Big brands out for a piece of Africa’s hospitality pie

About five years from now, Africa’s hospitality industry will be dominated by global brands, if the current trend is anything to go by.
This year alone, five well-known global hospitality brands have announced plans to venture into the African market or to increase their presence on the continent.

They are Hyatt Hotels and Resorts, Hilton Worldwide, Pearl of Africa Hotel, Dubai-based luxury resort company One&Only, and America’s international luxury hotel, Marriot.

At a media roundtable early this month that preceded the Africa Hotel Investment Forum that was held in the Rwandan capital, Kigali, from October 10 to 12, Global hospitality chain Hyatt Hotels Corporation announced plans to open six new hotels in Africa in the next three years. One of these hotels will be in Arusha, Tanzania, and another in the Ethiopian capital, Addis Ababa, with plans to expand to Rwanda, Kenya, Uganda, Mozambique, Ghana and Côte d’Ivoire underway.

Meanwhile, America’s Marriot International is among the global giants putting their money where their mouth is. The hospitality chain is setting up shop in Kampala, Kigali, Nairobi and Zanzibar. The firm is constructing the $98.9 million (Sh10.1 billion) JW Marriot Hotel next to Villa Rosa Kempinski in Nairobi’s Westlands to be hosted in a building owned by Aviation Industry Corporation of China (Avic) International Real Estate. The complex will comprise an office block, a hotel tower and four apartment blocks.

And on October 1, the Pearl of Africa Hotel, which already has a presence in South Africa, officially launched in the Ugandan capital, Kampala.

Meanwhile, data from the Ministry of Tourism indicate that some 15 high-end hotels have opened in Kenya since 2013, with about half of them beginning operations in 2016. Most of them are in Nairobi and have added 1,700 rooms to the market. The foregoing paints a picture of a scramble for the African hospitality market and the question it is bound to raise is, why the rush by global hotels to set up shop on the continent and what does this mean for the local investor?

“We see enormous potential in the region. Our expansion reinforces the commitment to develop our pipeline in Africa,” Mr Peter Penev, Hyatt’s vice-president for real estate and development, told DN2.

“With the introduction of a pan-African, visa-free passport next year alongside the continued improvement in the connectivity and growth of the region’s airlines, we expect tourists and business travel will only continue to increase. We look forward to working with our local developers and partners to further deliver on our plan to help grow the industry in East Africa.”

He revealed that Hyatt’s primary focus on East Africa stems from the governments’ continued investment in infrastructure, an expanding middle class and a growing international recognition of the region’s stability, all contributing to an 11 per cent growth in sub-Saharan African tourism in the past year alone.

“When we first came to Nairobi about four years ago, there was a lot of research done on what would be a good location to expand our markets. From a statistical point of view, we know that nine out of the 20 fastest growing economies are based in sub-Saharan Africa. If you narrow down to East Africa, this is a more stable market. The economy is more diversified and there is deeper credit ratio among the countries in East Africa,” says Tejas Shah, Hyatt’s sub-Saharan vice-president for acquisition and development.

Kenya recorded a 16.7 per cent increase in international arrivals in 2016 to hit 877,602 visitors. In addition, there has been an increase in domestic tourism that has played a major role in boosting local tourism, thereby putting the hospitality industry on the rise again. For instance, domestic travel grew by 14.6 per cent in 2016 to beat the 3 per cent target set by the Kenya Tourism Board (KTB) in 2015. Kenya National Bureau of Statistics data indicate that Kenyans took 3.6 million bed nights in 2016 compared with 3.1 million in 2015.

Reports also indicate an increase in intra-African travel. According to the United Nations Conference on Trade and Development (UNCTAD), four out of 10 international tourists in Africa originate from within the continent (from 34.4 per cent in 2010 to 40.3 per cent in 2013). However, this share is still below the global average. Globally, about four out of five international tourists originate from the same region, suggesting that in Africa, this percentage is likely to increase.

All these factors could have lured the global hotels to the African market, with insiders saying that the anticipated introduction of a pan-African, visa-free passport next year could not be more timely.
Tourism Cabinet Secretary Najib Balala had earlier said that the increase in investments in hotels was a deliberate attempt by the government to shore up the number of hotels by offering incentives to investors.

“Our thinking then was that if there were no incentives, there would be no investments. We have seen a growth in investments and today we have about 7,000 new beds in Nairobi alone. This is in addition to other refurbishments that were done outside Nairobi,” Mr Balala said.
But for all the expansion and the opportunities that they will create, the question regarding what this means for the local investor cannot be ignored. Perhaps it is in anticipation of this question that Mr Balala told a press conference that almost all the buildings that will host the hotels are owned by Kenyans.

“What is coming in from the foreign investors is the brand. This puts the local hotels in the network of hundreds of hotels around the world and potentially gives you more business because if you are travelling, you are likely to use a hotel whose brand you are familiar with,” said Balala.

The CS said he did not foresee a situation where increased competition would lead to low returns. He noted that Kenya is coming from a situation where it did not have adequate hotel beds.

His sentiments are shared by Mark Dunford, East African head of Jones Lang LaSalle (JLL), an international professional services and investment management firm, who believes the notion that the Kenyan market is quickly heading to oversupply is not true.

“Everyone is talking about oversupply but I think the reality is that markets like Nairobi are maturing rather than heading towards oversupply,” said Mr Dunford.
He believes that with an ever-growing middle class and projected growth in GDP — of 6 per cent in the next three years — demand will eventually catch up with supply.

IN NUMBERS

16.7

The percentage by which international arrivals to Kenya grew in 2016
14.6

The percentage by which domestic travel grew in 2016; the Kenya Tourism Board had set a 3 per cent target in 2015
3.6

The number of bed nights in millions taken by Kenya in 2016
3.1

The number of bed nights in millions taken by Kenyans in 2015.

Speaking to different seasoned investors in the hospitality industry, one of the biggest takeaways is that hospitality industry is currently looking up and for local investors in search of long-term investment opportunities this would be a good time to move in.

“Hospitality tends to be a long-term investment in terms of asset class. So if you are an investor who has that long-term vision, hospitality is a good asset class to be in,” said Mr Shah.

But for would-be first time local investors who are looking at the sector as a highly attractive investment option and would want to partner with renowned international brands, Mr Penev has some advice: “You need guidance on how to make that dream a reality.”
To which his colleague, Mr Shah, added, “The majority of local investors we are dealing with are first-time owners of hospitality assets. They have diversified businesses, yes, but I think there is a need for a lot more care and attention and ample investment in terms of time for the entire process of developing a hotel to be successful.”

He added that developing hotels is complicated, stemming from the construction, which might take a longer time compared with other forms of development.

“Just because a contractor was successful in Dubai doesn’t mean they will be successful in Nairobi. Having the right advisers and the right partners for the development, for instance, a designer architect, financial institutions that understand the African market is very important. It will help you avoid delays and cost overruns,” added Mr Penev.

FYI

Factors attracting international brands

•Africa’s fast growing economies

•Increased intra-African and worldwide travel

•Improvement in the connectivity and growth of African airlines

•Anticipated introduction of a pan-African, visa-free passport

For investors, one of the segments that needs to be explored further given the nature of people coming to Nairobi, Mr Dunford said, is long-stay branded residences. He addsys that apart from the regional and international business travellers who fly in for a couple of nights, there is quite a large segment that comes in for a month’s stay or more to work on specific projects for their non-governmental organisations or agencies.

“At the moment they are renting apartments or staying in hotel rooms. So there is no realism between spaces, which is what long-stay brands like Hyatt House offer. And there is definitely potential for that segment,” said Mr Dunford.

Still, with heavy investments in this sector already going on and considering the opportunities they are bound to create in terms of employment, for instance, the government’s intervention in ensuring that the demand meets the supply side of the market is paramount.

The tourism CS is reported to have said that the government is looking for ways to grow the numbers so that hoteliers do not resort to undercutting each other in order to win business. One of the government’s interventions is the formation of the Kenya National Convention and Exhibition Bureau (KeNCEB), which will be tasked with marketing the country as a business and conference tourism destination.

Mr Balala said, “At the moment, the capacity is okay... we do not foresee any problems with extra accommodation now and over the next three years. After that, we might see a good amount of competition and we are evaluating ways to make sure that hoteliers do not burn their fingers because of low yields. This will include investing in marketing and pitching for big events.”

However, with the country having lost the rights to host the 2018 African Nations Championship (Chan), a tournament that would have marketed Kenya as a destination for sports tourism, and reports emerging that at least two Kenyan movies, including the 2013 terrorist attack on Westgate Mall, will be shot in South Africa, the impact of the government’s intervention in showcasing the country as a good destination for leisure, business, sports tourism, movies and global forums remains to be seen.

HILTON PLANNING TO OPEN 100 HOTELS IN AFRICA IN THE NEXT FIVE YEARS

The EastAfrican recently reported that Hilton was set to open its first hotel in Kigali, where it is planning to upscale the 153-room Ubumwe Grand Hotel in Rwanda to trade under the name Double Tree by Hilton when the work is completed in 2018. In addition, Hilton is rebranding Nairobi’s Amber Hotel as part of a $50 million (Sh5.1 billion) plan to open 100 hotels in Africa in the next five years. Hilton Worldwide is also developing a 171-room hotel known as Garden Inn near the Jomo Kenyatta International Airport. The luxury chain’s third in Kenya and 50th in Africa will be a 255-room establishment in Upper Hill that will be housed in The Pinnacle, which will be the tallest building in Africa. Hilton currently operates 19 hotels in sub-Saharan Africa, with a further 29 in the pipeline.