HICA: Africa deal count up, lags other regions
 
HICA: Africa deal count up, lags other regions
23 SEPTEMBER 2015 7:44 AM
Lack of an established, well-defined financing source is among the challenges faced by investors looking to buy or build hotels throughout Africa.
JOHANNESBURG—African investors are finding funding for transactions and development projects a little tougher to come by than the rest of the world.
 
Speakers at the recent Hospitality Investment Conference Africa event in Johannesburg said that lack of financing isn’t necessarily the result of poor industry fundamentals.
 
What the hotel industry in Africa lacks is an established, well-defined long-term capital provider that can help with exit strategies, said Mark Wynne Smith, global CEO of JLL’s Hotels & Hospitality Group, during the “Global trends shaping travel and tourism” panel.
 
“If (investors) want to bring people into a market you have to be able to show they can get out as well,” Wynne Smith said.
 
JLL expects total transactions in Africa to surpass the $500-million mark within three years, the CEO said. The firm forecasts global transactions volumes to surpass $70 billion this year.
 
Finding lenders and the proper financing structure takes some calculated steps, according to speakers.
 
Shamima Mallam-Hassam, head of business development for CIM Global Business, said during the “Equity funders and investors” session that private equity sources investing in Africa are going through Mauritius for the financial structuring because of a competitive business environment and the ease of doing business there provides a comfortable international financial center.
 
Meanwhile, South Africa’s First National Bank is one of the continent’s active lenders but its typical loan-to-value ratio is no higher than 50%, said Charnel Kara, tourism specialist for the bank, during the “Equity” panel.
 
Kara, who said the hospitality sector is high on the bank’s lending priority list, added that cash flow is the essential element for capital lending to the hotel industry.
 
Access to funding at all is dependent upon a partnership with a reputable operator, added Neil Bald, managing director of Johannesburg-based AHA Hotels & Lodges, while speaking on the “Equity” panel.
 
Mixed-use momentum
As African economies continue to grow, mixed-use projects are becoming more popular.
 
“They’re catching on—it’s turning into kind of an arms race,” said investment consultant Deborah Peters during the “Hotels as part of mixed-use developments” session.
 
“Mixed-use developments are targeting the growing middle class in Africa. … But zoning is very particular,” Peters said.
 
Zoning regulations vary by country. For example, in Mauritius, the zoning approval process can be completed in three to four months; environmental studies in Mozambique alone can take seven to 12 months; and the entire zoning process in Durban, South Africa, can take three to five years, said Andrew Thompson, development and sales director for eLan Group, during the “Mixed-use” discussion.
 
Like elsewhere in the world, having correct studies is critical for fast-tracking a hotel project, Thompson said.
 
A big factor in the zoning process is the scope of the project, according to Wayne Troughton, CEO of HTI Consulting. Big leisure resort developments vary greatly when compared with shopping center projects and smaller mixed-use developments in which a hotel is the main component.
 
“The property investor is used to different asset classes that could produce stable and consistent yields,” Troughton said while participating on the “Mixed-use” panel. “A hotel investor is a longer term investor. They understand the volatility. If you’re trying to bring the two together, it can take time.”
 
However, more developers of large-scale projects are seeking hotels because of the much-needed foot traffic they provide, Thompson said.
 
“The standalone hotel is not necessarily a destination—you have to create things around it,” he said.
 
“If the demand is not there for the hotel you want the demand to be created first,” Troughton said, citing office space as the first element needed for a mixed-use project. “The hotel doesn’t generate demand; it pulls demand from nearby offices and centers.”
 
Regardless of the components, a mixed-use development must be self-sufficient to be successful, according to speakers.
 
“It’s still is a street-corner analysis—no development can live within its own bubble,” said Xander Nijnens, head of JLL’s Hotels & Hospitality Group in Sub-Saharan Africa, during the “Mixed-use” panel. “It’s critical that you understand the market that’s in that area, the new supply coming on and how you can position yourself.
 
“We see mixed-use developments globally as one of our big three trends in hotels,” he added. “A lot more mixed-use developers and a lot more real estate investors and developers are taking on more than one asset class.”
 
Investors in the know
The trends in Africa are reflections of what’s going on elsewhere around the globe. Wynne Smith said there can be no negatives about the fact that 70% of capital being invested in hotels around the world is from local and regional sources.
 
“Those are investors who understand,” Wynne Smith said. “The income growth opportunities in this (hotel) market can be much more exciting than what we can offer investors in some of the core (real estate) markets.”
 
The caveat is that the vast majority of capital is only interested in investing in the U.S. and Europe, he said.
 
Wynne Smith said experiences mean more than they ever have for consumers, and that affects how investors look at the hotel business.
 
“The investment markets understand what experience means to assets, understand there’s an experience premium and are willing to pay for it,” Wynne Smith said. “People in the investment community are becoming more adventurous in that space.”
 
Those investors tend to be private capital or investment funds rather than international brands that are shedding assets from their ledgers as often as possible.
 
“On the asset-light discussion, it’s important that major international groups have generally got an asset-light approach at the moment,” said Guy Stehlik, CEO of Bon Hotels, during the “Mitigating risk in Africa’s hotel development and operational cycle” session.
 
That can only spell opportunity for investors, according to Adrian Gardiner, founder and chairman of Mantis Collection.
 
“A lot of the big players have gotten out of the actual building,” he said during the “Risk” panel discussion. “If you’re going to get out as an investor in a city you’re probably going to go the route of selling it to your property developer.”
 
Investment funds and private equity represent 59% of the hotel disposition market around the world and 38% of the hotel acquisition market, Wynne Smith added.
 
“They are driving what is mostly taking place in the market today,” he said. “We’re seeing a significantly higher use of balance sheets to buy assets to get brands into particular markets. 
 
“The churning of assets is back in the mainstream.”
 

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