Africa’s maturing hotel sector is no longer all about the luxury properties catering for high-end travelers.
A new wave of domestic visitors and the continued growth of international tourism are fueling demand for mid-market options, along with niche segments like serviced apartments, in the continent’s bustling centers such as Lagos, Nairobi, and Johannesburg.
“The hotel market in Sub-Saharan Africa has evolved in the last decade with many global operators opening quality hotels in key markets like South Africa, Mauritius and Kenya,” says Xander Nijnens, Executive Vice President, Hotels & Hospitality Group Sub-Saharan Africa, JLL.
And the supply of new hotels has kept on coming across the region as occupancy rates of over 70 percent attracted investors and occupiers back in 2007. West Africa, for example, has been increasing its room supply by 8 percent a year over the last ten years.
Yet demand for higher-end accommodation has not kept pace with supply. “The current challenge is that too many upscale hotels opened relative to demand, resulting in a saturated market for four- and five-star hotels in many cities,” Nijnens says.
As such, investors and operators have turned their attention to new opportunities in a previously overlooked area; the mid-market sector.
Changing travel needs
Across Africa, its fast developing cities are home to both a growing middle class embracing leisure travel and a burgeoning private sector that increases the need for cross-country business travel.
“We are already seeing much more regional corporate travel, which was previously met by informal accommodation – guesthouses, lodges, for example,” Nijnens says. “Now, these travelers are looking for the quality and reliability that the branded mid-market and budget sectors can offer.”
And the hotel operators are steadily building their presence in the mid-market. Regionally, Onomo operates a portfolio of three-star hotels in West Africa and South Africa with plans to expand into East Africa, whilst City Lodge expanded into broader Africa several years ago. Smaller regional brands like Urban and City Blue also have ambitions in this segment.
Global operators are equally interested. The Carlton Rezidor Group will open four upper midmarket hotels in Kenya in the next three years. Marriott International recently inked a deal to open seven new hotels in East and West Africa, while Hilton announced plans to renovate and rebrand 29 hotels across the continent over the next five years.
“Much of the future branded pipeline will be driven by the operators’ mid-market brands. In the long-term, the bulk of hotel demand for these hotels is projected to come from domestic and regional travelers,” Nijnens says.
Mark of mature markets
Despite the longer-term prospects, more immediate challenges are pressing on Africa’s hotel sector.
For regional hotel markets to develop, there is a growing need for more effective debt funding and a reduction in development costs. Lengthy rezoning and development approval processes coupled with protracted construction periods mean that it can easily take three to five years to develop a hotel, says Nijnens, compared to 18 months for a property in most developed markets. Costs can also run high, with expensive financing for loans adding to rising land prices and construction costs.
Yet with saturation in key markets across the region, investors are getting shrewder about understanding demand and catering to changing traveler needs in new developments. “Better positioning properties within the mid-market sector should help to provide investors with stronger returns and offer a wider range of acquisition opportunities for institutional investors,” concludes Nijnens “As the mid-market sector becomes more established, activity and liquidity levels within the market should pick up, which ultimately will attract more global capital to the sector and drive future growth.”