The African hotel industry is capable of generating market revenue of US$13,8 billion (R247,7 billion) by 2027, according to the UN Conference on Trade and Development.
However, getting finance in the industry is beset with difficulties. The volatility of currencies of African states combined with unreliable government provision of basic services and lenders’ fears of social, political and economic instability, mean that where finance is found, it is attached to high interest rates and short loan tenures.
Rosemary Anderson, FEDHASA Chair, told Travel News that one of the greatest challenges was the mismatch between financing and revenue currencies.
“Most hotel developments secure financing in international currencies, while their revenues are predominantly in local currencies. This leaves developers vulnerable to significant local currency devaluations against the loan currency, making it difficult to service debt.”
Furthermore, lenders build in provisions in the form of less favourable loan terms for higher-risk developments as protection against perceived risks, such as currency collapse or the impacts of economic, social and political instability.
“In Europe, banks on average offer interest rates of between 6% and 7%. Meanwhile, in Africa, interest rates on average are between 7% and 12%. Even in Egypt, owners and developers face interest rates of more than 15%,” said Amr Elhamy, CEO of the Sovereign Fund of Egypt’s Tourism, Real Estate and Antiquities Sub-Fund during a recent HVS webinar.
According to Anderson, investments in Europe are historically perceived as more stable in these aspects. As a result, lenders feel more comfortable dealing with European projects without including additional provisions to safeguard against potential negative outcomes, as they might with African developments.
Additionally, in Africa, the pressure of high interest rates is compounded by short loan tenures, as lenders, aware of the risks, attempt to protect themselves. This has the effect of dissuading developers.
“Currency depreciation, high interest rates, social, political and economic instability concerns, and unreliable government provision of basic services are key challenges. Africa as a whole carries a perception of greater risk, perhaps unfairly so,” said Anderson.
“Research and data are needed to counteract these preconceived notions about investing in African hotel developments. Such evidence would provide a more accurate picture of the true risks and opportunities in the sector.”
Anderson explained that public perceptions about countries, regions, destinations, cities or hotels now seemed to carry more weight than before.
“In South Africa, higher-rated hotels (four- and five-star) recovered faster after the pandemic, achieving higher occupancy rates than three-star and lower-graded establishments. A hotel of the same star rating, even within the same hotel group, can command higher room rates in Cape Town than in other South African cities or towns,” said Anderson.
There was a need for African governments to recognise the significant value that tourism and hospitality could bring to their economies and job markets, she added.
Through improving social, political and economic stability, as well as providing reliable infrastructure, including electricity, water and sanitation, financial institutions would be more willing to offer favourable loan structures, she said.
“Investors consistently seek good returns. If the market can demonstrate sound opportunities, investment will follow organically. Success breeds success…Only then will hotel developers be offered loans with better terms, including longer tenures, higher loan-to-value ratios and lower interest rates.”