HOTEL FUNDING IN TODAY’S ENVIRONMENT
The causes and impact of the global financial crisis are on everyone’s lips right now, with everyone an instant expert on macro-economic theory all of a sudden. And much has been written about where Africa stands in the rather complicated scheme of things.
The “experts”, real and instant, have good news and bad news. The former is that Africa’s banks are hardly, if at all, exposed to the elaborate, and dangerous, financial instruments that have resulted in big-names crashing and burning, but the latter, the bad news, being that the continent is not immune to the aftermath – the economic slowdown, recession, reduction in credit, reduced tourism flows, and so on. And then there’s the mixed good/bad news, the reduction in oil prices from the crazy highs. For oil producing and exporting countries like Nigeria and Angola, bad news, but for net importers, like Kenya, a welcome easing of pressure on the budget. The economic slowdown in Africa is not all that bad news, with growth forecast by the IMF to slow from around 7 per cent in 2007 to 6 per cent in 2008 and 2009 – rather better than the forecasts of recession in the developed world.
In the hotel industry in Africa, the fact remains that many markets are severely under-hotelled, and entrepreneurs are still seeking finance to build new ones. So how are they to be financed if the “normal” lenders are no longer there to assist?
Well, in reality, international capital flows have been insignificant in funding hotel construction in Africa, apart from that coming from “special” lenders like the International Finance Corporation (IFC), part of the World Bank, South Africa’s Industrial Development Corporation, the US-based ExIm Bank and the Nordic sovereign funds which have grouped together in the Rezidor-led Afrinord vehicle. So most hotel development funding has been locally-sourced, with high interest rates and short tenors one of the main reasons for slow development activity.
One solution to the shortage of traditional debt finance is to change your project from a single-use hotel scheme to a mixed-use development. Some commentators state that, due to a combination of high construction costs and tight credit, it is not possible to make a return on a new full-service hotel project. Whilst I find that extreme, the underlying sentiment has some merit, and I believe that mixed-use schemes, where a hotel is developed on the same site as, or even in the same building as, residential apartments, retail, office and other non-hotel uses, have a considerably greater chance of attracting scarce lending. They provide a more consistent – and bankable – cash
flow, either to reduce the lending risk, or in some cases, to reduce the debt requirement by providing project-generated equity.
This model can apply to urban and resort hotels alike. The development of second homes, either on a whole ownership or fractional title basis, can provide significant levels of equity funding to defray the costs of luxury resorts. This has been undertaken very successfully in established resort destinations such as Mauritius, where the Anahita World Class Sanctuary successfully sold exclusive residences, some with the Four Seasons brand name behind them, to assist in the funding of the resort. Several developers of new and existing resorts are looking to replicate this in Zanzibar.
Urban mixed-use developments have equal or greater opportunities, particularly where there is a need to make a return on very high land prices (prime land in Lagos is currently selling at more than US$2,500 per square metre!). Kingdom Hotels, the Dubai-based hotel owner and developer, is currently constructing the new Mövenpick Hotel in Accra with retail, office and serviced apartment components in the scheme, not just to increase the financial attractiveness of the project, but also to generate greater activity on the site from morning to night, and to generate additional income from the synergies between the individual components.
One place where there are numerous mixed-use developments is the Middle East, particularly in Dubai, where hotels are combined with both leisure (holiday homes) and commercial (office and retail) facilities. I have written before regarding the inflow of Gulf funds to hotel and tourism development in Africa, from Dubai World’s investments in mega-projects in Rwanda, South Africa and other countries, to IFA investing in single assets such as the Fairmont Zanzibar resort.
Look for a combination of Gulf finance and mixed-use developments in Africa’s hotel industry in future.
Finally, local finance will continue to be available for good hotel projects, but from relatively new sources. As Africa’s economies stabilise, alongside more political stability, pension funds and insurance companies are attracting increased contributions, and need to invest in long-term projects, to match their commitments. In Nigeria, we have seen several insurance companies purchasing hotels in order to renovate them and benefit from the uplift in profitability and value that results. So look for new, local sources, who understand and accept the local risks far more than do those troubled, and risk-averse lenders far away.