Africa offers great opportunities for tourism investors and brands, especially in the leisure segment, as the industry is growing, resources are virtually countless, and the continent is ripe for innovation. But new players must adjust their approach and expectations to the specific characteristics of local markets, which are quite different from more developed markets.
Social and economic environment: Local economies in Africa are growing and stability is becoming a norm as social environments mature, but African markets remain relatively underdeveloped. Political and social events have greater effects on tourism than in developed markets. Presidential elections, for example, typically lead to a significant decrease in the performance of hotels due to the uncertainties that these elections still create. On the other hand, major conferences or sports events have bigger positive effects, while improvements in accessibility and changes in visa regulations can be game-changers. Other impacts, like an increase in supply due to new hotel openings, may have more significant consequences than in more mature environments, because of the small size of markets. Local markets may also recover more quickly though. Viability or feasibility studies must take a certain degree of uncertainty into account and reflect a strong understanding of the likely impacts of events - either positive or negative - without underestimating investment potential.
Reliable market data are scarce, therefore up-to-date, strong local knowledge and experience are fundamental for preparing credible feasibility studies.
Development timeline and expenses: Timeline of developments, thus of investments in Africa differs from the typical development timeline observed in mature markets. One reason can be the uncertainties in the availability and accessibility of construction materials due to supply chain challenges. Most of the supply must be imported from other continents, which can result in longer construction periods and higher development costs. The lack of expertise in developing hospitality and leisure assets may also cause delays that have a significant impact on ROI. Taking these uncertainties into account, hotel operators and third-party management companies require more advantageous conditions to cover possible risks related to signing agreements and investing into assets. Negotiations between owners and operators may also take longer to complete and can be more strenuous compared to mature markets. Setting up the appropriate project management team of experts can be key in mitigating the negative impacts of uncertainties and challenges.
Availability and costs of financing: Because of the uncertainties and risks related to leisure projects in Africa, banks are wary to lend significant amounts of money and often require important back-ups that not all investors can provide. Lenders have very little knowledge of these investments partially as they are relatively new in Africa. As a result, loans are often more difficult to secure, and investors with no consultants need to put more effort, money and time in looking for debt providers. Loans often bear higher interest rates than in mature countries to cover the risks of leisure investment, unless a proper investment strategy is in place. Banks are increasingly open to negotiations and several new loan products are introduced in Africa as local expertise develops. But a viability or feasibility study must demonstrate a thorough knowledge of the specific loan structure for the future project and recommend the best terms for both the investors and the banks.
Operational concept and performance: The operational concept for a future asset in Africa should also address local market characteristics, as possible revenue sources and cost centers can be different from those of a typical hotel or leisure asset in Europe, for example. The planned product must be adapted to local demand: properties, for instance, may need to be smaller to be profitable, while conference facilities can prove to be a stronger revenue contributor as they can be greatly used for private events, such as weddings and birthdays. Standards are important to create a sense of security and quality, but leisure tourists are increasingly seeking experiences. A viability study should push the boundaries of creativity to create concepts that may not work in mature markets but are efficient in Africa. Several aspects should be also considered in terms of expected performance. Average room rates, for example, are typically lower, while costs should be lower as well. Revenues from food and beverage can be higher than in other markets as hotels are often primary leisure destinations for local residents. Utility costs can be also higher, which may be compensated by lower salaries. All these assumptions should be considered when building financial projections, which may be very different from those for developments in mature markets.
Africa is becoming an amazing environment for the development of leisure assets; however, both investors and brands must be aware of the specificities of the local markets before stepping into the Big Continent. Indeed, developing in Africa is very different from developing in mature markets; uncertainties, delayed timeline and high development costs along with the challenge of securing financing are some of the main challenges that investors are likely to encounter along the way. However, it does not mean that’s not worth the game. Innovation, creativity and strong strategies are at the heart of African developments.
A strong project management team, expert consultant and strong strategic thinking unlock incredible potential for most African developments with a good return on investment, topped with a bonus of, mesmerising experiences provided by the diverse African culture, with its picturesque nature & wildlife, the beautifully kind people and great food!
About the author: Laura Dutrueux, RLA Africa Managing Director
Laura is the Managing Director of the RLA Africa office based in Cape Town. Since 2015 she has worked across most of Africa representing owners, developers and investors with feasibility studies, valuations, conceptualisation, renovation and improvement plans and operational consulting services for various hospitality and leisure assets as well as upscale and luxury residential developments. Her strong knowledge of the African markets is combined with a strategic and creative approach to the tourism and leisure industry.