Spotlight on Africa: Opportunity on the Horizon

October 2015

An Overview of the Hotel Real Estate Sector in Africa

2 Spotlight on Africa: Opportunity on the Horizon

ContentsIntroduction 3 Investment Drivers in Africa 4Hotel Supply 6 Hotel Demand 10Investment Focus & Returns 12Africa Hotel Investment Outlook 13Hotel Operators in Africa 16Opportunities on the Horizon 18Contributors 20

Luanda, Angola

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Introduction

The narrative on the investment potential in Africa has improved significantly over the past decade and many sectors in the African economy are seeing high growth in investment from global corporates, institutional investors and private equity. The drivers for this change in sentiment are sustained economic growth, increased stability, favourable demographics and improving infrastructure.

In the global hotel sector, we are forecasting hotel transaction volumes of USD 68 billion in 2015, a 15.0% growth on 2014, and a record level of cross-border capital flows. This buoyant market is being driven by strong hotel sector fundamentals, high levels of global liquidity and increasingly global real estate capital allocation. The bulk of the investment continues to be focused on mature markets with emerging markets representing some 8.5% of open market transactions globally.

Global hotel real estate capital has been cautious in flowing into Africa due to perceived high risk and limited investment scale. Despite this cautious approach, hotel supply on the continent has grown by 4.1% annually during the past 10 years, which has been driven primarily by local and regional developers. Global investors are increasingly taking note of the potential of the region and considering their optimal entry strategy into these markets.

The aim of our research is to map out the supply and demand drivers in the hotel real estate sector in Africa, to highlight target returns and to understand barriers to entry. More than 50 investment companies participated in this research and we thank them for their contribution. We hope that our research will assist in creating further transparency in the hotel real estate sector in this challenging yet exciting growth region.

Challenges

4 Spotlight on Africa: Opportunity on the Horizon

Investment Drivers in Africa

Sustained Economic Growth

Improving Economic Management

Favourable Demographics

Infrastructure Investment

Innovation & Technology

FDI & Expanding Corporate Footprint

Commodity & Energy Resources

Expanding Middle Class

Rapid Urbanisation

Short-term Shocks

Political Risks

Local Bank Constraints

Country-specific Risks

Economic Factors

Postive Trends

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Fast Facts

USD 5.4 TnGDP (PPP)

54Countries

1500+Languages

4.6%GDP Growth

1.1 BnPopulation

USD 57 BnForeign Direct Investment

Algiers, Algeria

6 Spotlight on Africa: Opportunity on the Horizon

We estimate that there are 4,650 hotels with 581,000 keys in Africa, split 57.0% in North Africa and 43.0% in Sub-Saharan Africa. This equates to less than 5.0% of the global hotel supply. In the past 10 years, the net growth across the continent has averaged 4.1%, with a similar level of growth in the north and south of the continent. Due primarily to the effects of the global financial crisis, the average growth over the past five years equated to 2.6% per annum. In this time period the sub-regions showing the highest growth have been Central, East and West Africa, while the more mature markets of Southern Africa and North Africa slowed in their pace of growth.

North Africa is experiencing a demand downturn due to geopolitical instability and social unrest in several countries, which we anticipate will depress supply growth in the short term. We project that supply will grow at 1.5% annually between 2015 and 2017 to result in 5,000 additional rooms entering the market annually, at an investment of USD 855 million per annum.

Sub-Saharan Africa is seeing acceleration in hotel supply growth albeit off a lower base. We project supply growth of 3.0% in 2015, accelerating to 3.5% in 2016 and 4.0% in 2017. Lower resource prices are reducing the capital available for hotel investment and we assume that export earnings from resources will show some recovery in the medium term. Our projected supply growth equates to an average of 9,000 additional rooms entering the market per annum at an investment of USD 1.3 billion in 2015, rising to USD 1.5 billion in 2016 and USD 1.8 billion in 2017.

On a combined regional basis, this estimated growth equates to some USD 2.1 billion in investment in 2016, rising to USD 2.4 billion in 2017 and USD 2.7 billion in 2018. This investment is in the development of new hotels only, which is the main investment driver in the region, and excludes ongoing reinvestment in existing hotels or transactions.

Global brands are increasingly penetrating the hotel sector in Africa and internationally branded supply is estimated at 22.0% of total rooms on the continent. The further up in the quality scale one climbs, the higher the penetration of brands. We forecast global brand penetration to grow as international demand increases and consumers become more brand aware. Despite this growth, local and regional brands will continue to play an important role as they that best understand local demand and real estate markets.

4 650Hotels

581 000Existing Rooms

USD 2.3 Bn Annual Hotel Investment

+1.5%Supply Growth Forecast in North Africa

+3.5%Supply Growth Forecast in Sub-Saharan Africa

Mana Pools National Park, Zimbabwe

Hotel Supply Overview

FCTFCTFCT

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Supply Growth 2000-2017

‘On a combined regional basis, this estimated growth equates to some USD 2.1 billion in

investment in 2015, rising to USD 2.4 billion in 2016 and USD 2.7 billion in 2017.’

North Africa (Rooms)

Sub-Saharan Africa (Rooms)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

FCTFCTFCT

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

SOUTHERN101,000 KEYS17%

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Hotel Supply Distribution

NORTH332,000 KEYS57%

EAST89,000 KEYS15%

CENTRAL14,000 KEYS2%

WEST44,000 KEYS8%

> 30,000 keys

10,000 - 30,000 keys

5,000 - 10,000 keys

0 - 5,000 keys

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Baie du Cap, Mauritius

Hotel Demand Overview

The primary demand drivers for hotels on the continent are sustained economic growth, corporate entry by international companies, formalisation of trade, improving air access, and growing business and leisure tourism. Tourist arrivals, for both business and leisure, in Africa are projected to increase by 5.7% per annum compared to 3.2% globally up to 2030. Increased tourist arrivals to Africa is coming off a low base, with only a 4.9% share of global arrivals, and this should signal high potential for future growth. This is a promising outlook for international guest demand.

North Africa and the Indian Ocean region have extensive exposure to foreign leisure tourism, while the focus of the formal hotel sector across the rest of the continent is primarily business tourism. Domestic demand variables are looking strong, with a regional GDP growth outlook of 4.6% per annum from 2015 to 2017, and guest demand further buoyed by increasing intra-regional trade, economic growth, urbanisation and favourable demographics. The growing middle class across the continent and domestic leisure and business travel creates a positive long-term outlook for this segment.

Demand variables differ significantly across the continent and tourism markets are highly sensitive to social and political unrest, as well as regional contagion. We anticipate demand in the region to grow by 5.0% per annum between 2015 and 2017. The share of this demand growth, however, varies across the continent with certain countries on a high growth trajectory and other markets contracting.

STR Global reported hotel occupancy in the region for the first six months of 2015 at 56.0%, which remains some way off the 71.0% achieved in 2007 at the peak of the last performance cycle. Sub-Saharan Africa performed better at 59.0% when compared to North Africa at 54.0%. Average Daily Rates in North Africa were at USD 91 during this period and at USD 118 in Sub-Saharan Africa. The appreciation of the USD against emerging market currencies has depressed USD rate growth.

10 Spotlight on Africa: Opportunity on the Horizon

Accra, Ghana

Tracking Performance

‘We anticipate demand in the region to grow by 5.0% per annum between 2015 and 2017’

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African Hotels: ADR Performance (USD)

North Africa Sub-Saharan Africa

2007 2008 2009 2010 2011 2012 2013 2014 H1 2015

117 120 124

145139

132 126 122 118

72

919185 8686 8887 91

SOURCE: STR Global, 2015

African Hotels: Occupancy Performance

North Africa Sub-Saharan Africa

2007 2008 2009 2010 2011 2012 2013 2014 H1 2015

75%

66%69%

45%

57%58%

68%71%

52%47%

52% 54%

59%60%61%60%57%

72%

SOURCE: STR Global, 2015

Target IRR by region Global Major Gateways Americas Asia Pacific EMEA AfricaLeveraged IRR 16.4% 15.4% 18.0% 12.8% 13.9% 16.0%-25.0%Cap Rate 7.2% 6.6% 7.3% 7.0% 6.8% 8.0%-12.0%

Investment Focus & Returns

Short-term investment sentiment in hotel real estate in Africa is buoyant at 7.1 (out of 10) and long-term sentiment is stronger at 7.8, according to our investor survey. This reflects the emerging nature of the African hotel sector, with opportunities for investment likely to present themselves at an accelerating rate as more investment grade assets enter the market. Key challenges are certainty of exit and liquidity in the market and we see this improving in the medium term. In the short term, supply shocks are likely in maturing markets, while this should improve as supply foundations firm up. Investment Funds have the strongest sentiment of all investor types with an 8.4 level of long-term interest.

Target IRRs naturally differ considerably across such a diverse region with a range of some 16.0% for the lowest risk developments to 25.0% for higher risk investments on a leveraged USD basis. Initial yields (cap rate) are targeted between 8.0% to 12.0%+. Regionally, this compares to commercial property yield for investment grade assets of 8.5% to 10.0% in Sub-Saharan Africa and 8.5.0% to 11.0% in North Africa. Globally leveraged IRR is targeted at 16.4% and initial yield targeted of 7.2% for hotel real estate, according to our Hotel Investment Sentiment Survey (December 2014). This indicates a target return premium in Africa of 30.0% to 40.0% over global averages as a result of perceived higher risk.

12 Spotlight on Africa: Opportunity on the Horizon

Investment interest in short and long-term

Long-term planned exposureShort-term planned exposure

Investment Fund

Hotel Operator

Other

Developer

High Net-Worth Individual

Real Estate Investment Trust

0 10

Zanzibar, Tanzania

Who are the investors?Globally, emerging market hotel ownership is led by developers and property companies at 36.0% and hotel operators at 32.0%, which is similar in Africa where local and regional players are the primary investors in the sector. We estimate that 75.0%+ of investment in hotel real estate in Africa is sourced from local and regional investors rather than global capital. Real Estate Investment Trusts and Private Equity Funds own 42.0% of hotels in mature markets, yet hardly feature in Africa. In North Africa, we are seeing increasing sovereign wealth investment activity while this remains muted further south.

Sub-Saharan Africa, in particular, is a development driven market which results in a lower level of opportunity for funds seeking income-producing assets, which are generally unwilling to take development risk. Private Equity type developers in the region focus primarily on the retail and commercial sectors and tend to look at hotels only on a fixed-lease basis to suit their development, leveraging and exit model. As there are very few operators offering leases in the market, it is unlikely that these players will contribute significantly to growth in the sector.

There is appetite for reasonably priced yielding assets from global capital, yet the challenge is the low levels of liquidity and scale in the market to effectively meet this demand. These investors are global hotel investors rather than regional REITs or private equity players. There are a number of new private equity hotel development platforms in the making that may convert to income funds at the end of their investment life, which would improve exit opportunities. Another opportunity is the separation by Owner Operators of their real estate assets and their operating business to create dedicated hotel real estate investment vehicles.

Africa Hotel Investment Outlook

Acquisition volume by market type in 2014

Hotel ownership by market type

Sovereign Wealth Fund

Real Estate Investment Trust

Private Equity

Other

Hotel Operator

High Net-Worth Individual

Developer/ Property Company

Corporates

Bank/Institutional Investor

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EmergingEmerging MatureMature

%

100

90

80

70

60

50

40

30

20

10

0

Indifferent 23%

Target Investment Structure

14 Spotlight on Africa: Opportunity on the Horizon

What are investors looking for?The predominant focus on the continent is development, with 46.0% of investors focused solely on this investment type, 17.0% only looking at acquisitions and 37.0% seeking both. Given the current development cycle and lack of investment grade assets for sale in the market, this is likely to be opportunity driven. Target gearing levels are between 40.0% and 70.0%, with most developments being funded at 50.0% to 60.0% by commercial lenders and development finance institutions.

The preferred operating structure for investors is management agreements at 50.0% compared to 26.0% for lease agreements. Given the emerging nature of many of these hotel markets, and consequently higher levels of demand and supply shocks, we consider management agreements most appropriate. In North Africa, we are seeing a reduction in the number of tour operator leases on resort properties and an increase in management agreements as a result.

The majority of interest from investors is in capital and primary cities, due to lower risk, higher return and larger scale. The corporate market is favoured by 56.0% of investors due to the more resilient nature of this segment and higher growth in business tourism. The interest by star grading is fairly evenly spread between 3, 4 and 5-star hotels and we are noticing that investment funds are looking increasingly at the mid-market segment, while growth in the upper upscale and luxury segments continue to be driven by local developers and high net worth promoters.

38% 5-star

31% 3-star

31% 4-star

Target Grading

37% Both

46% Development

17% Acquisitions

Focus of Investment

Leisure 21%

Corporate 56%

Target Market

JV Majority 29%

JV Minority 9%

Outright Ownership 31%

Various 31%

Barriers to Investment in Africa

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What are the main challenges to investing?Developing and investing in real estate in Africa has its challenges due to the emerging nature of the sector, the lack of transparency in the real estate markets and a shortgage of critical development skills and expertise in many markets. Certainty of delivery in particular is a challenge in hotel development across the region, with delayed timelines and exceeded budgets the norm rather than the exception. This delivery risk should improve in the medium term, as the sector becomes more professional and sees an increase in experience and expertise. Operators are also investing in additional technical support for developers to increase the realisation rate of their pipelines.

One of the key challenges noted by investors is bridging the gap between returns offered by project promoters and target IRRs sought by capital markets. Increasing land prices, high development costs and longer construction periods depress projected returns of many projects. With the market maturing and more exit opportunities becoming available, we see investment risk premium reducing and the gap narrowing. Development costs should reduce over the next decade, with higher levels of competition for the supply of development materials and skills. High import duties on construction materials and taxation on development also remain barriers to returns on investment.

Capital markets seek opportunities with the lowest risk against the highest reward and considerations such as operating and development risk and exit strategy can be managed, whereas risks such as economic, political and currency stability (and availability) are externally driven. Investment guarantees and insurance as well as certainty of free repatriation of profits, access to foreign currency and access to USD-denominated loans are critical to any decision to invest at a reasonable investment risk premium.

Lack of political stability

2

Opportunity cost of my land against other real estate asset classes

9Lack of investment grade properties available to purchase

8

Lack of suitable local equity partnership opportunities

7Lack of clear exit opportunities at the end of my asset- holding period

5Lack of access to quality contractors and development professionals

6

High development costs

3Lack of foreign currency stability (high volatility/lack of access)

4Projects not meeting my return thresholds

1

Barriers ranked from highest to lowest

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Hotel Operators in Africa

The majority of hotels in Africa are independently or regionally branded, with global brands representing 22.0% of room supply on the continent. This is slightly higher in North Africa at 24.0% than in Sub-Saharan Africa at 20.0%. The vast majority of these branded hotels are operated under management contracts, with some franchise agreements and very few leases. There are a number of global brands which own hotels on the continent, generally due to legacy reasons, yet few are currently investing and prefer to adopt the asset-light approach to growth.

Demand for international-branded hotels is likely to improve due to an increased demand from global corporates and a growth in international tourists. By their nature, international brands tend to have a broader reach and more effective global distribution. Development pipelines reported by the brands are on the rise, yet the challenge continues to be the conversion of these pipelines into openings. With the maturing of real estate markets and increasing hotel development expertise in the region, we will see the pipeline realisation rate improving during the coming years. It is likely that the more prominent global brands will become quasi-regional players with strong local brand recognition – similar to other emerging regions where global hotel brands have become local household names.

Despite this growth in penetration by global brands, we see local and regional brands continue to play an important role across the continent. In many markets they already have the majority market share and are delivering real portfolio growth. We expect new local and regional brands to continue to be launched during the coming years, especially in the mid-scale and economy segments. We anticipate consolidation in the hotel operating sector in the future with a number of brands considering expanding their footprint by acquiring regional players.

Dar-es-Salaam, Tanzania

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22% Global Brands

GlobalBranding

78% Regional Brands/Independent

50% Management Agreement

26% Fixed lease

6% Franchise Agreement

12% No External Operator

6% Lease Agreement

Target Operating Structure

Opportunities on the Horizon

The hotel real estate sector in Africa is emergent in the global context, yet the macro-economic and demographic drivers should ensure that this continent will be a significant source of growth for the global hotel industry during the decades to come. In the medium term, we anticipate continued demand and supply fluctuations due to the emergent nature of the sector and the consequent lower levels of hotel supply and demand for rooms.

Global brands are playing an important role in increasing the visibility and quality of hotel real estate in Africa and their penetration is set to grow significantly, albeit through management contracts. Local and regional brands will continue to be formed and we anticipate consolidation to reduce brand fragmentation in the sector. The midmarket and budget segments, in particular, are likely to be engines of future supply growth fuelled by a rising middle class and increasing economic activity.

Local and regional investors currently dominate hotel investment and ownership in the region and, with their ability to navigate their markets better than global entrants, they are best placed to capitalise on the opportunities offered in these diverse markets. The further maturation of the sector and the introduction of new investment platforms should result in local investors exiting their investments and increasing liquidity in the markets. This will result in a reduction in risk premiums sought by global capital and create the ability for investors to achieve suitable scale in their regional portfolios.

Developers and investors that are able to successfully operate in challenging environments are well placed to achieve suitable risk-adjusted returns in Africa. In the short-term in particular, emerging market currency fluctuations, export earnings, over-exposure to resources, economic volatility and socio-political instability will impact on investment returns and opportunities. In the long-term there is little doubt that Africa will be a meaningful player in the global real estate economy and the pioneers with development and transaction expertise in the market are well placed to reap the benefit from early entry. The next several years will see a significant evolution in the hotel real estate landscape in Africa and we anticipate that global capital will flow into the sector as and when the right opportunities arise.

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Moçambique

CairoStar Capital 2Aly Rashed Street, HeliopolisCairo, Egypt+202 248 01946

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Chicago200 East Randolph DriveChicago, IL 60601 USA+1 312 7825800

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Jonathan HubbardHead of Investor ServicesHotels & Hospitality GroupEurope, Middle East and Africa+44 20 7399 5530jonathan.hubbard@eu.jll.com

Wayne GodwinAssociateHotels & Hospitality GroupSub-Saharan Africa+27 11 507 2200wayne.godwin@eu.jll.com

Xander NijnensSenior Vice PresidentHotels & Hospitality GroupSub-Saharan Africa+27 11 507 2200xander.nijnens@eu.jll.com

Jessica JahnsHead of ResearchHotels & Hospitality GroupEurope, Middle East and Africa+44 20 7399 5821jessica.jahns@eu.jll.com

COPYRIGHT © JONES LANG LASALLE IP, INC. 2015. This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.

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