JLL expects a significant evolution in the hotel real estate sector as global investors increasingly scrutinise the continent’s potential
JLL’s latest thought leadership research paper ‘Spotlight on Africa: Opportunity on the Horizon’ explores the investment potential of hotels in Africa, which has improved significantly over the past decade, though it is not without its challenges.
The growth drivers for the hotel sector in Africa include improving fiscal management, favourable demographics (a population of 1.1billion), rapid urbanisation, a growing middle class, rich commodity and energy resources, considerable infrastructure investment and increased tourism.
The expanding economy and increased regional trade will drive business tourism and hotel sector demand. Tourist numbers are projected to increase by 5.7% per annum in Africa compared to 3.2% globally up to 2030. JLL projects hotel demand to increase at a rate of 5% per annum between 2015 and 2017, yet notes that this growth varies across the continent with certain countries, on a higher growth trajectory, whilst other markets are contracting.
JLL forecasts 1.5% annual supply growth in North Africa and an average annual supply growth of 3.5% in Sub-Saharan Africa. This equates to USD 2.1 billion in new hotel investment in 2015, rising to USD 2.4 billion in 2016 and USD 2.7 billion in 2017. Investment is driven by local and regional players who account for at least 75% of hotel investment in the region. Global capital is however increasingly taking note of the opportunity and is assessing its optimal entry point.
Xander Nijnens, Senior Vice President, Sub-Saharan Africa for JLL Hotels & Hospitality Group, comments: “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.”
JLL noted that 46% of investors are pursuing hotel developments, while 17% are looking only at acquisitions, while 37% are seeking both. This is reflective of the emergent nature of hotel real estate in Africa. From a development perspective target IRRs are in the range of 16% to 25% and capitalization rates are in the range of 8%-12%. This equates to a target investment yield premium of 30% to 40% compared to global averages.
Most markets in Africa are still development-driven and as a result there are low open market transaction volumes in the hotel real estate market. There are a limited number of investment grade assets on the continent and they remain closely held. JLL forecasts liquidity to improve in the medium term as new developments come to market and ownership evolves.
Today, JLL estimates that international brand penetration in Africa is at 22%. 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 across the continent.
“In the long-term there is little doubt that Africa will be a meaningful player in the global real estate economy and pioneers with Africa specific development and transaction expertise are well placed to reap the benefit of an 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,” concludes Nijnens.