Spotlight on Africa: Opportunity on the Horizon

Transcription

1 October 2015 Spotlight on Africa: Opportunity on the Horizon An Overview of the Hotel Real Estate Sector in Africa

2 2 Spotlight on Africa: Opportunity on the Horizon JLL 3 Contents Introduction Introduction 3 Investment Drivers in Africa 4 Hotel Supply 6 Hotel Demand 10 Investment Focus & Returns 12 Africa Hotel Investment Outlook 13 Hotel Operators in Africa 16 Opportunities on the Horizon 18 Contributors 20 The narrative on the investment potential in Africa has improved significantly over the past decade and many sectors in the African economy are seeing high growth in investment from global corporates, institutional investors and private equity. The drivers for this change in sentiment are sustained economic growth, increased stability, favourable demographics and improving infrastructure. In the global hotel sector, we are forecasting hotel transaction volumes of USD 68 billion in 2015, a 15.0% growth on 2014, and a record level of cross-border capital flows. This buoyant market is being driven by strong hotel sector fundamentals, high levels of global liquidity and increasingly global real estate capital allocation. The bulk of the investment continues to be focused on mature markets with emerging markets representing some 8.5% of open market transactions globally. Global hotel real estate capital has been cautious in flowing into Africa due to perceived high risk and limited investment scale. Despite this cautious approach, hotel supply on the continent has grown by 4.1% annually during the past 10 years, which has been driven primarily by local and regional developers. Global investors are increasingly taking note of the potential of the region and considering their optimal entry strategy into these markets. The aim of our research is to map out the supply and demand drivers in the hotel real estate sector in Africa, to highlight target returns and to understand barriers to entry. More than 50 investment companies participated in this research and we thank them for their contribution. We hope that our research will assist in creating further transparency in the hotel real estate sector in this challenging yet exciting growth region. Luanda, Angola

3 4 Spotlight on Africa: Opportunity on the Horizon JLL 5 Investment Drivers in Africa Fast Facts Postive Trends USD 5.4 Tn GDP (PPP) Improving Economic Management FDI & Expanding Corporate Footprint 4.6% GDP Growth 54 Countries Favourable Demographics Rapid Urbanisation Innovation & Technology 1.1 Bn Population Infrastructure Investment Commodity & Energy Resources Sustained Economic Growth Expanding Middle Class USD 57 Bn Foreign Direct Investment Languages Challenges Political Risks Economic Factors Local Bank Constraints Short-term Shocks Countryspecific Risks Algiers, Algeria

4 6 Spotlight on Africa: Opportunity on the Horizon JLL 7 Hotel Supply Overview Supply Growth Existing Rooms We estimate that there are 4,650 hotels with 581,000 keys in Africa, split 57.0% in North Africa and 43.0% in Sub-Saharan Africa. This equates to less than 5.0% of the global hotel supply. In the past 10 years, the net growth across the continent has averaged 4.1%, with a similar level of growth in the north and south of the continent. Due primarily to the effects of the global financial crisis, the average growth over the past five years equated to 2.6% per annum. In this time period the sub-regions showing the highest growth have been Central, East and West Africa, while the more mature markets of Southern Africa and North Africa slowed in their pace of growth. North Africa (Rooms) 400, , , , , , Hotels North Africa is experiencing a demand downturn due to geopolitical instability and social unrest in several countries, which we anticipate will depress supply growth in the short term. We project that supply will grow at 1.5% annually between 2015 and 2017 to result in 5,000 additional rooms entering the market annually, at an investment of USD 855 million per annum. 100,000 50, FCT FCT FCT USD 2.3 Bn Annual Hotel Investment +1.5% Supply Growth Forecast in North Africa Sub-Saharan Africa is seeing acceleration in hotel supply growth albeit off a lower base. We project supply growth of 3.0% in 2015, accelerating to 3.5% in 2016 and 4.0% in Lower resource prices are reducing the capital available for hotel investment and we assume that export earnings from resources will show some recovery in the medium term. Our projected supply growth equates to an average of 9,000 additional rooms entering the market per annum at an investment of USD 1.3 billion in 2015, rising to USD 1.5 billion in 2016 and USD 1.8 billion in On a combined regional basis, this estimated growth equates to some USD 2.1 billion in investment in 2016, rising to USD 2.4 billion in 2017 and USD 2.7 billion in This investment is in the development of new hotels only, which is the main investment driver in the region, and excludes ongoing reinvestment in existing hotels or transactions. Sub-Saharan Africa (Rooms) 400, , , , , , ,000 50, % Supply Growth Forecast in Sub- Saharan Africa Global brands are increasingly penetrating the hotel sector in Africa and internationally branded supply is estimated at 22.0% of total rooms on the continent. The further up in the quality scale one climbs, the higher the penetration of brands. We forecast global brand penetration to grow as international demand increases and consumers become more brand aware. Despite this growth, local and regional brands will continue to play an important role as they that best understand local demand and real estate markets FCT FCT FCT Mana Pools National Park, Zimbabwe On a combined regional basis, this estimated growth equates to some USD 2.1 billion in investment in 2015, rising to USD 2.4 billion in 2016 and USD 2.7 billion in 2017.

5 8 Spotlight on Africa: Opportunity on the Horizon JLL 9 Hotel Supply Distribution 57% 332,000 KEYS NORTH 17% 101,000 KEYS SOUTHERN 15% 89,000 KEYS EAST 8% 44,000 KEYS WEST > 30,000 keys 10,000-30,000 keys 2% 14,000 KEYS CENTRAL 5,000-10,000 keys 0-5,000 keys Baie du Cap, Mauritius

6 10 Spotlight on Africa: Opportunity on the Horizon JLL 11 Hotel Demand Overview Tracking Performance The primary demand drivers for hotels on the continent are sustained economic growth, corporate entry by international companies, formalisation of trade, improving air access, and growing business and leisure tourism. Tourist arrivals, for both business and leisure, in Africa are projected to increase by 5.7% per annum compared to 3.2% globally up to Increased tourist arrivals to Africa is coming off a low base, with only a 4.9% share of global arrivals, and this should signal high potential for future growth. This is a promising outlook for international guest demand. North Africa and the Indian Ocean region have extensive exposure to foreign leisure tourism, while the focus of the formal hotel sector across the rest of the continent is primarily business tourism. Domestic demand variables are looking strong, with a regional GDP growth outlook of 4.6% per annum from 2015 to 2017, and guest demand further buoyed by increasing intra-regional trade, economic growth, urbanisation and favourable demographics. The growing middle class across the continent and domestic leisure and business travel creates a positive long-term outlook for this segment. Demand variables differ significantly across the continent and tourism markets are highly sensitive to social and political unrest, as well as regional contagion. We anticipate demand in the region to grow by 5.0% per annum between 2015 and The share of this demand growth, however, varies across the continent with certain countries on a high growth trajectory and other markets contracting. STR Global reported hotel occupancy in the region for the first six months of 2015 at 56.0%, which remains some way off the 71.0% achieved in 2007 at the peak of the last performance cycle. Sub-Saharan Africa performed better at 59.0% when compared to North Africa at 54.0%. Average Daily Rates in North Africa were at USD 91 during this period and at USD 118 in Sub-Saharan Africa. The appreciation of the USD against emerging market currencies has depressed USD rate growth. African Hotels: Occupancy Performance 72% 75% 66% 69% 60% 61% 60% 57% 71% 68% 59% 58% 57% 52% 54% 52% 47% 45% H North Africa Sub-Saharan Africa SOURCE: STR Global, 2015 African Hotels: ADR Performance (USD) H North Africa Sub-Saharan Africa SOURCE: STR Global, 2015 Accra, Ghana We anticipate demand in the region to grow by 5.0% per annum between 2015 and 2017

7 12 Spotlight on Africa: Opportunity on the Horizon JLL 13 Investment Focus & Returns Africa Hotel Investment Outlook Short-term investment sentiment in hotel real estate in Africa is buoyant at 7.1 (out of 10) and long-term sentiment is stronger at 7.8, according to our investor survey. This reflects the emerging nature of the African hotel sector, with opportunities for investment likely to present themselves at an accelerating rate as more investment grade assets enter the market. Key challenges are certainty of exit and liquidity in the market and we see this improving in the medium term. In the short term, supply shocks are likely in maturing markets, while this should improve as supply foundations firm up. Investment Funds have the strongest sentiment of all investor types with an 8.4 level of long-term interest. Target IRRs naturally differ considerably across such a diverse region with a range of some 16.0% for the lowest risk developments to 25.0% for higher risk investments on a leveraged USD basis. Initial yields (cap rate) are targeted between 8.0% to 12.0%+. Regionally, this compares to commercial property yield for investment grade assets of 8.5% to 10.0% in Sub-Saharan Africa and 8.5.0% to 11.0% in North Africa. Globally leveraged IRR is targeted at 16.4% and initial yield targeted of 7.2% for hotel real estate, according to our Hotel Investment Sentiment Survey (December 2014). This indicates a target return premium in Africa of 30.0% to 40.0% over global averages as a result of perceived higher risk. Target IRR by region Global Major Gateways Americas Asia Pacific EMEA Africa Leveraged IRR 16.4% 15.4% 18.0% 12.8% 13.9% 16.0%-25.0% Cap Rate 7.2% 6.6% 7.3% 7.0% 6.8% 8.0%-12.0% Who are the investors? Globally, emerging market hotel ownership is led by developers and property companies at 36.0% and hotel operators at 32.0%, which is similar in Africa where local and regional players are the primary investors in the sector. We estimate that 75.0%+ of investment in hotel real estate in Africa is sourced from local and regional investors rather than global capital. Real Estate Investment Trusts and Private Equity Funds own 42.0% of hotels in mature markets, yet hardly feature in Africa. In North Africa, we are seeing increasing sovereign wealth investment activity while this remains muted further south. Sub-Saharan Africa, in particular, is a development driven market which results in a lower level of opportunity for funds seeking income-producing assets, which are generally unwilling to take development risk. Private Equity type developers in the region focus primarily on the retail and commercial sectors and tend to look at hotels only on a fixed-lease basis to suit their development, leveraging and exit model. As there are very few operators offering leases in the market, it is unlikely that these players will contribute significantly to growth in the sector. There is appetite for reasonably priced yielding assets from global capital, yet the challenge is the low levels of liquidity and scale in the market to effectively meet this demand. These investors are global hotel investors rather than regional REITs or private equity players. There are a number of new private equity hotel development platforms in the making that may convert to income funds at the end of their investment life, which would improve exit opportunities. Another opportunity is the separation by Owner Operators of their real estate assets and their operating business to create dedicated hotel real estate investment vehicles. Investment interest in short and long-term Investment Fund % Acquisition volume by market type in 2014 Hotel ownership by market type Hotel Operator Other Developer High Net-Worth Individual Real Estate Investment Trust 0 10 Long-term planned exposure Short-term planned exposure Mature Emerging Mature Emerging Sovereign Wealth Fund Real Estate Investment Trust Private Equity Other Hotel Operator High Net-Worth Individual Developer/ Property Company Corporates Bank/Institutional Investor Zanzibar, Tanzania

8 14 Spotlight on Africa: Opportunity on the Horizon JLL 15 What are investors looking for? The predominant focus on the continent is development, with 46.0% of investors focused solely on this investment type, 17.0% only looking at acquisitions and 37.0% seeking both. Given the current development cycle and lack of investment grade assets for sale in the market, this is likely to be opportunity driven. Target gearing levels are between 40.0% and 70.0%, with most developments being funded at 50.0% to 60.0% by commercial lenders and development finance institutions. The preferred operating structure for investors is management agreements at 50.0% compared to 26.0% for lease agreements. Given the emerging nature of many of these hotel markets, and consequently higher levels of demand and supply shocks, we consider management agreements most appropriate. In North Africa, we are seeing a reduction in the number of tour operator leases on resort properties and an increase in management agreements as a result. The majority of interest from investors is in capital and primary cities, due to lower risk, higher return and larger scale. The corporate market is favoured by 56.0% of investors due to the more resilient nature of this segment and higher growth in business tourism. The interest by star grading is fairly evenly spread between 3, 4 and 5-star hotels and we are noticing that investment funds are looking increasingly at the mid-market segment, while growth in the upper upscale and luxury segments continue to be driven by local developers and high net worth promoters. 46% Development 37% Both Outright Ownership 31% Various 31% Barriers to Investment in Africa Projects not meeting my return thresholds Lack of investment grade properties available to purchase 1 Lack of clear exit opportunities at the end of my assetholding period 8 Lack of political stability 5 2 Lack of access to quality contractors and development professionals High development costs 6 3 Lack of suitable local equity partnership opportunities Lack of foreign currency stability (high volatility/lack of access) 7 Opportunity cost of my land against other real estate asset classes % Acquisitions 38% 5-star Focus of Investment Target Investment Structure JV Majority 29% JV Minority 9% Corporate 56% Barriers ranked from highest to lowest What are the main challenges to investing? Developing and investing in real estate in Africa has its challenges due to the emerging nature of the sector, the lack of transparency in the real estate markets and a shortgage of critical development skills and expertise in many markets. Certainty of delivery in particular is a challenge in hotel development across the region, with delayed timelines and exceeded budgets the norm rather than the exception. This delivery risk should improve in the medium term, as the sector becomes more professional and sees an increase in experience and expertise. Operators are also investing in additional technical support for developers to increase the realisation rate of their pipelines. 31% 4-star 31% 3-star Target Grading Target Market Leisure 21% Indifferent 23% One of the key challenges noted by investors is bridging the gap between returns offered by project promoters and target IRRs sought by capital markets. Increasing land prices, high development costs and longer construction periods depress projected returns of many projects. With the market maturing and more exit opportunities becoming available, we see investment risk premium reducing and the gap narrowing. Development costs should reduce over the next decade, with higher levels of competition for the supply of development materials and skills. High import duties on construction materials and taxation on development also remain barriers to returns on investment. Capital markets seek opportunities with the lowest risk against the highest reward and considerations such as operating and development risk and exit strategy can be managed, whereas risks such as economic, political and currency stability (and availability) are externally driven. Investment guarantees and insurance as well as certainty of free repatriation of profits, access to foreign currency and access to USD-denominated loans are critical to any decision to invest at a reasonable investment risk premium.

9 16 Spotlight on Africa: Opportunity on the Horizon JLL 22% Global Brands Hotel Operators in Africa Global Branding The majority of hotels in Africa are independently or regionally branded, with global brands representing 22.0% of room supply on the continent. This is slightly higher in North Africa at 24.0% than in Sub-Saharan Africa at 20.0%. The vast majority of these branded hotels are operated under management contracts, with some franchise agreements and very few leases. There are a number of global brands which own hotels on the continent, generally due to legacy reasons, yet few are currently investing and prefer to adopt the asset-light approach to growth. Demand for international-branded hotels is likely to improve due to an increased demand from global corporates and a growth in international tourists. By their nature, international brands tend to have a broader reach and more effective global distribution. Development pipelines reported by the brands are on the rise, yet the challenge continues to be the conversion of these pipelines into openings. With the maturing of real estate markets and increasing hotel development expertise in the region, we will see the pipeline realisation rate improving during the coming years. It is likely that the more prominent global brands will become quasi-regional players with strong local brand recognition similar to other emerging regions where global hotel brands have become local household names. Despite this growth in penetration by global brands, we see local and regional brands continue to play an important role across the continent. In many markets they already have the majority market share and are delivering real portfolio growth. We expect new local and regional brands to continue to be launched during the coming years, especially in the mid-scale and economy segments. We anticipate consolidation in the hotel operating sector in the future with a number of brands considering expanding their footprint by acquiring regional players. Dar-es-Salaam, Tanzania 78% Regional Brands/Independent 6% Franchise Agreement 6% Lease Agreement 12% No External Operator Target Operating Structure 26% Fixed lease 50% Management Agreement 17

10 18 Spotlight on Africa: Opportunity on the Horizon JLL 19 Opportunities on the Horizon The hotel real estate sector in Africa is emergent in the global context, yet the macro-economic and demographic drivers should ensure that this continent will be a significant source of growth for the global hotel industry during the decades to come. In the medium term, we anticipate continued demand and supply fluctuations due to the emergent nature of the sector and the consequent lower levels of hotel supply and demand for rooms. Global brands are playing an important role in increasing the visibility and quality of hotel real estate in Africa and their penetration is set to grow significantly, albeit through management contracts. Local and regional brands will continue to be formed and we anticipate consolidation to reduce brand fragmentation in the sector. The midmarket and budget segments, in particular, are likely to be engines of future supply growth fuelled by a rising middle class and increasing economic activity. Local and regional investors currently dominate hotel investment and ownership in the region and, with their ability to navigate their markets better than global entrants, they are best placed to capitalise on the opportunities offered in these diverse markets. The further maturation of the sector and the introduction of new investment platforms should result in local investors exiting their investments and increasing liquidity in the markets. This will result in a reduction in risk premiums sought by global capital and create the ability for investors to achieve suitable scale in their regional portfolios. Developers and investors that are able to successfully operate in challenging environments are well placed to achieve suitable riskadjusted returns in Africa. In the short-term in particular, emerging market currency fluctuations, export earnings, over-exposure to resources, economic volatility and socio-political instability will impact on investment returns and opportunities. In the long-term there is little doubt that Africa will be a meaningful player in the global real estate economy and the pioneers with development and transaction expertise in the market are well placed to reap the benefit from early entry. The next several years will see a significant evolution in the hotel real estate landscape in Africa and we anticipate that global capital will flow into the sector as and when the right opportunities arise. Moçambique

11 JLL Regional Headquarters: Chicago 200 East Randolph Drive Chicago, IL USA London 30 Warwick Street London W1B5NH United Kingdom Singapore 9 Raffles Place #39-00 Republic PLaza Singapore JLL Africa Offices: Johannesburg Office 303, The Firs Cnr Biermann & Cradock Ave Johannesburg, South Africa Lagos Mulliner Towers 39 Alfred Rewane Road Lagos, Nigeria Nairobi Delta Tower Chiromo Road Nairobi, Kenya Cairo Star Capital 2 Aly Rashed Street, Heliopolis Cairo, Egypt Casablanca 13, rue Ibnou Toufail Quartier Palmiers Casablanca, Morocco JLL MENA Building 1, Office 403 Emaar Square Dubai, UAE To find out how JLL can assist you in making real estate decisions in Africa, contact: Xander Nijnens Senior Vice President Hotels & Hospitality Group Sub-Saharan Africa xander.nijnens@eu.jll.com Chiheb Ben-Mahmoud Executive Vice President Hotels & Hospitality Group Middle East and North Africa chiheb.ben-mahmoud@eu.jll.com Jonathan Hubbard Head of Investor Services Hotels & Hospitality Group Europe, Middle East and Africa jonathan.hubbard@eu.jll.com Contributing Authors Jessica Jahns Head of Research Hotels & Hospitality Group Europe, Middle East and Africa jessica.jahns@eu.jll.com Wayne Godwin Associate Hotels & Hospitality Group Sub-Saharan Africa wayne.godwin@eu.jll.com COPYRIGHT JONES LANG LASALLE IP, INC This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.