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.
W Hospitality Group, Lagos