East African Hotel markets emerging from High Supply Growth Cycle

The “secondary market” (being pre-owned commercial buildings) is the focus of JLL’s annual 2017 Investment Review, covering the three commercial real estate sectors: office, retail and industrial.

April 23, 2018

Following a peak in the economic and hotel demand cycle in 2014, supply growth in East Africa has been at an unprecedented high level during the past three years. Demand fundamentals have been strong in a region which has experienced the highest level of economic growth in Africa in recent years. Yet supply growth, with the entrance of many global hotel operators, has outpaced demand in many markets. However, the hotel development pipeline has now reduced which will allow hotel performance to recover.

Hotel investment in East Africa has been driven by local private investors with access to prime land and lending capacity off their diversified balance sheets. We are seeing increased interest in acquisition opportunities in the region by foreign investors as the sector is maturing rapidly. International branding has increased significantly during the past five years, and new supply is generally of investment grade quality by global standards. We expect the coming years to see an increasing level of hotel conversions to international brands as owners seek broader distribution, whilst the budget and midmarket segments offer the best development returns in the medium term.

Over the past 24 months, Nairobi has undergone a high supply growth cycle, with more than 2,000 rooms entering the market, resulting in a 23% increase in supply. With currently close to 8,500 keys, and circa another 1,000 keys anticipated to enter the market in the next two to three years, Nairobi is now nearing the end of its supply growth cycle. Performance is expected to remain under pressure in the short-to-medium term, however long term fundamentals are strong. High tourist arrivals growth, public sector support for tourism, new air routes and corporate expansion will drive demand growth.

Addis Ababa is characterised by a moderate level of supply, that is primarily unbranded and locally owned or operated. Addis Ababa is due to enter a period of high supply growth (up to 4,000 keys), much of this will be branded, which will change the distribution landscape. Whilst there is a significant pipeline, it is anticipated that only 30% to 40% will actually be realized due to limited access to financial leveraging and hard currency lending. The continued growth of Ethiopian Airlines and increasing foreign corporate entry in Ethiopia will be required to drive demand to absorb new supply entering the market.

Dar es Salaam has experienced the most manageable supply growth in recent years, whilst demand has slowed in the past 18 months due to reduced government demand, the move of the capital to Dodoma, and a reduction in foreign investment sentiment. New supply will open in 2018 and 2019 to complete the most recent supply cycle. Improved corporate demand off the back of strong economic growth, as well as a recovery in government demand will be required to absorb new supply.

The hotel performance outlook in Kampala is positive following the addition of close to 1,000 new rooms in the market. Kampala is an important regional center and will likely experience a strong increase in corporate activity and conferences during the next five years resulting in a hotel demand growth.

Hotel supply in Kigali has doubled during the past two years and this has resulted in a decline in hotel performance. Rwanda has been very successful in attracting the conference and events market, and it will be essential for this to continue to allow excess supply to be absorbed. A limited supply pipeline paired with strong government support for the tourism sector should result in the industry recovering in the medium term.

The impact of the high level of supply growth across the region is likely to continue to be felt in 2018, with the strong demand fundaments pushing hotel performance thereafter. Future supply is likely to grow at a much more moderate pace and through product which is better geared to market demand as hotel investors get more experienced. We favour the budget and midmarket segments in the region for investment returns, whilst conversion and value-add opportunities could provide good value. The completion of this hotel supply growth cycle is also likely to see assets coming to market for sale which will bring some much needed liquidity to the market where quality assets are tightly held. This should in turn bring fresh capital into the sector.

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