Hotel groups expanding into Africa

Posted On Monday, 24 June 2013 11:01 Published by Commercial Property News
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An undersupply of quality hotels catering to business travellers means hospitality development in commercial centres has become a pivotal strategy for hoteliers

Arthur Gillis Protea HotelsHomegrown and international hotel groups are expanding into the rest of Africa, as economic growth boosts business and leisure travel on the continent. An undersupply of quality hotels catering to business travellers means hospitality development in commercial centres has become a pivotal strategy for hoteliers, as the continent's natural resources boom and rapid urbanisation - which is leading to a rise in purchasing power - attracts investment.

Arthur Gillis, CEO of Protea Hospitality Group, which has hotels worth more than US$100m under construction in Zambia, Rwanda, Ghana, Nigeria, Uganda and SA, says Africa has more development potential than just about anywhere else in the world. He says many African economies are expanding rapidly and "it's encouraging to see GDP projections of between 6% and 8% becoming reality on the back of political stability".

A widely cited McKinsey report from three years ago, which predicted Africa's consumer spending could reach $1,4 trillion by 2020, announced to the world that Africa was open for business. Protea became a wholly owned SA company again in April 2009 after a consortium comprising Protea Hotels management, its black economic empowerment shareholders and Investec Private Equity bought back the 74% stake the hotel group had sold to Australian-based Stella Hospitality Group.

Another local group, JSE-listed City Lodge Hotels, opened its first "built from scratch" hotel outside SA, in Gaborone, last month. The company, which has a market capitalisation of R5,3bn, is investigating expansion into certain Southern African Development Community countries, as well as selected East and West African countries. In July last year it bought a 50% share in two existing hotels in Nairobi, Kenya.

Africa is also an important region for hotel and casino operator Tsogo Sun. Its offshore division, which houses its African operations, had revenues of R361m in the year ended March, up 11% on the previous year. Though this was largely driven by the weakening of the rand against the dollar and the euro, the group's occupancies remain strong. Aside from Mozambique and Nigeria, where it is investing R920m, Tsogo Sun also operates in Zambia, Tanzania, Kenya and the Seychelles.

Investment companies also want to tap into Africa's underserviced market. Lonrho's project with easyGroup will introduce easyHotels.com by Lonrho throughout Africa, to provide international-standard rooms at a low cost. Tim Harlech-Jones, development manager at extrabold, an SA-based independent hotel management company, says there's a huge gap for international hotel brands offering good-quality accommodation in Africa. "Sub-Saharan Africa is in need of a strong internationally branded two- to three-star portfolio of hotels that can be customised regionally and offer value for money," he says.

According to consultancy W Hospitality Group, international brands like Hilton Worldwide, Carlson Rezidor, Accor and Marriott are already blazing the trail. Michael Cooper, Hilton Worldwide vice-president of development for Central, East Africa and SA, says the long-term aim is to establish a presence in every key city in Africa.

French hotel group Accor, with brands like Mercure and ibis, also has aspirations: it wants to open 5000 rooms in 146 hotels in Africa by 2016. W Hospitality Group MD Trevor Ward says it is extremely encouraging to see new brands entering the market. "This shows the confidence of the hotel chains, not just in the continent conceptually, but also as somewhere where they can diversify their brand footprint. We are being contacted by a number of dedicated investment funds seeking to enter the African hotel market."

As hotel groups expand into various territories, their business models and funding options differ. A shared ownership structure with a domestic partner is a popular route. A hotel group will typically fund its share of the investment with a combination of debt and equity.

Wayne Troughton, CEO of HTI Consulting, a hospitality and property consultancy, predicts that most of the growth in Africa will be through management contracts, whereby a hotel's owner contracts with a separate company to perform managerial functions in return for a fee.

"A management company's structure would be that it gets paid on a percentage of revenue of the hotel and then also on a percentage of gross operating profit. We're also starting to see some hotel chains putting in key money, or others having structures like funds to support expansion, though these are not the norm," he says.

Though Africa presents a compelling investment case for hotel operators who are benefiting from higher profitability due to steeper average room rates, development and trading comes with challenges, such as recruitment and training of staff. Also securing the right property in a good location can be an uphill battle.

Ross Heyns, an equity analyst at Kagiso Asset Management, says land tends to be expensive and ownership rights are often contested. In addition, building a new hotel can cost a lot more in Africa and the provision of basic services is often inadequate, requiring the installation of facilities such as a backup power supply and a water-filtration system.

Competition for land is strong from not only hoteliers but also retailers, office developers and residential developers. City Lodge Hotels FD Andrew Widegger says other challenges include corruption and the small pool of competent and qualified building contractors.

Most hospitality companies agree that having a local partner who has on-the-ground knowledge and understands a country's business and legislative framework can help navigate and simplify strategic execution, permits and risk management. Like the retail, telecommunications and banking players that have set up shop on this continent, hotel groups are learning that in Africa everything takes longer. Andrew McLachlan, vice-president business development, Africa & Indian Ocean Islands, at Carlson Rezidor, says in SA it expects a new, 200-room hotel to open 18-24 months after construction begins but that in certain parts of sub-Saharan Africa the construction period can be double that.

"This makes the overall cost of the development very expensive. In addition, many items in a new hotel need to be imported and, with poor harbour and road infrastructure, the logistics presents its own unique challenges," he says.

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