Ed: This article aims to examine hotel supply and demand dynamics, advise that hotel markets are cyclical, and therefore a long-term view is essential.
Having enjoyed several years of growth, the worldwide hotel industry is now experiencing a significant downturn, along with every other industry. Forecasts from PricewaterhouseCoopers are for an 8 per cent decline in both occupancies and prices in the USA in 2009 resulting in a reduction in yield of 16 per cent. A decline of 12 per cent is forecast for the UK in the same period. Some commentators say that all regions of the world will experience similar double-digit declines in performance this year.
There are no data available for Africa, but we know that no-one is immune from the global recession. And we also know, as reported in this column previously, that many markets in Africa are currently witnessing a building boom, so whilst demand is decreasing, supply is increasing – a double-whammy, some would say!
I remember as a young consultant, many years ago, denying that the hotel industry was cyclical. Well, you live and learn, and 25 years later, I know that, as night follows day, the hotel industry certainly IS cyclical, alongside the wider economy. Whether it is caused by external shocks like the oil price hikes of the early 1970s, and the terrorist attacks of 2001, or from self-inflicted wounds such as the sub-prime mortgage scandal and civil unrest, there is an inevitability that the economy will ebb and flow over the years, on a 7 to 10 year cycle.
In Nigeria, we not only have our own banking crisis, caused by irresponsible lending, but also the downturn in the global economy has brought a reduction in demand for oil, the country’s main export, and therefore demand for hotel accommodation from these two sectors (banking and the oil industry) is down some 20 per cent on last year in central Lagos. Interestingly, however, this downturn is not uniform across the country – Ikeja, in the north of Lagos State, and the capital Abuja, are both experiencing high volumes of demand, with occupancies in the former regularly exceeding 90 per cent on a monthly basis. And Calabar, in Cross River State, is also doing well, where the government has a clear focus on expanding the tourism industry in “the Nation’s Paradise”.
Elsewhere in Africa, Accra’s hotel industry remains extremely strong, buoyed by the nascent oil industry, and the international attention following President Obama’s visit
there, Luanda still presents problems to anyone wanting a hotel room, and Harare’s hotel occupancies are edging higher, as investors seek opportunities there.
But I foresee challenges for the industry ahead, as new hotels finally come on stream – 2010 openings include the Four Points by Sheraton and Radisson Blu in Lagos, the Marriott in Accra, and the Sana in Luanda. Whilst growth in demand tends to be gradual, growth in supply is a once-off hit – a little bit like the pig swallowed by the python, causing indigestion and an abnormal situation at first, but then slowly being absorbed until equilibrium is once again restored. So occupancies are likely to be lowered once new supply enters these markets, and there could too be pressure to lower prices – although that is not inevitable, and certainly undesirable for hotel owners with loans to service.
Like the inevitability of cyclicality, periods of oversupply also seem to be inevitable. But this does not mean that investors should shy away from new development – far from it, because the demand trend is also, inevitably, upwards. What it does mean is that investors must only invest for the long-term – build in periods of flat or declining demand into your forecasts, to see what impact that has on future debt service obligations. You will always lose market share to a new entrant to the market, at least in the early days of it being open, because of the curiosity factor, and the offer of introductory rates. How long that loss of business will last is down to management, and their ability to win back lost clients, and attract new business.
The other impact of this is that investors need to seek their niche in the hotel market. For reasons which often relate more to ego than economics, entrepreneurs in emerging markets tend typically to want to build luxury hotels in the first instance, “gouging” the market in times of short supply of any acceptable alternative. That provides opportunities to fill in the gaps between the top of the market and the older, outdated stock, which has little or no future in a modern economy. Accor and Rezidor are leading the way in sub-Saharan Africa, the former with their Novotel and Ibis brands, and Rezidor with Park Inn. Others are following, as Hilton start to introduce their Doubletree and Garden Inn products, and Holiday Inn Express is making a comeback in South Africa.
And finally, hotels are not only a long-term investment, they are long-term projects, with a minimum of three years from inception to opening. So if you are planning a hotel now, or just commencing construction, demand should be back to trend by the time you open. It’s inevitable, isn’t it?
W Hospitality Group, Lagos
Countries fight over it, communities fight over it, and individuals fight over it. The possession of land is one of the fundamental rights of man, but when contemplating a hotel development, whilst possession mat well be “nine-tenths of the law”, it’s that other 10 per cent that can be the deal breaker.
Generally speaking, land tenure and title in sub-Saharan Africa are a mine field. Vast tracts of land, nomadic peoples, the imposition of Western ownership concepts (normally intended to benefit settlers and disadvantage the indigenes), civil wars, nationalisation, dictatorships – the combination has led to the situation where, sometimes, the ownership of a piece of land is virtually impossible to determine. And there is a vicious circle working here, too – according to Peter Hertz of ARD, Inc. “insecure land tenure and property rights and the inequitable access to land and natural assets are two of the leading triggers of violent conflict, population displacement, the over-exploitation of natural resources, and political instability” in Africa.
Add to that the problems of transferring title once proven, and it is no wonder that land issues are one of the main impediments to hotel development (and other forms of physical development, too) in sub-Saharan Africa.
Take the example of Ghana, where there are four different types of land title – State land, Vested Land, Customary/Stool Land, and Family/Private Land. The method of acquisition varies by type – for state and vested land (which is customary land administered by the government), negotiations for acquisition are with the government, may or may not be straight forward. Purchasing Stool land, however, means participating in the tribal customs of the specific area, and negotiating with the Chief. Whilst this is of an inherently local nature, the process is overseen and approved by the State, to avoid exploitation (of either party!).
Negotiating purchase of family/private land does not need the concurrence of the State. But, as with any purchase of land, it does need registration and, according to the World Bank, Ghana scores well compared to the sub-Saharan African average, requiring five procedures, which take 34 days and cost just over 1 per cent of the value of the land. The regional average is 6.7 procedures, 81 days and 9.9 per cent of value. Uganda and Nigeria require 13 procedures, The Gambia takes 371 days to register title, and in Chad it costs an eye-watering 23 per cent of value. Regularising the law on land title is one thing, but the more difficult and costly it is to register a change of title, the greater the chances that formalized titles will quickly become informal again.
One cannot write about land title and transference in Africa without a reference to Nigeria’s infamous 419 scams. Everywhere you go you see signs on buildings and fences, stating what must puzzle newcomers “This land/building is not for sale. Beware 419”. Adding to the confusion of land title and ownership – and perhaps because of it – fraudsters make a living from selling property they don’t own to unsuspecting purchasers, sometimes several times over!
In addition to the economic and financial aspects of land purchase and usage, hotel developers, particularly (but not only) in resort areas need to be aware of the social implications of their plans. The lack of land title on the part of the local community may provide an opportunity for perfectly legitimate purchase of a prime beachfront spot – but that may be the best launch point for their fishing boats, used by countless generations. Or it may exclude the local women from collecting shellfish there, to feed their families and to earn an income. Or, and as serious as the former problems, it may be a place considered sacred by the local people, which could “curse” any development there, and discourage the local people from working there.
If higher levels of economic growth are to be promoted, and the resultant benefits will include poverty alleviation, ensuring a favourable climate for investors is essential. Tourism, and the development of hotels and other lodging establishments is one of the largest consumers of capital in the sector, is clearly a contributor to economic growth and poverty alleviation in most Africa countries, and will only be encouraged if access to physical space, i.e. land, is made easier – not only for foreign investors, but also for indigenous entrepreneurs, who own and operate the vast majority of the businesses.
And, instead of the vicious circle described above, a virtuous circle can be created, with secure property rights giving confidence to investors to do business, providing collateral to enable access to credit, and contributing to the development of financial systems – to the benefit of the economy as a whole.
W Hospitality Group, Lagos
Search the web for “Green Hotels Africa”, and you’ll be surprised – at how few hotels there are listed! One hotel in Egypt, a couple in South Africa, and that tends to be it. Even responsiblehotelsoftheworld.com, surely an organisation that every hotel in the world would want to be part of, has only two hotels listed in Africa. And who says they are “green” or “responsible” anyway?! The website? The hotel? Or the customers? One website says “This property is purported to be ‘green’ but has not been verified”. You know what? – I reckon that hotel has those little signs in the bathrooms asking you to consider the environment, and to reuse your towels – which are then replaced by the room attendant each day anyway.
That really is as far as most hotels are prepared to go – the towel business – but they’re missing a trick. Because the experience of hotel developers in the USA shows that the payback on the additional cost of building a sustainable hotel is measured in months, not years. The new Proximity Hotel in North Carolina spent an additional US$7,000 on water-saving equipment, and in the first year is on track to save more than US$13,000 – and will continue to save in future years.
There are no benchmarks for how much extra “building green” costs, one industry commentator in the USA thinks it needs to be no more than 1 per cent additional, but even if it is 5 per cent, even 10 per cent more, with returns like that, it must make sense, mustn’t it?
And it isn’t only about operational cost savings. Ten years ago, we didn’t much care about whether a hotel offered internet services, did we? Today, a hotel that doesn’t have high speed, wireless broadband is at a distinct competitive disadvantage. And I can see the day in the near future when a hotel that doesn’t have green credentials will also suffer, because the customer has a choice. And being environmentally aware, being socially responsible, is the right thing to do, isn’t it?
The availability of potable water in some parts of the world, and in many in Africa, is a huge issue, which is only going to get worse. Fairmont Hotels reckon that the average water consumption of an occupied hotel room is 825 litres – and according to Infochangeindia.com, the average daily water consumption of a luxury hotel room in Delhi is a staggering 1,600 litres, ten times that of the average city resident. Such inequality cannot be right.
At the Fairmont hotel in Toronto, under the City of Toronto’s ICI Water Saver Program, businesses are rewarded for demonstrated water savings. In 2005, the hotel installed a commercial water softener that reduced water use in the laundry to one
wash and one rinse per cycle, saving 476,000 litres of water per day - enough water to supply 500 homes!
Apart from Fairmont, all of the hotel chains are promoting green operational practices. Rezidor, one of the fastest growing chains in Africa, produces an annual Sustainability Report which in 2008 reported that energy consumption decreased 6 per cent in their Radisson Blu properties and 14 per cent in Park Inn, water per guest night down 3 per cent and 7 per cent respectively, and waste per guest night down 2 per cent for Radisson Blu and 22 per cent for Park Inn. InterContinental’s new on-line Green Engage system envisages energy savings of up to 25 per cent. Marriott has developed a five-point strategy in collaboration with Conservation International which includes reducing fuel and water consumption by 25 per cent per available room over the next 10 years, installing solar power at up to 40 hotels by 2017, and expanding existing “reduce, reuse, recycle” programs. All of these means higher profits for the owners, and increased capital values.
In the USA, there’s a scheme promoted by the Green Building Council called LEED - Leadership in Energy and Environmental Design. LEED provides certification for “green” buildings, and the Proximity Hotel was the first to obtain a Platinum Award. In some states in the USA, there are generous tax breaks for being certified, as well as savings on sales tax on recycled materials.
Given the phenomenal activity in the African hospitality business today, as evidenced by the unprecedented number of internationally-branded hotels which are under construction or in advanced stages of planning, shouldn’t Africa be taking a lead? The triple benefits – cost savings from operations, consumer acceptability, and “doing the right thing” in a continent which still retains much of its natural environment – far outweigh any additional investment required.
And in conclusion, back to those bathroom towels. Without the right attitude, green initiatives will not work. Unless the guests, the staff and the management are all thinking “sustainable”, it becomes what the critics call “green wash” – all talk and no real action. Accor are trialling their Green Shield programme, picking up on a Cornell study which proves that everyone responds best when the payback is clear. They are calculating how much money can be saved by reusing towels, telling the customers and staff what that is, and donating the money to the UN’s Billion Tree Programme. At the same time, staff are being trained to implement and communicate the initiative.
According to Kurt Ritter, CEO of Rezidor “We are living in a world which increasingly views green initiatives as a crucial foundation for business.”
For more information about green hotels:
Katrina, I can add more if you think this works…..
W Hospitality Group, Lagos
Is Namibia Africa’s next tourism success story? The World Travel & Tourism Council (WTTC) certainly thinks so, ranking it number one in terms of expected growth in sub-Saharan Africa. Some achievement for a country that was one of the last to gain its independence (from South Africa in 1990) and where tourism only achieved real government recognition quite recently.
And according to research undertaken by the World Economic Forum and the WTTC in 2009, Namibia scores 82nd out of 133 countries in terms of its tourism competitiveness, bettered in sub-Saharan Africa only by Mauritius (40th), South Africa (61st) and Botswana (79th). Namibia scored better than two of its prime competitors in Africa, Kenya (97th) and Tanzania (98th).
It’s an extraordinary country, offering an incredible mix of experiences to the visitor. Most famous for the Skeleton Coast, where the Atlantic beaches rise to the highest sand dunes in the world, Swakopmund is now regarded as one of the extreme sports capitals of the world, with water, air and sand adventures of all sorts available. Namibia also has the Etosha National Park in the north, where the Etosha Pan, a flat saline desert (“the great white place of dry water”) which gives the park its name attracts abundant game and bird life.
Other, but no lesser attractions include the Fish River Canyon in the south, the Caprivi Strip in the north, and the Kalahari Desert in the east.
Sandwiched between Angola and South Africa, and bordered on the east by Zambia and Botswana, Namibia enjoys demand both from the regional market, as well as from Germany, the former colonial power. The majority of visitors to the country arrive by road – Namibia has one of the best road networks in Africa, with long-distance journeys perfectly acceptable by road as well as by air. The main nationalities are as follows:
|Tourist Arrivals by Nationality|
|Sources: Namibia Statistical Report, 2007|
Investment is, as is often the case, from the main markets – in Namibia’s case from South Africa and from Germany, as well as from domestic sources. One exception to this is Kuwait-based IFA, who have formed OLIFA, a joint venture with the local company Ohlthaver & List. The joint venture has one operating asset, the 106-room Kempinski Mokuti Lodge in Etosha, and is shortly to start construction on the site of the former Strand Hotel in Swakopmund, a “traditional” seaside resort on the Atlantic coast, almost an exact copy of a North Europe Baltic Sea resort, much loved by the German market. The new 100-room deluxe hotel, intended to be Namibia’s finest, will also be managed by Kempinski, and the project also includes branded hotel residences. Two further projects are planned for Windhoek and the Caprivi Strip.
Windhoek will also see a new 138-room African Pride hotel opening in 2011, joining Protea’s 10 other hotels in Namibia. Note that Protea can normally be relied on to pick winners – other countries where they have multiple outlets outside of South Africa include Tanzania and Nigeria, both with excellent growth prospects. The African Pride will be part of Freedom Plaza, a mixed-use development including also retail, residential, entertainment and office components. Investors in this scheme are South Africa’s Madison Property Fund Managers, Swish Properties and Redefine Income Fund, with local partner United Africa Group. An Arabella hotel is also planned in the same scheme.
South African hotel groups dominate the landscape – apart from Protea, Sun International and Legacy are represented in Windhoek and Swakopmund. But the government is keen to encourage other investors and compared to many other countries has an attractive investment environment characterized by: zero customs
duties on imports from South Africa, low excise duties, relatively low VAT, a relatively stable currency (linked to the rand) and stable political climate. The tax system is conducive to growth through the provision of significant and generous initial capital allowances and accelerated depreciation of assets.
Namibia has a great future as one of Africa’s leading tourism destinations. The government wants to reduce its dependency on primary industries such as mining and agriculture which, although important, are focused on specific areas, and therefore do not create employment throughout the country – which tourism can do. Tourism has had a positive impact on resource conservation and rural development. Some 29 communal conservancies have been established across the country, resulting in enhanced land management while providing tens of thousands of rural Namibians with much needed income.
W Hospitality Group, Lagos
I have written in previous editions of Ai Tourism Investor about the inroads that the regional and international chains are making into Africa – companies such as Protea from South Africa, France’s Accor, the Brussels-based Rezidor with their Radisson and Park Inn brands, and Starwood’s Sheraton and Four Points brands. A recent survey undertaken by us shows that the new-project pipelines of these and other chains in Africa have never been bigger – Africa is firmly on their agenda!
And happily, many investors in the hotel industry are also keen to secure the services of these chains, so there are deals to be done. But there seems to be some confusion regarding the business models that these groups adopt when entering African hotel markets – how often have you seen headlines stating that “ABC international hotel chain is building a new hotel in ZYZ city”? A headline which is almost always inaccurate! By and large, the hotel chains do NOT invest in nor build hotels. Of course, there are exceptions to this rule – Southern Sun own hotels in Dar es Salaam and elsewhere, and Rezidor have invested in Bamako and other locations.
Typically, however, the likes of Hilton, Sheraton et al are providers only of management and marketing services. Only? Well, of course, these services are key to any hotel’s success, particularly in Africa’s increasingly competitive markets, as more and more hotels open.
Operation and branding by a hotel management company has a positive impact in a number of areas, including:
These benefits should bring greater sales and profitability, and therefore enhanced asset value.
The cost? In financial terms, the chains are charging fees in the order of 3 to 5 per cent of sales, and 8 to 12 per cent of profit, plus a charge for marketing, and other expenses incurred on behalf of the owner of a hotel. Very often there are also upfront fees for technical design services, and the owner will also be required to provide funds for pre-opening and working capital.
Some owners believe that the financial costs are higher than the benefits received from the management company’s services, but in my experience that is due to one or a combination of other factors, rather than to the actual fees paid e.g. the management company does not properly communicate with the owner, or the owner is not ready to accept the loss of day-to-day control that is a condition of the management agreement.
For an owner wishing to retain control of his asset, and to reduce fees paid to a third party, the options are threefold: manage the hotel himself as an independent unit; obtain a franchise with an international chain; or join a marketing consortium.
Independent, unbranded operation can work well, particularly in a sellers’ market. But in the face of competition from professionally managed and branded hotels, the independent hotel invariably performs less well.
Under a franchise agreement, the international chain provides brand standards and marketing support, whilst the owner undertakes the management himself. The customer will not be aware of the difference between, say, a Holiday Inn managed by the owner of the hotel, or one managed by Holiday Inn themselves. This business model is very common in the USA, but far less so in Africa, mainly due to the lack of management expertise that dogs the industry. To the best of my knowledge, most franchised hotels in sub-Saharan are managed not by individual owners but by the major, experienced players – African Sun manage Holiday Inn hotels in Zimbabwe and Accra, Southern Sun manage InterContinental- and Accor-branded hotels in South Africa, and so on.
Fees for franchise agreements are typically expressed as a percentage (5 to 8 per cent) of rooms revenues only. Lower cost than a management contract, but the owner still needs to provide management to the hotel.
Another model entirely is the marketing consortium (so called because they are a collection of independent hotels, and the organisation is run by its members), typified by such global players as Best Western and Leading Hotels of the World (LHW). These organisations provide marketing services to independent hotels, charging a membership fee, which is typically based on the size of the hotel. Whilst certain quality standards and parameters are imposed by the organisation, the owner is able to operate the hotel independently. Best Western imposes a higher branding requirement than LHW – the “hard” versus the “soft” approach. For boutique hotels, there’s the UK-based Small Luxury Hotels of the World, and for those properties where design is “it”, there’s Design Hotels.
How does an owner decide which business model to adopt? For most hotel owners in Africa, the franchise model is not an option – as noted above, global chains such as Hilton and Sheraton will not franchise to independent hotel owners, particularly those without management experience.
So the question is “to manage or not to manage”? And that choice is very often taken not by the owner, but by the debt and equity providers – a lender wants to know who is going to be there generating the cash flow to repay the debt, and may well make the engagement of a professional, branded management company a condition of that loan. Hotel management is not easy, they are complicated businesses, and having a professional in place, with an established marketing network, is a distinct advantage in competitive markets, and in times of a downturn. For many owners, the cost of engaging an operator is fully justified by the financial and other benefits which accrue.
But the international management companies a re not always the answer, and hotel owners with experience of management can consider the option of a marketing consortium like Best Western, who are, like the international operators, increasingly turning their attention to Africa. We are currently working with Best Western to source independent hotel owners with the right quality of product, and the right mindset, to join the consortium. Best Western and others like them provide marketing services only, with the objective of providing brand recognition to the hotel, and driving business to their members through sales and marketing activities. That leaves the independent hotelier free to manage, in the knowledge that they are “not alone”. In addition to the marketing and other business benefits that the marketing consortia provide, the hotel owner gains from the opportunity to network with like-minded hoteliers – a valuable support network.
W Hospitality Group, Lagos