africa: A Diverse Frontier
Local Currency vs. US Dollar Terms
Sub-Saharan Africa (including South Africa)
Sub-Saharan Africa (excluding South Africa)
0%
10%
20%
Local Currency
30%
40%
50%
60%
70%
80%
90%
100%
US Dollars
Source: JLL, 2016
When looking at development finance, these loans are more expensive and of
a shorter duration. They tend to be capitalised as a project cost which is then
refinanced or repaid on exit. The standard maximum loan term for stabilised hotels
tends to be around seven years from a commercial bank, and up to ten years for
development banks. Without corporate guarantees in place, commercial banks
generally require that loans on income producing hotels be fully amortised over the
term. Certain development banks are more flexible and may consider interest only
loans, particularly during the first years of operation. We expect banks to reduce
their amortisation requirements as liquidity improves and evidence of successful
exits increases.
Cost of debt
The majority of hotel developments and transactions outside of South Africa are
funded in US Dollar terms to align the capital structure with the predominantly US
Dollar based cash flows. US Dollar denominated debt facilities are generally linked
to LIBOR. The typical margin range over US Dollar LIBOR is between 4.0% and
7.5% for operational hotels and between 7.0% and 9.0% for development projects.
This margin is dependent on the risk attached to the project, jurisdiction of the loan
and capital available to the bank, with internal and external factors considered.
Local and regional banks often lend in local currency and, due to high inflation, it
is not uncommon for the interest rates to range between 18% and 25%. Certain
commercial banks take a more competitive view on pricing, a strategy to secure
ensuing transactional banking once the hotel begins trading.
JLL
Lender All-in Pricing Range
USD Funding
ZAR Funding
Other Local Currency
0%
5%
10%
15%
20%
25%
Source: JLL, 2016
Outlook
Debt for hotel development and transactions in Sub-Saharan
Africa is in relatively short supply and continues to be driven
by broader sponsor recourse rather than project lending.
The development finance institutions play a critical role in
lending to projects and to pioneering in new markets. We
expect more lenders to enter the hotel real estate sector
in the medium-term as the sector matures and as liquidity
improves. Increasing institutional investment in the sector
should also see leading regional lenders become more active
as these investors can leverage off broader balance sheets
and existing banking relationships. The development of debt
capital markets will in turn have an impact on equity capital
flows as effective lending leads to improved returns.
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26 Spotlight on Africa: A Diverse Frontier
Looking ahead
Sub-Saharan Africa offers a uniquely diverse set of hotel real estate markets with a
broad range of opportunities and challenges, as well as risk and reward. From the
perspective of global capital searching for investment opportunities, the region can
be a challenging one to navigate. Investors and lenders alike are recognising this and
while regional players continue to leverage their first mover advantage to entrench
their presence in the sector, global capital markets are likely to increasingly flow into
the region as markets mature and transparency increases.
The demand for hotel beds in Sub-Saharan Africa is underpinned by positive
economic, demographic and tourism trends which should ensure that demand growth
will be one of highest out of any region in the world. Hotel developers and operators
are increasingly understanding how to tap into this demand and offering a broader
hospitality offering best suited for each market and client base. This demand growth,
paired with the more effective matching of supply to this demand, sets a good
foundation for investment.
Hotel investors in the region are discerning in their investment decisions as hotel
projects often compete for capital with other real estate asset classes and industries.
The increase in political, economic and currency stability will see a reduction in the
risk premium placed on hotel investment in the region which will in turn increase
capital flows. Development costs should reduce further in the medium term as
development professionals, owners and lenders gain further experience in the region.
As the pipeline of new projects is more effectively implemented, liquidity will increase
and exit options will improve.
Lenders are more cautious towards the hotel sector than their clients in the region
and are challenged with underwriting operational cash flows in what is seen as an
emerging sector. For the foreseeable future we expect commercial bank lending
to be determined on the basis of recourse to the sponsor, while the development
banks will play a critical role in pioneering new frontiers. As institutional investment
increases, we expect lending to become more readily available at improved terms
which will in turn provide better leverage returns on equity for investors.
Long-term investment fundamentals for the region remain positive despite the
short-term challenges that have impacted the hotel sector in Sub-Saharan Africa in
the past two years. Macro-economic development and government policy towards
tourism, investment and economic growth remain critical in a corporate demand led
sector. Hotel investors who carefully consider the supply and demand variables of
the markets in which they develop and transact are well placed to generate high risk
adjusted returns. Those who are able to establish platforms with scale should be
increasingly well placed to attract external capital or become an acquisition prospect
for larger global players. With such a wide range of opportunities and challenges in
the region, this will continue to be a divergent region in which to invest.
JLL
JLL
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To find out how JLL can assist you in making real estate decisions in Africa, contact:
Xander Nijnens
Senior Vice President
Hotels & Hospitality Group
Sub-Saharan Africa
+27 11 507 2200
[email protected]
Jonathan Hubbard
Head of Investor Services
Hotels & Hospitality Group
Europe, Middle East and Africa
+44 20 7399 5530
[email protected]
Craig Hean
Managing Director
Sub-Saharan Africa
+27 11 507 2200
[email protected]
Lagos
Room 112, Mulliner Towers
39 Alfred Rewane Road
Lagos, Nigeria
+234 1 448 9261
Nairobi
6th Floor, Delta Tower
Chiromo Road
Nairobi, Kenya
+254 7301 12024
London
30 Warwick Street
London W1B 5NH
United Kingdom
+44 20 7493 4933
Singapore
9 Raffles Place
#39-00 Republic Plaza
Singapore 048619
+65 6220 3888
JLL Sub-Saharan Africa Offices:
Johannesburg
Office 303, 3rd Floor, The Firs
Cnr Biermann and Cradock Ave
Rosebank, 2196
+27 11 507 2200
JLL Regional Headquarters:
Chicago
200 East Randolph Drive
Chicago, IL 60601
USA
+1 312 782 5800
Contributing Authors:
Wayne Godwin
Associate
Hotels & Hospitality Group
Sub-Saharan Africa
+27 11 507 2200
[email protected]
James Nathan
Associate
Hotels & Hospitality Group
Sub-Saharan Africa
+27 11 507 2200
[email protected]
COPYRIGHT © JONES LANG LASALLE IP, INC. 2016. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics
discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the
information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking
involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in
particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.