Thomas White Global Investing
MENA Region
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November 23, 2012
A Postcard from the Middle-East & Africa
MENA Region: The Great African Hotel Rush

Hotel in Africa

Thanks to a strong demand for hospitality services and a slew of willing hotel chains, Africa is witnessing a rush to build luxury and budget hotels.

If you are a traveling businessman ending a day’s hard work under Africa’s searing sun, you better be prepared to rest your weary feet and spend the night in whatever accommodations you might be able to snap up.

It seems Africa is experiencing an acute shortage of hotel rooms these days. While Africa’s tremendous growth gave ample opportunities for many ambitious men to dream, the Dark Continent apparently has not given bold businessmen enough space to sleep through the night for lack of good hotels.

Over the past decade, even as the number of commodity and infrastructure entrepreneurs who thronged Africa grew by leaps and bounds, the number of hotels that were prepared to house them barely kept pace. Consequently, rentals for a hotel room in Africa jumped from a few tens of dollars per night to nearly $400 a night across Africa in the space of a few years. In some cases, businessmen, fearing not being able to get a room at whatever cost, paid exorbitant sums just to keep a room reserved throughout the year. With room occupancy rates and rentals soaring, hotel owners minted money in Africa even as tourists and entrepreneurs paid handsomely through the nose.

But this situation might soon change, much to the relief of entrepreneurs and tourists seeking to visit Africa. The enormous demand for leisure and business travel to Africa is attracting major global hotel brands from the U.S. and Europe to setup hotels on the continent. In the beginning of 2012, the number of deals to build hotels in Africa leaped to 208, almost a 30% jump compared to 2011 figures. Nearly 50 new luxury and budget hotel construction projects have been initiated since the beginning of 2012 alone.

Industry heavyweights are spearheading Africa’s luxury hotel boom. Hotel chain Marriott plans to increase the number of hotels it operates on the continent to 50 in 2020 from just eight now. Minnesota-headquartered Carlson Companies Radisson Blu and Paris-based Accor Group are planning to build nearly 15 and 19 hotels, respectively, over the next few years. Other brands scouting for a piece of the African hotel market include France-based Onomo International and Swiss-based Movenpick Hotels and Resorts.

Keen not to be left behind the hospitality boom, Africa’s home-grown hotel chains are also jumping into the fray. Johannesburg Stock Exchange-listed City Lodge and Cape Town-based Protea Hospitality Group are readying up millions of dollars to expand into many of Africa’s burgeoning hotel markets.

Although the moves by western brands to expand in Africa look euphoric at first glance, many of the global brands testing the waters in Africa are actually treading carefully. For one, western hotels have been keen to tap the local expertise in Africa.  In fact, most of the hotel development projects initiated by the western chains work in such a way that the local African partner will acquire land, construct buildings, and get regulatory clearances while the European or the U.S. partner will concentrate on the core branding, marketing, and hospitality services. For instance, according to a report from the Financial Times, the local investor Honeywell Group, controlled by Nigerian businessman Oba Otudeko will be the owner of the key luxury hotel managed by Radisson Blu in Victoria Island.

Expanding into Africa makes solid business sense for many hotel chains across the world. At a time when developed markets such as the U.S. and Europe are offering meager growth prospects, and Asian markets are slowing from heady expansion, Africa and its healthy demographic trends and good growth prospects, supports long-term investment in the hospitality sector. In fact, Africa is the only continent in the world where birth rates are above replacement levels and where the youth labor force is expanding. And, just over 30% of African hotels are branded compared to 70% in the U.S., suggesting a huge opportunity for global chains to gain a toehold.

Nonetheless, despite these advantages, western luxury hotel chains acknowledge the risks arising from funding and security issues in Africa. While many hotels in countries like Morocco and Egypt have added to the coffers of major global hospitality chains, most of the new projects that are being developed in markets such as Nigeria and Kenya have witnessed rioting, violence, and other security issues in recent times. Still, many of the hotel chains opine that having an established local partner will likely help them effectively overcome the business challenges. With help from World Bank’s International Finance Corporation and other international institutions, many of the local investors too have expressed confidence in overcoming funding issues associated with the huge construction costs.

Yes, it appears that the great hotel rush to Africa certainly is unstoppable. And soon, businessmen will be able to sleep like logs after a day’s hard work without worrying about having a roof over their heads.

 

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