For someone wanting to invest in the hotel industry in Africa, but who wants to mitigate their risk, the emergence of several dedicated funds is worth a close look.

Investing in hotels brings with it all sorts of risks.  True, any investment has some risk, even sovereign bonds.  Stock markets can go up or down, as can the price of gold and other precious metals.  But hotels, as an asset class, bring all sorts of risks.  Build an office block, and if you plan it right, you have one financial transaction, the rental payment, every two years of so with a blue chip tenant, in whose interest it is to keep the place in good order.  Office blocks are reasonably simple buildings, and it is the tenant who bears the financial burden of specifying and installing all the technical gewgaws they need, the equipment and the furniture.

Now take one of those big hotels you find in Abuja and Abidjan, with 500+ rooms.  The development cost is high, because they are complicated buildings, there are several different types of space (lobbies, restaurant, bedrooms, kitchens, offices and others) each with specific requirements, and the skills to get everything right can be very hard to find in emerging markets.  And once the construction and completion risk are behind you, there’s the commercial risk.  Unlike your office block, with one financial transaction every two years, a large hotel like the Abuja Hilton has thousands each and every day, each customer must be pulled in and kept happy for 24 hours or more, ever supplier delivery needs to be checked and rechecked……..you can see the difference in risk.

But, as is the way of the world, the higher the risk, the higher the reward.  Research has shown that as an asset class, hotel real estate has the potential of returning higher rewards than any other type of property, provided it is well managed and maintained.  Office blocks tend to get demolished and replaced after a few decades use, but there are plenty of examples of hotels remaining in use for hundreds of years.

It is this risk and reward profile, and the opportunities for growth in the hotel sector in Africa, that has prompted the creation of these industry-specific funds.  Before they arrived on the scene, investors had a choice of investing directly into projects, with all the attendant risks, or on quoted stocks – but outside of major centres such as South Africa and Egypt, there are very few such opportunities.  In Nigeria, for example, there are only two quoted companies, which have investments in three large hotels in Lagos and Abuja, but the control of those two companies rests with one family.

The benefit that a hospitality fund brings is the opportunity for an investor, including those with only a small amount to invest, to enter the industry, and to reduce their risk.  In order to provide returns to investors, the fund managers will spread the portfolio across a variety of types of hotel – deluxe, mid-market, economy, transient and long-stay – and in most cases with a variety of operators (although some funds will commit exclusively to one operator for the economies of scale that they can achieve).  Multiple locations can be included in the fund’s investment portfolio, as can hotels at different stages in the development and operational cycle.  Whilst many fund managers will prefer to buy existing assets with a proven cash flow and, hopefully, an opportunity for expansion, it is not always possible to achieve that in emerging markets, and therefore development projects will also be considered.

The fund managers will, of course, be controlling their risk at all stages of the game.  I mentioned above the hotel operator – it is a rare fund manager that will invest in an asset that does not have professional management in place, in order to mitigate the commercial risk.  But a hotel fund will also have considerable expertise in-house, employing asset managers, acquisition teams, project managers and so on.  And to supplement the in-house expertise, consultants are brought in as and when appropriate.  Promises have been made to investors regarding returns on their investment, and therefore the fund managers have to do everything they can to mitigate risk and produce returns.

I have identified five active funds in Africa which have a hotel focus, three of which are here in Nigeria:

Actif Invest.  Based in Casablanca, Actif Invest is part of the Finance Com group, one of the largest companies in Morocco.  Through its Maghreb Siyaha Fund (MSF), with a target of €250 million under management, the MSF is investing in hotels, touristic residences and resorts in Morocco, including the Hotel Targa in Agadir, managed by Oasis Resorts (based in Spain), and the Carré Eden Marrakech, which is to be managed by Radisson Blu.  Actif Invest is somewhat unusual in that it is prepared to invest in resorts, which have a higher risk profile than “Main Street” business hotels.  However, the fund managers are based in Morocco, a country with a well-established tourism industry, and have studied and understood those risks.

ARM Hospitality and Retail Fund.  This fund was established by Asset & Resource Management Co. (“ARM”), a leading Nigerian asset management and investment firm with over US$1 billion funds under management.  Launched in 2011, the fund already has one major asset completed, the 230-room Four Points by Sheraton hotel in Lagos, which is one of the leaders in the city, and is managed by Starwood, the largest operator in Nigeria by number of rooms.  Their second investment is the Trinity Gardens project, also in Lagos, which is to be a mixed-use development, including a 200-room Four Points by Sheraton hotel, a retail mall and an entertainment centre.  I

have written before about the benefits of mixed-use developments – another way of spreading and mitigating risk – and ARM have recognised not only that, but the massive opportunities in the retail sector in Nigeria, hence the title and focus of the Fund.

A slight twist to the story with ARM is that, in addition to their projects with Starwood as their technical partner, they also see the potential to develop hotels in Nigeria without an established brand name, creating their own management company and brand.  As with Actif Invest and their knowledge of resorts, ARM’s professionals have studied the market, and have the expertise to execute this successfully.

AIQ Hospitality and Retail Fund – based in Lagos, this fund is being established by AIQ Capital, a financial advisory services firm.  They are in the early stages of fund-raising for the US$150 million equity target, and intend to build a chain of up to 20 budget and mid-market hotels in Nigeria over the next 10 years with an international brand to operate the hotels.  The second tranche of the fund will build small neighbourhood retail malls throughout communities in Nigeria.  Like ARM, they have identified the synergies between hotels and retail.

Capital Alliance Property Investment Company.  CAPIC is one of the funds of African Capital Alliance, a Lagos based private equity firm, and was established in February 2008 to invest in real estate and real estate-related opportunities in West Africa, with a primary focus on Nigeria.  A large proportion of the fund has been devoted to the hotel sector, with a target of six mid-market hotels in Nigeria and Ghana, to be managed by Protea, the largest operator in West Africa by number of hotels.  The Protea Benin City opened in February 2013, and others are under development in Lagos and Takoradi, Ghana.  The US$165 million fund has a 10 year life.  CAPIC is also investing in office, residential and retail developments.

The Hospitality Property Fund.  This fund is based in Johannesburg, and is the only specialised listed property fund investing solely in the hospitality and leisure sectors.  It is by far the largest hotel fund in Africa, with 26 properties in its portfolio.  All have leases in place, the majority with fixed and variable or variable leases, and a very small number with fixed leases.  All but one or two are managed by regional or international operators.  The fund’s profits are distributed in full as debenture interest, free of tax, due to the structure that has been adopted.

Investors in these funds need an exit, that is to get their money back.  The Hospitality Property Fund is quoted on the JSE main market, so there is liquidity in the shares.  The other funds are considering either a listing or single asset sales as the exit strategy.

The likelihood is that we will see more hotel funds established, focusing on specific regional markets, or on specific types of hotel.  That is good news for the African hotel industry.

Trevor Ward

W Hospitality Group, Lagos

[email protected]

How to maximise the returns from your hotel investment

Hotels are often seen as a necessary first step to attracting international investment into an under-developed area, as without a decent base to stay International Investors are less likely to come to the country to discuss other business opportunities. In recent years there has been a strong influx of new hotel developments across Africa as inward investment in property hospitality has grown.

The fundamental question is how to ensure that any new hotel being built maximises its potential and adequately rewards the investors.

Ensure the basics are right

Ideally when first looking at a project you will need to be able to ensure the basics are right.  They include:

The right product

Is it the right product in the right place? There is strong demand for luxury resorts in certain parts of Africa, whilst in other areas mid-market business or budget hotels are the optimum type of hotel operation. Creating the right property (including quality, size and ancillary facilities) is one of the most important steps to ensuring you can maximise your investment returns.

I know of one case where W Hospitality Group were asked to advise on a new hotel development in West Africa and, because of the nature of the market, they advised incorporating a high proportion of suites into the branded hotel that usually had no suites. That hotel is trading extremely well, much better than it would otherwise, because this advice was received at an early enough stage to be incorporated into the design.

I cannot be explicit enough on this – there is no substitute for good professional advice early on. The cost of an initial feasibility study is NEVER wasted.

The right brand

Appointing an International Operator to manage a hotel can have a significant impact on the returns you make from your investment.  In the initial development phase this decision will affect an investor’s ability to secure funding and also the likely cost of securing it.

Whilst the hotel is trading international operators can usually improve performance, increasing revenue production, whilst also using their size to generate cost savings thereby

improving the owner’s return. In addition when the hotel is finally sold it can usually attract a higher multiple of earnings if it is internationally branded (and therefore a higher price).

However, if it is “the wrong brand”, or in the “wrong structure”, it could have a negative impact on operational earnings potential and the capital value of the asset.

Right structure

If a brand is considered the best option for a hotel then consideration must be made whether to structure the partnership through a lease, a management agreement or through a franchise agreement.  The ideal choice will depend upon who the investor is, their long term strategy and the prevailing market conditions.

As the devil is definitely in the detail of such arrangements, It is essential that professional advice is taken at this stage.  If care is not taken in firstly choosing the most appropriate structure and then over every clause contained in any agreement this could have a direct impact on both the income earned, and on the price achieved on sale.

Prepare at the outset for the exit

A wise investor plans for the time to sell the hotel from the very beginning. If you know what you want to do in the first instance you can ensure that is built into your planning, as long term holds have different strategies than medium term holds or early disposals.

Ensure trading is optimised throughout the holding period

However long you intend to own the hotel it is important that trading should be optimised. Note the use of the word “optimised”  – it is deliberately not “maximised”, though of course in many instances these words will be effectively interchangeable. However in certain circumstances maximisation of income may be detrimental to long term earnings and/or capital value.

Assuming that the hotel is not being operated by the owner then it usually proves prudent to employ an “asset manager” to liaise with the operating company, to ensure the owner’s interests are upper most in the manager’s thoughts at all times. The asset manager will review performance, budgets, marketing plans, maintenance schedules and capital investment programs to ensure everything is being done to enhance the owner’s returns.

It is important not allow basic repairs and maintenance to be neglected. If the property is not kept in good repair it has an impact on both trading and capital value, and that impact is always greater than the short term savings generated by under-investing in the fabric of the hotel.

Ensure a smooth exit

When disposing of the hotel, an experienced specialist hotel agent will be best placed to secure a quicker sale at the best possible price. The agent must be competent in the specific location, with the type of property and with the type of structure being sold. Generally the best agents will only work on a sole agency basis, to ensure they can fully control the disposal process, thereby enhancing the chances of a successful transaction.

It will also be important that the property is marketed to the correct people. There is no point, for example, in advertising a property to International buyers when non-locals cannot own property in that country. In addition certain types of properties and structures attract certain types of buyers.

There are times when it is best to speak informally to one or two buyers in an off-market scenario to best complete a sale. Your agent will advise on this, on a case by case basis.

There is one final point to mention. If advising on hotel transactions over the last fifteen years has taught me nothing else, it is essential that all the due diligence paperwork is collated ahead of going to market. Nothing stops a very keen potential buyer having an interest in a possible transaction than having to wait for the paperwork to review. It is imperative to the success of a transaction to be able to follow up such interest immediately to build the momentum in the transaction, so it can be pushed through to a successful conclusion.

Conclusions

In summary, if you are to maximise the returns you receive from your hotel investment, you need to ensure you get the basics right in the first place, ensure that trading is optimised throughout the holding period, and ensure that the best sales price is attained by making the exit as smooth and as professional as possible.

Trevor Ward

W Hospitality Group, Lagos

[email protected]

It is a universal truth that cities ebb and flow, enjoying good times and bad times.  Look at Johannesburg, where the CBD degenerated into a no-go zone, having once been a proud, thriving place.  Look also at Lagos, where the original city, Lagos Island has, behind the frontline of skyscrapers housing mostly banks, become a huge street market.

But look again at Johannesburg.  The CBD is not what it was 10 years ago, with massive regeneration underway.  Look also at the Hatfield area of Pretoria, where The Fields project has arrested the urban decay that was threatening to escalate, and is now in its second phase.

Both the Johannesburg CBD and Hatfield projects include hotels, and the chicken-and-egg question has been asked – can a hotel development be the catalyst of urban regeneration, or does the process have to start first, to create an environment in which the hotel will prosper?

The answer, of course, is never a simple yes or no, but on balance, I believe that a hotel cannot be developed in isolation, in the hope that others will follow.  The reason is, I believe, that urban renewal needs something of a “big bang” to get things going, and that needs public sector involvement and political will.  Sometimes, but not always, government funding is also required.

Urban renewal is not only about renovating or redeveloping run-down areas and buildings, it is also about creating a new community.  Most areas which have suffered from urban degradation have also experienced a collapse of the social structure, as the retail sector moves to the suburbs, residential units are abandoned, and the office tenants move to safer climes.

To create a community, you need social infrastructure to come in at around the same time, and it is noticeable that most urban regeneration projects incorporate mixed-use developments.  The first phase of The Fields project in Hatfield comprised residential apartments, shopping and prime-grade office space, as well as a Protea Hotel.  The second phase comprises more office space, and a second hotel, the 184 room City Lodge.

Each component feeds off each other, with the sum greater than the parts.  Looking specifically at the hotel components, it is highly doubtful that they could survive on their own, without the demand generated by the office users for accommodation

during the week, the local residents for the food and beverage facilities, and the visiting sports teams and other leisure groups at weekends.

Down in Johannesburg CBD, one of the first projects to get going was the city’s main bus terminal, Gandhi Square.  But not on its own.  Transportation is vital if a city centre is to become alive again, but it is also the activity around the transport nodes that are important – Gandhi Square is also the location of multiple shops and restaurants.  Dubbed a “central improvement district” by Gerald Olitzki, the man credited with the Gandhi Square project, it has been a catalyst to show what can be done, that the streets can indeed be reclaimed, and that it is safe for other developers to come back into the centre.

One step at a time.  With the transportation sorted out, the offices started to come back.  They, and the bus station, created demand for shops and restaurants, which made the area a more attractive place to live, and residential apartments were developed.

Redevelopment seems not to be confined to just one area, but has a ripple effect – on the southern fringe of the Johannesburg CBD is Stimela Square, where another mixed-use project is underway, comprising office, retail and a hotel, arranged around a city garden square, once again embracing the concept of community, not just commercial development.

In Braamfontein, the opening of the Gautrain Station has itself been the catalyst for the Braampark development, already the location of various prestigious companies, as well as various government agencies and parastatals such as the South African Human Rights Commission – a strategy for government support to regeneration without the need for taxpayer support.  Where offices go, hotels will always follow.

I mentioned Lagos Island as requiring regeneration, particularly as, like the Johannesburg CBD of old, it is completely dead at night.  There are no hotels in Lagos Island at all, and only low income housing and informal retailers.  Sadly, there don’t appear to be either the entrepreneurs nor the political will to do much about the place.  I have always believed that a hotel would do really well here, at a midscale level catering to office workers and their visitors, with an assuredly-thriving food and beverage operation, particularly in the early evening

One hotelier is already taking the plunge, not yet in Lagos (although they have definite plans to be there), but in central Johannesburg.  Lonrho have announced that the first easyHotel in Africa will be developed on the corner of Rissik Street and Pritchard Street.  Ewan Cameron, CEO of Lonrho Hotels commented “we see the easyHotel Johannesburg as part of the regeneration of this important area, benefiting from but also contributing to the success of other developers in reclaiming the area”.  Would he have been a pioneer, and gone in there without the other office, retail and

other developments there?  “We need the critical mass of other businesses, and of residents, to make a hotel a success”.

In the US, urban regeneration has often been driven by public sector spending, on such landmark development as sports stadia and convention centres.  Hotels and other businesses follow, because these facilities are intended to be catalysts for other, private sector developments, and the jobs that they bring.  But that’s in the US, where public funds are available (or at least they used to be), and where the private sector had the capacity to contribute to the development of these mega-projects, through the likes of bed taxes and other levies (that these developments often bankrupted the local governments is another story!).

In Africa, government rarely has the resources to undertake the superstructure of urban regeneration itself, and can contribute the most through the provision of transport infrastructure, along the lines of what Lagos State is doing with its light railway schemes, concessionary deals on land, and tax breaks.  In Johannesburg, private sector developers who constructed new buildings in designated zones had a tax break of 20 per cent in the first year, followed by 5 per cent for 16 years.  In recognition that there is considerable value in keeping some old buildings, companies undertaking renovation had a 20 per cent, 5 year tax break.  Given that without private sector intervention, the city centres would almost certainly remain unwanted and unloved, the cost to the government is zero, but there are the benefits of job creation, a reduction in crime and social disorder and, of course, happier voters!

Down there in downtown Johannesburg where, without a doubt, angels feared to tread for many years, it is now possible to take a guided walking tour of the area.  In the beginning, tourists used to ask “is it safe to do this”.  Now they say “show us what’s new”!  Increasingly, that’s the new hotels that are bringing back the life, and improving people’s lives.

Trevor Ward

W Hospitality Group, Lagos

[email protected]

 

 

An Update on the Lagos Hotel Market

Over the years, many observers and players have warned of oversupply in the Lagos hotel market.  Ten years ago there was very little to choose from, but in 2003 there was a surge of interest in developing new hotels, attracted by the high occupancies and room rates of the existing players, and the large number of hotels being planned was beginning to worry those observers.

In developed markets, it is very difficult to conceive of growth in the supply of or demand for hotels in double digit percentages year on year, and this was the paradigm that those observers were working within. How can demand possibly grow enough to cope with supply that is set to double in the next five years?

Figure 1 shows the evolution of supply in Lagos between 2003 and 2011, capturing those hotels in the city with a minimum quoted rate of US$100 per night.

Figure 1

In fact, it took six years for the supply to double.  Notable openings included several by South African chains – Protea, Southern Sun, Sun International and Legacy.

Lagos Hotel Industry

New Supply

Hotel Rooms Opening Year
Federal Palace (Sun International) 150 2008
Protea Ikeja 92 2008
Southern Sun 195 2009
Protea Westwood 56 2009
Four Points by Sheraton 234 2010
Best Western, VI 112 2010
Best Western, Ikeja 142 2010
Ibis Lagos MMIA 204 2011
Radisson Blu 170 2011
Legacy Wheatbaker 67 2011

That’s just over 1,400 new rooms, and at the same time there were several small, unbranded hotels entering the market.  So by the end of 2011, we had 5,000 new rooms, an increase of 167 per cent on the 2003 position.

Looking forward, there are some 2,900 new rooms in branded hotels, with contracts signed for management.  These hotels include second hotels for Ibis and Four Points, and the entry (and in two cases re-entry) of brands such as African Pride, Le Meridien, Holiday Inn, Mantis and InterContinental to the market.  One of the most visible of these is the 360-room InterContinental, a 25-storey building in the heart of Victoria Island.

Oversupply?  I don’t believe so.  In the heady days of 2008, the average occupancy in Lagos was over 80 per cent, and some hotels were achieving over 90 per cent.  That is exceptional performance, and hotel owners were enjoying very high levels of profitability.  In 2012, the average occupancy is down at about 60 per cent – but within that sample you have new hotels which are still building their business, and which are achieving below 50 per cent, and those established, branded hotels which are achieving 75 per cent and above.  That is not a situation of oversupply.

The fact is that, whilst the future hotels can be identified, their completion is by no means certain, and it is a fact that no major hotel development has been completed on time, the delay being, in some cases, measured in years – the Radisson Blu broke ground in late-2003, and opened in mid-2011.

The reasons for these delays are not always clear, but contributing factors include:

Of the 2,900 rooms in the future pipeline, 1,500 have yet to start work on site, and 566 are on-site, but work has stalled for some time.  So that means that only 834 are actively under construction.  With some unbranded hotels also underway, that means that only around 1,000 new rooms are “certain” to enter the market – but the InterContinental has been delayed several times, and that could happen to other projects as well.

Not only are new hotels delayed, and yet to start construction, but we have witnessed two hotel projects, both at the airport in Ikeja, apparently cancelled by the Federal Government for non-performance by the developer.  Together these hotels were supposed to have around 700 rooms and suites, so the existing hotels in Ikeja can continue enjoying their sellers’ market for some time.

What does this mean for existing and prospective investors in the Lagos hotel industry?

Lagos is Nigeria’s most economically important and prosperous city, containing much of the nation’s wealth and economic activity, fuelled by one of the largest seaports in Africa.  The commercial, financial and business nerve centres of Nigeria are located in Lagos, where most of the country’s largest banks and financial institutions are located, including the Nigerian Stock Exchange.  The State hosts 60 per cent of the country’s total industrial investments and foreign trade while also attracting 65 per cent of Nigeria’s commercial activities.  It also accounts for more than 40 per cent of all labour emoluments paid in the country, and has 45 per cent of Nigeria’s skilled labour force.

It is estimated that Lagos State contributes more than 20 per cent of the national GDP, and a recent estimate placed the State’s 2011 GDP at US$50 billion, the fifth largest in Africa and the largest in West Africa.  GDP growth in the country as a whole is estimated to be between 7 and 8 per cent, which means that growth in Lagos State is likely to exceed 10 per cent annually.

Growth in a diversified economy means greater demand for hotel accommodation, often at the same rate as GDP growth – a direct correlation.  Whilst there is high cost

inflation for hotel owners, room rates are typically pegged to the US dollar, providing something of a hedge against inflation.  And historic profits have been at very high levels – operating profits exceeding 60 per cent of revenue in many cases, compared to 30 to 40 per cent in Europe and in South Africa.  Reducing profits may not be welcomed, but will not represent a train-smash for appropriately-geared operations.

As for new entrants to the market, there is still plenty of room, in my opinion.  I do not see oversupply, except perhaps in the upper upscale market (if, and only if, all the projects go ahead, which seems unlikely) – that sector is probably full for now, but there is huge scope in the branded midscale and budget sectors, where operating costs are that much lower.

It is a difficult market to operate in, but Lagos is improving, and there is a better understanding today of how to develop a hotel than there was back in 2003.  In particular, we are seeing the introduction of professional consultants, both local and from abroad, to the project teams, so that the causes for delay, and in some cases failure, can be avoided in the future.

Trevor Ward

W Hospitality Group, Lagos

[email protected]

 

As the number of branded hotels in Africa increases, so too does the probability that a hotel asset transaction market will emerge, as investors see the opportunity to purchase well-designed, well managed hotels.  That means that owners will be thinking more about the valuation of their hotels, pursuant to a sale.

Sometimes there is nothing quite as contentious as valuation.  Whilst some might think that this contention would be just part of the negotiation between a buyer and a seller, when the Kenyan government sold The Grand Regency Hotel in Nairobi, the then-Finance Minster lost his job! [see Ai September 2008].  This was at a time when the Kenyan people had become increasingly sensitised to the actions of government, and there was a backlash against what was seen as an incorrect price for a publicly owned hotel.  The sale, to a foreign purchaser, was at a price of around US$44 million, and this was perceived – particularly by opposition politicians and the media – to be too far too low.  “Valuations” of US$114 million were quoted, and this transaction went on to form part of the larger Goldenberg scandal.

However, there was no real evidence to suggest that anything untoward had occurred, but that didn’t stifle the cry that “it’s worth far more than that!”.  And there’s the rub – what’s a hotel worth?  And what’s the difference between worth and valuation?

The main criticism valuation professionals would have of the Grand Regency affair was that it occurred “off market”, i.e. one party made an offer that was accepted, instead of opening it up to bids in a transparent manner, which meant that there could be no certainty that a better price could not have been obtained from someone else.

What is a Value?

The key question is “What is value?”  In summary, Market Value is defined as  ”the amount an asset will sell for on a specific date between a willing buyer and willing seller, where each party had acted knowledgeably, prudently and without compulsion”.  The key points to note in this formal definition of Market Value are a willing buyer and seller, both of whom are being advised well, and therefore have knowledge of what it is all about. If either the buyer or the seller does not have good advice then there is no certainty that they will not pay too much or accept too little for the hotel.

It is important to differentiate between “Market Value” and “worth”. A hotel may be worth more to one owner than another (for example they may have cost savings that they can benefit from, they may have a specific tax benefit that could be exploited, or it is an area where they have a special need for a hotel) and these “worth calculations” only form one part of the Market Value assessment.  There is no compunction for a buyer (especially if professionally advised) to pay what the seller considers to be the “full worth” if the market, and the prospective purchaser’s advisers, are dictating a lower price.

Sometimes transactions occur at non-market value prices. However this is generally when one party (in relationship to that specific transaction) did not act prudently, knowledgeably, or were forced to sell at an inopportune time – a sale intended to enforce debt obligations, initiated by a lender who “wants out”, is a prime example of that.  A hotel and golf estate in Ireland was recently sold for one quarter of what the owner paid for it! If someone needs to sell then potential purchasers will usually realise they are dealing with an “unwilling” seller and will take advantage of the situation to make a lower offer.

How are Valuations Carried Out?

A valuer’s job is to reflect what the market would pay for an asset if it were openly marketed. In terms of a hotel they would need to look at who was likely to buy that category of property and how much they would pay. Different buyers use different methods to calculate what they can pay for a trading entity (ranging from a price per bedroom to a multiple of turnover) but the two most universally used approaches  are the Income Capitalisation Method and the Discounted Cashflow Approach.

There are technical differences to each approach, but in essence they both predict the likely earnings for a hotel, which are extrapolated and a value is attached to this income stream. This projected income stream reflects a hypothetical operator unless a lease or management contract is in place, in which case the likely income received, taking into account the specific operator, is used as the basis.

The projections and multiplication factors (yields) will be compared and contrasted with all relevant comparable transactions – if any exist – to assess the final value, which is then compared with market transactions on a price per bedroom basis to analyse the overall reasonableness of the valuation figure.

It is the level of experience of the valuer and their access to market data, along with their skill and judgement that will determine the accuracy of their valuation.

Note that a hotel valuer is basing his work on the trading ability of the asset, and therefore the valuation figure doesn’t always bear any resemblance to the cost of developing the asset, or its book value.  A purchaser of a hotel will always be looking at the cash flow potential, and if that cash flow today, at the time of the sale, is down on what is was when the hotel opened (perhaps because of increased supply in the market), then it is almost inevitable that the value will also have decreased.

How can a valuation be confirmed?

Checking that a valuation figure is correct can be extremely difficult. From an owner’s perspective no two hotels are identical as the value is dependent on location, facilities, condition, local demand, local supply, trading profile, customer base, and a hundred other variables which affect the businesses ability to generate profits, and no two hotels share completely the same trading profile.

A skilled valuer with detailed experience in the local area would be able to analyse trading levels and likely values if the hotel were placed on the market at that time. That said Market Value is determined by market sentiment, which in the hospitality industry changes extremely rapidly. It is therefore extremely difficult for a valuer to keep up with market sentiment unless they are thoroughly immersed in transactional business and aware of the sentiments and thought processes of the most active people in the market.

However the only way to be 100 per cent sure of the value of an asset is to ask an experienced hotel agent (preferably a chartered surveyor)  to widely market the property and sell the property on your behalf.   Because, at the end of the day, whether you are talking about value or worth, the only true figure of either is what someone is prepared to pay for it.

In the African context, outside of Southern Africa the valuation and asset transaction markets are very immature.  Sellers are typically wildly irrational when they put their hotels up for sale, assuming that it must be worth more than they built it for (never mind the fact that the construction budget massively over-ran!), or bought it for, or (and this is often the case) that they have run the property into the ground, and a purchaser will have to spend money on refurbishment and basic maintenance.

Only once the transaction market picks up, and there is more information to work with – and the news is that one of the largest hotel owners on the continent is currently marketing a portfolio of hotels, to gauge investor appetite – will asking prices be more akin to true value.

David Harper is a Director of the UK-based Leisure Property Services (www.leisurepropertyservices.com)

Trevor Ward is the Managing Director of Lagos-based W Hospitality Group (www.w-hospitalitygroup.com)

Trevor Ward

W Hospitality Group, Lagos

[email protected]

 

The hunting of animals and other creatures for sport, choosing individual “kills” or trophies, with exceptional physical attributes such as the biggest horns, must be the most paradoxical sector of the global tourism industry.  Not only paradoxical, but also the most controversial, depending on your point of view.  There are some 23 countries in Africa which permit hunting, the most high profile being in southern Africa, the destination of an estimated 90% of hunting tourists from outside the continent.  Kenya, with one of Africa’s largest safari industries, does not allow hunting.

I suspect that most observers, including me, feel a little uncomfortable with the whole concept of shooting for sport, animals chosen for their exceptional nature, unable to defend themselves against the latest hunting rifle and a man (and the vast majority of hunters are male) intent on securing the trophy.  That tends to be the western point of view.

But the other point of view, which is that pertaining in communities, investors and governments that benefit from the industry. is that hunting tourism is not only extremely lucrative and capable of sustaining job creation, but is also a proven way of conserving the very animals that are being hunted.  And the need for conservation comes, sometimes, from overhunting.  That is the paradox.

According to one survey the estimated annual direct revenue generated from hunting in Sub-Saharan African countries is in the order of US$200 million from around 19,000 hunters, the majority from Europe and the USA.  This generates around 6,000 jobs in South Africa, over 4,000 in Tanzania, 2,000 in Namibia, and 1,000 in Botswana, the four countries with the largest trophy hunting activity.  A study conducted by Radder in 2006 in South Africa’s Eastern Cape Province found that game reserves increased employment by 250% and average earnings by over 450%.

So how can consumptive tourism – trophy hunters – be more valuable than non-consumptive tourism – photo safaris?

Trophy hunting tourists, engaged in “consumptive tourism”, spend considerably more than tourists on photographic safaris – non-consumptive tourism.  It is estimated that trophy hunters spend 30 times more than other tourists in Zimbabwe, and 14 times in Tanzania.  Thus revenues can be generated from fewer people, with less environmental impact.  Hunters also stay longer, sending an average of 14 days on a trip, ranging from

four days to over three months.  In some countries, only the longer trips qualify to hunt the largest game (including elephants).

In economic terms, trophy hunting places a measurable and specific value on wildlife – go online and you can find rates for different types of animal in different countries and different regions.  An elephant will cost upwards of US$45,000 to “consume”, whilst an eland is in the order of US$2,000 and an impala just US$300.  For the uber-rich, a black rhino has a price of over US$400,000 on its head.  Communities and investors will protect wildlife and their habitats given this financial incentive to do so, perceiving value in that protection.  The conservation industry, at least those who support hunting tourism, see the protection of wildlife and habitat as the main contribution of the industry.  This protection means that other, less sustainable activities such as farming and animal husbandry are less lucrative.

Hunting takes place in both State-owned and privately-owned reserves.  Some countries, such as Namibia and South Africa, have both types, whilst in Tanzania all hunting terrain is State-owned, allocated to investors to exploit.  In all cases, hunting is strictly controlled through both a system of licences and hunting guides, with approval required for the equipment used, the targets and the volume of “off-take”, i.e. the percentage of the wildlife in an area that can be consumed.  A figure of 2 to 7 per cent is considered to be sustainable.  The lower the off-take, the more marketable the destination in the future.

In southern Arica, the vast majority of hunting tourism agencies are based in the country, resulting in considerably less leakage of revenues than from photographic safaris booked through overseas tour operators.  The authorities in Tanzania estimate that 33% of trophy hunting revenues accrue to the government, compared to only 8% of beach, photographic safari and other tourism revenues.

The Tanzanian authorities estimate that investment in a hunting block in the country could be up to US$100 million, a significant sum.

Trophy hunting can open up new areas for tourism, and can be undertaken in countries where “traditional tourism is less practical – Chad, the Central African Republic and Burkina Faso all have small hunting industries.  The exploitation of land for hunting has a much lower impact that that for photographic surveys – the protection of a pristine wildlife habitat is essential for the animals’ well-being, and being mostly on foot, intrusive roads are not required.

Kenya, with arguably Africa’s largest wildlife tourism industry, banned hunting several decades ago.  There, the ethical arguments against trophy hunting overcame the economic and conservation arguments.  Media coverage of the hunting industry is typically emotive, targeting the (often high) wealth of hunters, and the darker side of the industry,

such as illegal “canned hunting”, where animals are drugged, attracted by bright lights and so on.  But every activity, including within the tourism industry, has its mavericks, and proper control from government can push these activities out of a well-regulated hunting sector.  Job creation and income generation, wildlife and habitat conservation are convincing arguments for an industry in a continent that needs them all.

 

Trevor Ward

W Hospitality Group, Lagos

[email protected]

In sub-Saharan Africa, the casino industry is biggest in South Africa, where gaming giants such as Tsogo Sun, Peermont and Sun International dominate the land-based industry.  All three companies have casinos located in hotels that they manage, as well as stand-alone operations.  Elsewhere, Kenya has a reasonably large gaming industry, although most operations are quite small, and none rival what is on offer in Sun City and MonteCasino.

Look at the figures for per capita GDP, and it is no wonder that South Africa has the largest industry – at US$10,280, the per capita GDP in South Africa is almost five times the average for sub-Saharan Africa at US$2,108 (both figures at 2010 purchasing power parity, World Bank July 2011).

Whilst most casinos in Kenya cater primarily to the tourist trade, the bedrock of profitability in most operations is the local population, including resident expatriates.  So casinos in capital cities, from Abuja to Monrovia, can attract the higher-earning population there, and the diplomatic community.  Go into most casinos in Nigeria, for example, and the majority of players appear to be either Chinese or Lebanese, both nationalities known for their love of gaming.

The gaming industry is a difficult one to succeed in.  It is rarely praised, and often vilified.  Governments mostly love the industry, because it is such an easy target for taxation.  Local communities blame the industry for fomenting social ills, not only problem gambling (which the serious players in the industry take seriously, as being as much their problem as the individual’s), but also those such as corruption, crime and prostitution, seeing casinos as only for the rich and powerful, an alien presence owned by a foreign company, employing foreigners in all the top jobs, and so on.  It is not for them, so it must be wrong.  Religious organisations often support this antipathy – but it is noteworthy that Islam and Egypt, a country with the second largest number of casinos on the continent of Africa, live amicably side by side.

But casinos are a legitimate part of the hospitality business, and can be an extremely useful component of a mixed-use development.  Look at MonteCasino in Gauteng as an example; named not after the gaming content but after an Italian village, and themed as such, it is a superb mix of gaming, retail, entertainment, lodging and other facilities, a destination in its own right in which the casino is a relatively small, but essential, part.

Even if you are not a player, the presence of a casino, the noise, the lights, the ambience, still gets the adrenaline going.

But casinos are volatile businesses, and here’s a fact – the house does not always win!  Casinos can make a loss.  The economic environment will directly affect the propensity of the locals to gamble, and Tsogo Sun has recently announced a 4 per cent drop in profits due to a decline in leisure spending, and Sun International reported like-for-like growth in revenues of only 3 per cent in early 2011.  Not only is the impact from a negative economic environment, however – local and international political factors can have an impact.  A change of government can bring about new legislation, new taxation, or even an outright ban on gambling (which just forces it underground). And a deterioration in relations with foreign countries can close off cross-border traffic overnight.  Or (and lets face it, this is what it is all about!), the players can win, and the house can lose!

Casinos are not a licence to print money, but well and responsibly managed they are a profitable business, and fit well alongside a hotel, and especially within a mixed-use development.  Like any other business, they need careful planning, especially a close examination of the market – some communities have a higher propensity to gamble than others, and just because there are some big-time players in the country, doesn’t necessarily mean that they want to (be seen to) play in their home town.  Casinos are not a proverbial “licence to print money”, but they can be profitable businesses – and don’t underestimate the need to continuously reinvest in the equipment, especially the slot machines – tired old one-arm bandits will not attract the “right crowd”.

Operating costs of a casino are high – an operational margin of 10 per cent of the house revenue (i.e. after paying out winnings) is not uncommon.  A modern casino has high tech security equipment, sometimes with a 24-hour dedicated link to an offshore control centre, a large number of security, surveillance, gaming and catering personnel, and the need for an uninterrupted power supply, a major challenge in some places in Africa.  And then there is the investment required in responsible gaming programmes, and within the host community to overcome or at least mitigate negative attitudes.

Interestingly, Tsogo Sun and Sun International are two of the biggest investors in hotels outside of their home country – the former own hotels in Lusaka, Maputo and Dar es Salam, all branded Southern Sun, and it s a moot point whether the completion of the renovation of the Federal Palace Hotel in Lagos, and the creation of Nigeria’s largest casino there, would have been completed in 2008 without an investment from Sun International.

From their point of view, they would never assume that a casino will subsidise an otherwise-marginal investment in a hotel.  Whilst casinos are attractive to the leisure and

conference markets, they are not the main pull factor – the location has still got to be the right one.  And if the hotel cannot attract enough business in its own right to be sustainable, then the business model is flawed from the outset.

Casinos are exciting, glamorous and profitable – but they are not for the faint-hearted, and definitely not for the amateur!

Trevor Ward

W Hospitality Group, Lagos

[email protected]

We watched the revolutions on television.  Night after night we were shown pictures of riots in the centre of Cairo and Tunis, and we joined the revolutions in our sitting rooms, willing the demonstrators to succeed.  And we reached for the telephone and cancelled our holiday plans, withdrawing our economic support for the same countries that need just that support to recover from the damage.

We looked on as it spread to Libya, with much more than demonstrations and peaceful transitions – the formerly untouchable Gadaafi challenged the rebels, and they responded with a full blown war, still continuing in October 2011.  And the hotel industry in Tripoli was the centre of attention, as journalists were detained in the now-famous Rixos hotel.  The Corinthia also bravely stayed open.

Unlike the JW Marriott, the Four Points by Sheraton and the Radisson Blu, which had only just opened their doors, only to have to shut again within days.  It was unsafe for the staff and guests to remain, and anyway, apart from journalists, there were no guests.

Algeria and Morocco have been largely untouched by the “Arab Spring”, so far at least, and Morocco has grand plans to increase the share of national GDP contributed by tourism.

How quickly the world changes!  At the beginning of the year, the international hotel chains were focusing heavily on North Africa, opening hotels throughout the region, and with considerable pipelines of new deals:

Hotel Development in Africa 2011

Top 10 Countries by Number of Rooms

Hotels Rooms
1 Egypt 19 5,967
2 Morocco 30 5,297
3 Nigeria 23 4,811
4 Algeria 14 2,575
5 Libya 6 1,937
6 Ghana 7 1,346
7 South Africa 8 1,009
8 Tunisia 4 762
9 Equatorial Guinea 4 661
10 Ethiopia 3 482
Source: W Hospitality Group research, March 2011

All five of the North African countries featured in the top ten destinations for branded hotel developments, and four of them in the top five – driven either by the then-booming tourism industries in the likes of Morocco, Tunisia and Egypt, or by the opening up of the oil-based economies in Algeria and Libya.  Accor, the Paris-based hotel chain operating hotels under the Pullman Sofitel, Ibis and Novotel brands, amongst others, had over half of their development pipeline in Morocco and Algeria, underlining their commitment to North Africa.

Egypt topped the list, and understandably work on the majority of these 19 projects has stopped, due to the uncertainty about the future politics in the country, and the general effect of the global financial crisis.  But Egypt has proved several times in the past that it is a fighter, and has rebounded many times after terrorist attacks and the like.  The rebound this time may take longer, with riots in Cairo in October and uncertainty about the upcoming elections, but tourists have short memories, and resorts like Sharm el Sheikh and Hurghada can benefit from their strong individual identities, as opposed to being solely connected with the country’s tarnished reputation.

Libya’s future is unknown, but what is certain is that the country will require a great deal of support going forward, and the rebuilding of the cities will generate hotel demand.  Whether that will bring new deals to the country remains to be seen.

Tunisia has had the most peaceful political transition and, given the importance of tourism to the country’s income, the tourists are likely to return to the resorts in 2012, with full recovery by 2013.  that’s badly needed, with tourist numbers down 50 per cent in the peak summer season.

The crisis in North Africa affected not only the five countries of the region, but also countries regarded as “too close” – Sicily and other islands of Italy including Lampedusa and, strangely enough, also Malta.  The latter is recovering well from the initial downturn, and the tourist authorities in Sicily and other islands are hoping that tourists really do have short memories, even if their knowledge of geography remains a bit suspect!  But, as usual, every cloud has a silver lining, and North Africa’s loss is Southern Europe’s gain – Spain, Portugal, Greece and Turkey all reported unexpected increases in tourism numbers and revenues, at time when at least the first three countries badly need it.  According to press reports, Spain received almost 8 million tourists in August alone, hotel receipts in Portugal were up 12.5 per cent in July, Turkey is up around 20 per cent in the first half of the year, and Greece is up 14 per cent.

And finally, another knock-on effect of the Libyan crisis is being watched carefully by operators and investors – at the last count, the Libyan government owns and manages around a dozen hotels in Africa, through its Laico Hotels vehicle, owns at least two more hotels which are closed awaiting refurbishment, and is the owner of others managed by third parties, including the Radisson Blu in Sandton.  Some would say, probably correctly, that Libya is the largest hotel investor in the continent.  Will the new government wish to remain the holder of that title? Or will they start to divest, placing some superb assets, such as the Regency in Nairobi and the Okoume Palace in Libreville on the market?  We can only wait and see.

Trevor Ward

W Hospitality Group, Lagos

[email protected]

Announcing a new hotel opening in Chad recently, Hilton stated that their ambition is to have a hotel in “every major city in Africa”.  This is an advance on a previous announcement that they wanted to be in every capital city (54, at the latest count!), and is a recognition that there are many opportunities “off the beaten track”.

Take Nigeria, for example.  The country is a federation of 36 States plus the Federal Capital Territory (FCT), so really 37 in all.  Each State has a capital city, plus Abuja in the FCT.  The Big Three are Lagos, the commercial capital of the country and the official capital of Lagos State, Abuja the business capital, and Port Harcourt (Rivers State) the main centre of the oil and gas industry.  All three now have internationally-branded hotels, including a massive Hilton in Abuja (670 rooms and suites), and Starwood and Protea have a presence in all three.

As well as these capital cities, there are some important urban centres such as Warri and Eket, both oil towns, which warrant attention.

So far, only Protea and African Sun have ventured outside of the Big Three, the former with a recently-opened hotel in Warri, and African Sun operating hotels in Enugu and Benin City.  More are coming, there’s a Park Inn under construction in Abeokuta, a Protea opening shortly in Benin City, and I am working with several State governments to get professional management and brands into hotels which they own.

But, as usual, Nigeria is different from other countries!  Outside of South Africa, it is the only country in sub-Saharan Africa to have so many major cities (something in the order of 45 to 50, by my reckoning), and therefore so many opportunities for development.  And South Africa is already pretty well developed, and therefore with fewer opportunities currently, especially given the building boom that was triggered by the FIFA World Cup.  Angola is, probably, the next most attractive country, with 18 Provinces, each with a capital city, and a few other cities such as Soyo in the north, where massive investment is taking place in the LNG sector.  MITC, a Luanda-based developer. is working on a roll-out programme of mid-market, branded hotels in many of the Provinces, with international management engaged to operate and brand them.

At the other end of the scale, there are several small countries which have few (if any) major cities outside of the capital – Benin, Togo, Guinea Bissau, for example.  No wonder the major chains are focusing much of their efforts on Nigeria and Angola.

Not all “secondary” cities are suitable for hotel development, though.  Prerequisites are a growing economy (or a significant tourism potential), good air and road access, and an environment conducive to private sector investment and operations.  The trouble is, information about many of these locations is sparse, to say the least.  Whilst that may be an indicator in itself that there is little opportunity, I don’t believe that is necessarily a forgone conclusion every time.  I am a firm believer that a modern, well-managed, well-presented and well-located hotel product can create demand – if you build it they will come.  Obviously, the risk is higher, relying more on gut instinct than empirical evidence, but there are several examples of where this works – take Starwood’s Le Meridien Hotel in Uyo, Akwa Ibom State in eastern Nigeria, for example, where virtually all the demand is created, attracted by the beautiful setting, the top-class golf course and the conferencing facilities there.  But there is a fine line between successes like that, and white elephants driven by ego – the huge hotels built by government because the neighbouring state built one, and they think they must have one too.

My studies in secondary cities, especially in Nigeria and Angola, using adapted Lodging Market Penetration tools, reveal that the main opportunities are for mid-market hotels, typically with a maximum of 100 to 120 rooms, which can cater to three main markets, i.e. business visitors during the week, residential conferences, and weekend leisure traffic – there are several cities in Nigeria which have “reverse seasonality”, enjoying their highest occupancies and average daily rates at weekends when indigenes return home to party.  But however high the demand, I have found that there is always a cap on what people are prepared to pay for hotel accommodation – you just cannot charge as much in Soyo or Sokoto as you can in Luanda or Lagos.  The costing of the hotel therefore needs to be very carefully controlled, to ensure that returns are acceptable.

I think it will be some time before we see Hiltons at every turn – but then Africa never ceases to surprise us!

Trevor Ward

W Hospitality Group, Lagos

[email protected]

 

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 a couple of 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 rebranding if several hotels from international to “home-grown” brands.

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