As Africa’s economies grow, the demand for hotel accommodation is also growing apace – in those countries and cities where the main demand is business-related, there is a direct correlation between GDP growth and the increase in demand for hotel rooms. The more diverse the economy, and the greater the share of the tertiary sector in that economy (transportation and distribution, retail, financial services etc), the greater the correlation, and the greater the multiple of GDP growth.
The Africa story is, of course, one of exceptional growth during the past decade, and that’s forecast to continue. So Africa needs new hotels. In years gone by, it was pretty much only government that built new hotels, but now the private sector is making the running. In the ten years that I have lived in Lagos, there has been a sea change in the African hotel industry, made possible by the availability of new sources of finance.
It’s still not easy (will anything in Africa ever be “easy”?!), but we have come along way since the 1980s, when pioneers such as Mr Goodie Ibru, the developer of the Sheraton Hotel in Lagos, were up against all the odds, and more. Goodie received support from the IFC, then pretty much the only international investor in hotels in Africa. It took another 25 years, until 2010 before the next, purpose-built internationally-branded hotel, the Four Points by Sheraton, opened in Lagos, closely followed by the Radisson Blu. Both were funded by local equity investors
What I have seen in the last two to three years is the arrival on the scene – finally - of new, private sector lenders and equity investors. What I call the “special lenders”, such as IFC and Germany’s DEG – “special” because they have a different perspective to risk than “normal” lenders, and because they have a development agenda alongside the commercial return – have been in the market for some time, and are now being joined by others of the same ilk, as well as purely commercial lenders.
One of the largest single hotel transactions in sub-Saharan Africa, the sale of a majority stake in the Southern Sun hotel in Lagos, was closed at the end of June 2013, a US$70 million deal, unique not only because of its size, but also because the buyer, Tsogo Sun, is a hotel operator, and has managed the hotel since its opening in 2009. None of the international brands has expressed any interest in sub-Saharan Africa, seeking instead owners who will engage them to manage their hotels for them. The Southern Sun deal was funded part equity from Tsogo Sun and part debt from a leading South African bank, a “normal” lender.
I wrote about the new and existing funds that are investing in Africa’s hotels in the ^^^^^ issue of Ai – since then I have heard of two international hotel groups who are looking to break the mould and follow Tsogo Sun’s lead, by providing equity to hotel owners, in one case as the majority investor. And then there are other special lenders who are either increasingly active or who are entering the market for the first time. These include South Africa’s IDC, US-based OPIC, and Cairo-based African Export Import Bank (Afreximbank), which seems to have an almost insatiable appetite for hotel investment, so much so that they have developed a special financial product, the ConTour programme, specifically for hotel lending. I was told earlier this year that they have written term sheets for more than US$1 billion of hotel lending. Match that!
Well, others are in there too. I have heard of at least four international construction companies who are willing to invest in hotel projects, and on one case are acting as developers, buying sites and seeking partners to build hotels. One Europe-based contractor is well on its way to establishing a hotel investment fund, which is attracting interest from Africa-based pension funds and others. When fully leveraged, this fund could have more than US$1 billion to invest.
It never is going to be easy to fund hotels in Africa – indeed, they’re difficult projects to fund in many more-developed places as well – but the options are now there, and we’re in a very different funding environment today from what I encountered when I first moved to Africa in 2003, very different and much, much more positive for the future of the African hotel industry.
W Hospitality Group, Lagos