Sub-Saharan Africa Hospitality Sector Overview. The World Bank Group

Transcription

1 Sub-Saharan Africa Hospitality Sector Overview The World Bank Group

2 Table of contents 1. Statement of assumptions and limiting conditions Abbreviations Scope of work completed Summary of recommendations Hospitality sector overview SSA Middle East/North Africa Asia United States/Western Europe Additional characterizations of SSA Francophone and Anglophone countries Geographic region Visitor characterization Assessment of SSA via Anatomy of a hospitality deal framework Overview of framework Opportunity identification Identifying strategic partners Development Operation Appendix A Macroeconomic indicators Appendix B Interview questionnaire Appendix C Companies interviewed ERNST & YOUNG 2

3 1. Statement of assumptions and limiting conditions These findings and recommendations have been prepared under the terms of our statement of work ( SOW ) dated 18 January 2011 between Ernst & Young LLP ( EY ) and The World Bank Group ( World Bank ) and are only intended for use by those parties to the SOW. The analyses contained in this report ( Report ) are based upon estimates, assumptions and other information developed from our research, knowledge of the industry and information obtained from World Bank and interview respondents. These sources of information are the basis for any recommendations that are stated in this Report. While we believe that the sources of information are reasonably reliable, EY has not, as part of its analyses, performed an audit or review of any of the information used and, therefore, does not express an opinion or any other form of assurance on the accuracy of such information. The terms of our engagement did not provide for reporting on events and transactions that occurred subsequent to the last day of our fieldwork 14 September Accordingly, we accept no responsibility to update or revise this Report for events and transactions that occur subsequent to this date. However, we are available to assist you with additional services that may be required relating to the analysis. This report is intended for use solely by members of World Bank management. Copies should not be made, nor should this report be distributed to others without our express permission. ERNST & YOUNG 3

4 2. Abbreviations In addition to the abbreviations defined in the previous section of this Report (see Statement of assumptions and limiting conditions ), the following abbreviations are used throughout the remainder of this Report: ADR = Average daily rate A measure of the average rate paid for rooms sold calculated by dividing room revenue by rooms sold CFA = Communauté financière d'afrique in Western Africa and Coopération financière en Afrique central in Central Africa, related to the CFA-franc currency used in several countries in Africa (now tied to the euro) DRC = Democratic Republic of Congo GDP = Gross domestic product GOP = Gross operating profit RevPAR = Revenue per available room The total guest room revenue divided by the total number of available rooms; differs from ADR because RevPAR is affected by the amount of unoccupied available rooms, while ADR shows only the average rate of rooms actually sold SSA = Sub-Saharan Africa YTD = Year-to-date ERNST & YOUNG 4

5 3. Scope of work completed Reviewed available prior research and refined scope of proposed study Conducted a conference call with you and your associates to commence the engagement and discuss logistics of the engagement, as well as to confirm our understanding of your objectives, and review any other pertinent information and research (including World Bank s Phase 1 study as well as other research provided by you). Obtained and read any previously developed relevant third-party reports as identified by World Bank, including market studies and other relevant data, as applicable. Read macro-level economic and demographic data pertaining to the SSA region as relevant to present economic, political and business climate as well as future growth potential; also interviewed industry professionals to gain further insights to augment the desk-based research. Leveraged our extensive expertise in the hospitality and real estate industries, as well as our global network of relationships with C-suite executives, to help identify top investors, developers and operators internationally that may have existing businesses in the SSA region and/or have potential future interest. Some of the identified executives also have existing businesses in Asia and/or have potential future interest there. Conducted a conference call with you and your associates to discuss the scope, plan and structure of the proposed study, gain consensus on the specific framework of the engagement and confirm next steps. Co-developed a detailed questionnaire to help answer questions as identified under key objectives of the proposed study, as well as other relevant development, investment and operational considerations for the SSA accommodation sector. Prepared a short-list of potential interviewees, and co-developed with you a final list of investors, developers and operators selected as target interviewees for the study. The interview format was comprised of in-person meetings as priority (on a best effort basis) or telephone discussions. Ultimately, interviews were conducted with a total of 26 participants. The respondents, which included representatives of global and regional developers (i.e. USA, Europe and Africa) and operators, were comprised of three subgroups as follows: 10 interviewees at the investment/development decision-making level to discuss potential of the sector and constraints to investment and development. 13 interviewees at key operational decision-making level to address productivity and cost disparity at existing hotels in SSA, as well as to gauge interest and potential for brand expansion. Brand operator discussions included multi-chain global brands, as well as boutique and eco-tourism lodging establishments that comprise international and regional brands. Three interviewees at the strategic advisory and government decision-making level to address overall hospitality trends and policies throughout SSA in general and in specific countries. Upon completion of items listed above, a draft plan of the work to be performed was provided, which included suggested methodology, alternative approaches and targeted contacts. This was discussed, refined and confirmed by you before undertaking the subsequent tasks. Accommodation sector operation and investment overview Set up meetings/interviews and conducted interviews with selected representatives to assess current market conditions, trends and preferences. The interviews were conducted by senior and experienced EY professionals. The over-arching objective of these interviews was to gain insights about operational and financial considerations, relative positioning of SSA against other comparable/benchmark international markets, as well as the need, if any for policy reforms and investments in infrastructure, etc. The interview questions template, as reviewed and approved by you, focused the discussion on collecting information along the following key attributes, as available and as relevant for the SSA accommodation sector: ERNST & YOUNG 5

6 Current market conditions and trends Types of hospitality products Geographical concentration Related facilities, services and amenities Related positioning and marketing strategy Ownership and operating structure Investment criteria Land acquisition and development costs Construction and investment costs (including direct and indirect investment costs, as well as comparison vis-à-vis regions in North Africa and Asia) Key operating characteristics Major operating costs and productivity issues (including salaries and wages, number of employees versus number of rooms etc.) Target market segments Visitor/guest countries of origin Expansion plans Barriers to entry Brands overview Development and operational challenges Competitive strengths and weaknesses Assessment of the eight selected SSA countries Opportunities in and comparison with key markets in North Africa Opportunities in and comparison with key markets in Asia Note interview questions along all the attributes identified above were designed to provide for a benchmarking of the SSA region against regions in Asia and North Africa. Summarized, tabulated and compiled the insights shared by key executives and informed by secondary research. The synthesized information was designed to provide a quadrant analysis and an assessment of the current state of the accommodation sector in SSA region, as well as to highlight important strategic recommendations identified as necessary to promote growth of this sector in the future. Provided a high-level analysis of potential for hospitality development in selected countries in SSA in comparison with Asia and North Africa as well as critical success factors. Issued this draft Report, which includes a detailed overview of our analytical approaches; charts, tables and bullet point explanations of the findings from the analysis; and strengths/opportunities, constraints/challenges and quadrant analyses. ERNST & YOUNG 6

7 4. Summary of recommendations The quadrant analyses (detailed in Section 8 of this Report) yielded four categories of recommendations (or strategies for success) based on anticipated value created and level of effort to implement. Categories include: Gems High value and less challenging to implement Tackle High value but more challenging to implement Quick Hits Low to moderate value but less challenging to implement Avoid Low value and more challenging to implement The following summarizes the recommendations in each of the categories: Gems Tackle Provide tax incentives, breaks and subsidies to developers, operators and investors (as applicable) to promote hospitality development throughout SSA Provide grants for job creation, to assist with land purchases and for developing hotels in marginalized areas Actively promote Eastern and Southern Africa as tourist destinations by focusing on nature (e.g., safaris and beaches) Ease visa restrictions on visitors Train lending institutions on the fundamentals and dynamics of real estate investment to establish appropriate underwriting criteria (i.e., attractive to both lenders and investors) Develop economic development initiatives to promote the advantages of SSA to international investors; provide road map for investment Work with international hotel companies and developers/investors to match them with experienced local partners Clarify laws related to local partnerships; ease restrictions as needed Lower duties on construction imports Provide vocational training related to hospitality management Enact political reform and promote political stability Eliminate corruption within the government and reward accountability Improve infrastructure (e.g., roads, utilities and communication) Reduce crime Increase airline capacity and reduce air fares ERNST & YOUNG 7

8 Improve negative international perceptions of SSA by creating marketing platform to promote countries as tourist destinations; build a strong Internet site for each country, partner with hotel companies/brands, etc. Improve transparency of government processes related to hospitality development (e.g., incentives, approvals, laws and regulations, etc.) Assist local banks in key markets in providing long-term financing Promote environment for master franchise agreements (i.e., transparent processes and informed and accountable local partners) Improve speed and efficiency of using public sector financing and structuring public-private partnerships Create, clarify and/or ease land title process to accelerate development and discourage counterfeit titles Initiate and enforce formal processes for obtaining permits Require and enforce contracts related to land transactions and development Improve internal communication between government departments and reduce bureaucracy related to the permit approval process Improve education system to provide strong platform for learning Work with governments to improve utility expenses Improve Internet access and reliability throughout the region Quick Hits Avoid Improve communication between the government and the private sector via better protocols and technology Improve visitor data and statistics by creating exit surveys Implement strategic market assessments for individual countries to determine optimal balance of lodging supply and demand Encourage development of projects with international brands Encourage the education and training of skilled development professionals (e.g., architects, contractors, etc.) in SSA Ease visa restrictions on skilled employees No recommendations fall into the Avoid category ERNST & YOUNG 8

9 5. Hospitality sector overview 5.1 SSA Hotel performance In 2008 and 2009, the Middle East/Africa region (which includes the Middle East and North Africa) outperformed most selected major worldwide markets in terms of increased tourism, with the absorption of a large number of new tourism and hospitality developments primarily in the Middle East; however, the region experienced a decrease in 2009 in RevPAR, a primary benchmark for the hotel industry based on occupancy and ADR, attributed to the global economic crisis. The table below shows RevPAR percentage changes for selected SSA countries (where data was available) as compared to other expanding or established economies worldwide: RevPAR (%Change) Average YTD July 2010 (2008-YTD June 2010) Kenya -24.5% 41.6% 6.1% 7.7% Mauritius -6.9% -20.6% 5.5% -7.3% South Africa -3.4% -10.4% 39.3% 8.5% Middle East/Africa 17.0% -13.3% 3.9% 2.5% Brazil 14.9% -8.4% 35.0% 13.8% Canada 0.8% -17.9% 19.4% 0.8% China -4.1% -25.2% 33.8% 1.5% France 10.8% -18.0% 2.2% -1.7% Germany 10.6% -14.4% 13.8% 3.3% India -3.9% -37.9% 15.5% -8.8% J apan 11.1% -3.6% 8.0% 5.2% Mexico 1.7% -31.3% 9.2% -6.8% Spain 1.0% -23.6% 1.7% -7.0% United Kingdom -8.3% -22.1% 6.1% -8.1% United States -1.9% -16.7% 3.3% -5.1% Note: Percent changes based on currency in US dollars. Source: Smith Travel Research Observations: South Africa experienced significant improvement in RevPAR during the first half of 2010 due to the World Cup in June and July Though Kenya and South Africa have experienced significant fluctuations in hotel performance over the past few years, on average the improvements in RevPAR for these two nations has been more significant than many other expanding economies (besides Brazil) and all other established economies. ERNST & YOUNG 9

10 SSA hospitality sector characteristics Based on interviews with market participants and secondary research, the following outlines some key characteristics of the hospitality sector in SSA: According to respondents, a significant proportion of lodging facilities in SSA are small, unbranded guest houses or lodges. Prior to the 1990s, many of the large internationally branded hotels in SSA were government owned (due to lack of private capital) and managed by third-party operators or the brands themselves. The result of this government ownership is that these hotels are generally well-located, but are inefficiently designed. There is inconsistency between international standards for hotel rating systems (such as the Forbes Travel Guide star rating or AAA diamond rating) and star-rated hotels in SSA. In general, star inflation is common, with 5 Star hotels in SSA more aligned with 4 Star hotels elsewhere in the world. Guests staying in hotels in SSA (particularly branded hotels) consist primarily of visitors from outside Africa and younger domestic or inter-african travelers, while older domestic or inter-african travelers typically stay with friends or family when traveling. This trend is, however, slowly changing, as inter-african travelers are making up a greater percentage of hotel guests, resulting in increased demand for hotel rooms throughout SSA. The result of increasing inter-africa travel and increasing visitation from outside Africa, coupled with limited to no significant new hotel supply additions, has resulted in an undersupply of hotel rooms in many markets. This limited supply has resulted in high ADRs in several SSA markets (e.g., Luanda, Angola), where rooms can be priced at upwards of US$400+ per night for a basic hotel room with limited amenities. Most large hotel chains and international developers have been focused over the past few years on hotel development in Asia and the Middle East. Market participants indicated that as hotel supply increases throughout Asia, development in Africa is anticipated to pick up as hotel companies and developers shift their focus to Africa as the next opportunistic hotel market. According to Smith Travel Research, the Middle East/Africa hotel development pipeline comprised 455 hotels and 126,310 hotel rooms as of June 2010 (71,993 of which are under construction). Nearly 50% of this pipeline was contained within the United Arab Emirates. With the total development pipelines for the United Arab Emirates, Saudi Arabia, Egypt and Morocco removed, 41,437 rooms (33% of the 126,310 hotel room total pipeline for the region) remained in the pipeline for the remainder of the Middle East/Africa region. Though data is limited, market participants indicated that RevPAR growth has been significant (upwards of 20% per year) for several markets in SSA over the past 10 years, due to the increased travel and lack of new supply. Furthermore, as previously indicated, the markets in SSA were significantly less affected by the global economic downturn than much of the developed world. Market participants indicated strong growth in hotel fundamentals throughout the region is anticipated to continue to occur over at least the next five years. Global hotel brands located within SSA Based on interviews with market participants and secondary research, the following global hotel companies (and their respective brands, as indicated) have properties located in SSA: Accor Hotels Formule 1 South Africa Hotel Novotel Benin, Chad, Ghana, Guinea, Ivory Coast, Nigeria, Reunion and Senegal Hotel Sofitel Equatorial Guinea, Mauritius and Nigeria Ibis Hotels Benin, Cameroon, Ivory Coast, Madagascar and Togo Mercure Hotels Burkina Faso, Reunion, South Africa and Togo Pullman Hotels Ivory Coast and Senegal ERNST & YOUNG 10

11 Banyan Tree Hotels & Resorts Seychelles Best Western International Ghana, Nigeria, Reunion and South Africa Club Med Mauritius, Senegal Constance Hotels Experience Madagascar, Mauritius and Seychelles Fairmont Raffles Hotels International Fairmont Hotels & Resorts Kenya and South Africa Raffles Hotels & Resorts Seychelles (under development, anticipated to open in 2011) Four Seasons Hotels & Resorts Mauritius and Seychelles Hilton Worldwide DoubleTree Hotels & Resorts Tanzania Hilton Hotels & Resorts Cameroon, Ethiopia, Kenya, Mauritius, Nigeria, Seychelles and South Africa Hyatt Corporation South Africa (Hyatt Regency) Iberostar Hotels & Resorts Cape Verde Islands InterContinental Hotels Group Crowne Plaza Hotels & Resorts Kenya, South Africa and Zimbabwe Holiday Inn Express Hotels South Africa and Zimbabwe Holiday Inn Hotels Ghana, South Africa and Zimbabwe InterContinental Hotels & Resorts Kenya, Mauritius, South Africa and Zambia; additional hotels are anticipated to open in Angola, Nigeria and Senegal (all in 2011) Kempinski Hotels Chad, Djibouti, Namibia and Tanzania Legacy Hotels & Resorts Ghana, Madagascar, Namibia, Nigeria and South Africa Mövenpick Hotels & Resorts Mauritius and Tanzania Oberoi Hotels & Resorts Mauritius One & Only Resorts Mauritius and South Africa Orient Express Hotels Botswana and South Africa Preferred Hotel Group Preferred Boutique Rwanda and South Africa Preferred Hotels & Resorts Angola, Kenya and South Africa Sterling Hotels Ghana Summit Hotels & Resorts Kenya, Madagascar and South Africa Premier Hotels & Resorts South Africa Red Carnation Hotel Collection South Africa RIU Hotels & Resorts Cape Verde Islands Starwood Hotels & Resorts Worldwide Four Points by Sheraton Mauritius; an additional hotel is anticipated to open in Nigeria in 2010 Le Meridien Cameroon, Chad, Gabon, Mauritius, Nigeria, Senegal and Seychelles; an additional hotel is anticipated to open in Nigeria in 2012 The Luxury Collection Ethiopia, Mauritius and South Africa Sheraton Hotels & Resorts Djibouti, Gambia, Nigeria, South Africa and Uganda St. Regis Hotels & Resorts Mauritius (under development, anticipated to open in 2011) Westin Hotels & Resorts South Africa Taj Hotels, Resorts & Palaces South Africa and Zambia The Rezidor Hotel Group ERNST & YOUNG 11

12 Park Inn South Africa; additional hotels are anticipated to open in Mozambique in 2011 and Senegal in 2012 Radisson Blu Hotels & Resorts Mali, Senegal and South Africa; additional hotels are anticipated to open in Mozambique and Nigeria in 2010, Ethiopia in 2011 and Angola and Kenya in 2012 Wyndham Worldwide Hawthorne Suites Nigeria Ramada Hotels & Resorts Ghana Marriott International does not have a presence in SSA, though they indicated a significant pipeline of projects in various stages of development throughout the region. Regional SSA hotel brands Based on interviews with market participants and secondary research, the following regional African hotel brands have properties located in SSA: African Pride Hotels South Africa Beachcomber Hotels Mauritius and Seychelles The City Lodge Group of Hotels South Africa Laico Hotels and Resorts Burkina Faso, Congo, Gabon, Gambia, Guinea, Kenya, Mali, Rwanda, Tanzania, Uganda Protea Hotels Kenya, Malawi, Namibia, Nigeria, South Africa, Tanzania, Uganda and Zambia Serena Hotels Kenya, Mozambique, Rwanda, Tanzania, Uganda Southern Sun Hotels Kenya, Mozambique, Nigeria, South Africa, Tanzania and Zambia Sun International Botswana, Lesotho, Namibia, Nigeria, South Africa, Swaziland and Zambia Three Cities Botswana, Mauritius, South Africa, Zambia and Zimbabwe SSA hospitality sector by country Based on interviews with market participants and secondary research, the following outlines the current status of the hospitality sector by country in SSA: Respondents were asked What are the five most mature hospitality destinations in SSA? Responses indicated that the most mature hospitality markets in SSA currently include (in order of decreasing frequency of response): South Africa, Kenya, Tanzania, Ghana, Nigeria and Botswana. These six countries appeared in over 74% of total interviewee responses. Approximately 67% of respondents indicated that South Africa is the most mature hospitality market in SSA. Respondents were asked Which emerging markets within SSA show the greatest potential as a travel/hospitality destination? Responses indicated that the emerging destinations with the most potential currently include (in order of decreasing frequency of response): Angola, Ghana, Mozambique, Nigeria and Tanzania. These five countries appeared in over 60% of total interviewee responses. Angola was the most frequently provided response, with over 20% of respondents indicating that Angola was in the top five emerging SSA destinations, and was the most frequent response as showing the greatest potential as a travel/hospitality destination in SSA. Based primarily on the responses from interviewees, and supplemented by limited secondary research, the following table categorizes the hospitality sector in each of the countries in SSA as follows: Established Countries with hospitality sectors characterized by: several international and regional hotel brands, with hotels that report operating data (i.e., occupancy and ADR) to Smith Travel Research and at least 10 interviewees indicated that the country is one of the most mature destinations in SSA or the destination is an established global travel destination. Maturing Countries with hospitality sectors characterized by: several international and regional hotel brands, with hotels that report operating data (i.e., occupancy and ADR) to Smith Travel Research and between one and nine interviewees indicated that the country is one of the most mature destinations in SSA. ERNST & YOUNG 12

13 Emerging Countries that were indicated by interviewees as emerging destinations and may contain a limited number of internationally- or regionally-branded hotels, but do not contain hotels reporting data to Smith Travel Research; these countries represent some of the most significant potential from a hospitality investment/development/operation perspective given limited hotel supply and significant demand. Infancy Countries that were not mentioned by interviewees as mature or emerging destinations and for which limited or no relevant published data was available. Country Kenya Mauritius Seychelles South Africa International and regional brands currently represented ESTABLISHED Crowne Plaza Hotels & Resorts, Fairmont Hotels & Resorts, Hilton Hotels & Resorts, Holiday Inn, InterContinental Hotels & Resort s, Laico Hotels and Resorts, Preferred Hotels & Resorts, Protea Hotels, Serena Hotels, Southern Sun Hotels, Summit Hotels & Resorts Beachcomber Hotels, Club Med, Constance Hotels Experience, Four Points by Sheraton, Four Seasons Hotels & Resorts, Hilton Hotels & Resorts, Hotel Sofitel, InterContinental Hotels & Resorts, Le Meridien, The Luxury Collection (Starwood), Mövenpick Hotels & Resort s, Oberoi Hotels & Resorts, One & Only Resorts, Three Cities Banyan Tree Hotels & Resorts, Beachcomber Hotels, Constance Hotels Experience, Four Seasons Hotels & Resorts, Hilton Hotels & Resorts, Le Meridien African Pride Hotels, Best Western, The City Lodge Group of Hotels, Crowne Plaza Hotels & Resorts, Fairmont Hotels & Resorts, Formule 1, Hilton Hotels & Resorts, Holiday Inn Express Hotels, Holiday Inn Hotels, Hyatt Regency, InterContinental Hotels & Resorts, Legacy Hotels & Resorts, The Luxury Collection (Starwood), Mercure Hotels, One & Only Resorts, Orient Express Hotels, Park Inn, Preferred Boutique, Preferred Hotels & Resorts, Premier Hotels & Resorts, Protea Hotels, Radisson Blu Hotels & Resorts, The Red Carnation Hotel Collect ion, Sherat on Hot els & Resorts, Sout hern Sun Hot els, Summit Hot els & Resorts, Sun Int ernat ional, Taj Hot els Resort s & Palaces, Three Cities, Westin Hotels & Resorts Nigeria Senegal Tanzania Zambia Country International and regional brands currently represented MATURING Best Western, Hawt horne Suit es (Wyndham), Hilt on Hot els & Resorts, Hotel Novotel, Hotel Sofitel, Le Meridien, Legacy Hotels & Resorts, Protea Hotels, Sheraton Hotels & Resorts, Southern Sun Hotels, Sun International Club Med, Hotel Novotel, Le Meridien, Pullman Hotels, Radisson Blu Hotels & Resorts DoubleTree Hotels & Resorts, Kempinski Hotels, Laico Hotels and Resorts, Mövenpick Hotels & Resorts, Protea Hotels, Serena Hotels, Southern Sun Hotels InterContinental Hotels & Resorts, Protea Hotels, Southern Sun Hotels, Sun International, Taj Hotels Resorts & Palaces, Three Cities ERNST & YOUNG 13

14 Country Angola Cameroon Cape Verde DRC Ethiopia Ghana Ivory Coast Madagascar Malawi Mozambique Namibia Rwanda Sierra Leone Uganda Zimbabwe International and regional brands currently represented EMERGING Preferred Hotels & Resorts Hilton Hotels & Resorts, Ibis Hotels, Le Meridien Iberostar Hotels & Resorts, RIU Hotels & Resorts None Hilton Hotels & Resorts, The Luxury Collection (Starwood) Best Western, Holiday Inn Hotels, Hotel Novotel, Legacy Hotels & Resorts, Ramada Hotels & Resorts, Sterling Hotels Hotel Novotel, Ibis Hotels, Pullman Hotels Constance Hotels Experience, Ibis Hotels, Legacy Hotels & Resorts, Summit Hotels & Resorts Protea Hotels Serena Hotels, Southern Sun Hotels Kempinski Hotels, Legacy Hotels & Resorts, Protea Hotels, Sun International Laico Hotels and Resorts, Preferred Boutique, Serena Hotels None Laico Hotels and Resorts, Protea Hotels, Serena Hotels, Sheraton Hotels & Resorts Crowne Plaza Hotels & Resorts, Holiday Inn Express Hotels, Holiday Inn Hotels, Three Cities ERNST & YOUNG 14

15 Country Benin Botswana Burkina Faso Burundi Central African Rep Chad Congo Djibouti Equatorial Guinea Erit rea Gabon Gambia Guinea Guinea Bissau Lesotho Liberia Mali Mauritania Niger Reunion São Tomé and Principe Somalia Sudan Swaziland Togo International and regional brands currently represented INFANCY Hotel Novotel, Ibis Hotels Orient Express Hotels, Sun International, Three Cities Laico Hotels and Resorts, Mercure Hotels None None Hotel Novotel, Kempinski Hotels, Le Meridien Laico Hotels and Resorts Kempinski Hotels, Sheraton Hotels & Resorts Hotel Sofitel None Laico Hotels and Resorts, Le Meridien Laico Hotels and Resorts, Sheraton Hotels & Resorts Hotel Novotel, Laico Hotels and Resorts None Sun International None Laico Hotels and Resorts, Radisson Blu Hotels & Resorts None None Best Western, Hotel Novotel, Mercure Hotels None None None Sun International Ibis Hotels, Mercure Hotels Established markets hotel inventory overview The four established hotel markets in SSA include Kenya, Mauritius, Seychelles and South Africa. The following charts summarize the number of hotel rooms in Smith Travel Research s respondent sample in each market, as well as the ratio of hotel rooms in each country to the total number of hotel rooms in these four markets: ERNST & YOUNG 15

16 40,000 35,000 30,000 Established hotel markets by number of hotel rooms 36,427 Ratio of hotel rooms by market to total established markets hotel rooms 6.5% 4.3% 1.1% 25,000 20,000 15,000 10,000 South Africa Mauritius Kenya Seychelles 5, ,679 1, South Africa Mauritius Kenya Seychelles 88.1% Source: Smith Travel Research Additionally, the following chart outlines the average hotel size (i.e., number of rooms) for hotels in each of the established countries (based on data reported by Smith Travel Research): Rooms Average hotel size in established markets Kenya Mauritius South Africa Seychelles Source: Smith Travel Research Observations: ERNST & YOUNG 16

17 South Africa contains the greatest proportion of hotel rooms of the established countries, with over 36,000 hotel rooms (or over 88% of total rooms in the four established countries) in 293 hotels. Though Kenya contains only 10 hotels and nearly 1,800 hotel rooms, the country generally contains the largest hotels within the established countries at an average of 180 rooms per hotel. Maturing markets hotel inventory overview The four maturing hotel markets in SSA include Botswana, Nigeria, Tanzania and Zambia. The following charts summarize the number of hotel rooms in Smith Travel Research s respondent sample in each market, as well as the ratio of hotel rooms in each country to the total number of hotel rooms in these four markets: 2,500 2,000 Maturing hotel markets by number of hotel rooms 2,049 Ratio of hotel rooms by market to total maturing markets hotel rooms 15.0% 1,500 1, ,243 1, % 38.6% Nigeria Tanzania Zambia Bot swana 0 Nigeria Tanzania Zambia Botswana 23.4% Source: Smith Travel Research Additionally, the following chart outlines the average hotel size (i.e., number of rooms) for hotels in each of the maturing countries (based on data reported by Smith Travel Research): ERNST & YOUNG 17

18 Average hotel size in maturing markets Rooms Nigeria Tanzania Botswana Zambia Source: Smith Travel Research Observations: Nigeria contains the greatest proportion of hotel rooms of the maturing countries, with over 2,000 hotel rooms (or over 38% of total rooms in the four maturing countries) in seven hotels. Nigeria also contains the largest hotels within the maturing countries at an average of 293 rooms per hotel. ADR comparison of global hotel markets The following presents the ADRs for full-service hotels in various key global markets in the US, Europe, Asia and SSA: ERNST & YOUNG 18

19 Hotel Location 2009 ADR (USD) United States Sheraton New York Hotel & Towers New York, NY, USA $218 Europe Sheraton Frankfurt Congress Hotel Frankfurt, Germany $125 Asia The Great Wall Sheraton Hotel Beijing Beijing, China $108 SSA Sheraton Abuja Hotel Abuja, Nigeria $179 Sheraton Kampala Hotel Kampala, Uganda $109 Source: Individual Companies 5.2 Middle East/North Africa The hospitality sector in the Middle East and North Africa is characterized by the following: 2009 was a challenging year for the Middle East and North Africa region, which registered an average decline in RevPAR of approximately 15% to 20% compared with Individual markets were affected differently and there were also some exceptions. Beirut, for example, achieved an increase in RevPAR of over 90% due to the renewed political stability in Lebanon, while Jeddah witnessed growth in RevPAR of approximately 7%, driven by strong increases in corporate demand coupled with limited supply. According to the World Tourism Organization, Egypt is currently among the top 25 destinations worldwide, accounting for approximately 1% of the global market. Revenues in reached EUR 7.5 billion, contributing around 3.4% of GDP and a primary source of foreign exchange. The government s target is to improve Egypt s reputation as a business destination and to increase its share of global tourism to 2.2%. This should boost annual revenue in the sector to EUR 9.4 billion. Meanwhile, operators are looking to grow hotel capacity to 300,000 rooms enough to meet the goal of hosting 18 million visitors by 2015, up from 10.7 million in 2008, and generating some 1.2 million new job opportunities in the sector. Egypt has recently become an attractive investment option due to the hospitality-friendly policies adopted by the government and the improvement of the general investment environment. Several tourism mega-projects are under way around Marsa Alam and on the north coast, and the Al-Futtaim group has properties in the pipeline at the Cairo Festival City project. The Ministry of Tourism has also set an integrated Tourism Sustainable Development Plan that will continue with improvements to the tourism sector up to The Ministry of Tourism and General Authority for Investment identified 205 companies investing in hospitality and leisure in 2008; for YTD November 2009, 167 companies were participating in the sector. There are currently 624 new tourism projects throughout the country. Morocco s tourism sector accounts for approximately 8% of GDP and is one of the largest foreign-exchange earners. Travel costs to the country were significantly reduced in 1995 following cuts in prices by the national airline. The country is becoming an increasingly competitive destination for European travel. Meanwhile, tourism sector in Tunisia accounts for 10% of the country s GDP and is one of the country s highest export earners. Since 1992, the country s plans to develop the tourist sector have been ERNST & YOUNG 19

20 ambitious, including developing a tourist complex in Tabarka and a casino near Sousse. Many golf courses and leisure parks were also developed. Meanwhile, the private sector developed several four-star hotels and resorts, two automobile race tracks and other recreational facilities, primarily on the north coast of the country. Tourism in Libya is an industry still in its infancy but one that is gradually growing. According to HVS International, international visitation to Libya has historically been primarily made up of same-day travelers, comprising between 82% and 85% of total visits. This is primarily due to the lack of overnight (i.e., hotel) facilities. According to the World Travel and Tourism Council, visitation to Libya increased significantly beginning in 1999 to approximately 965,000, increasing further to approximately 1.2 million in 2007 (a majority are day trips). There are currently about 13,000 hotel rooms in Libya, a figure the government hopes to increase to 50,000. Hotel brands currently in Libya include Rezidor, Mövenpick, Radisson and Sheraton. According to the US Library of Congress, tourism in Algeria historically contributed approximately 1% of the country s GDP, lagging behind sector contributions in neighboring Morocco and Tunisia and receiving only approximately 200,000 visitors in Similar to Libya, this is primarily due to a combination of a lack of overnight (i.e., hotel) facilities and the threat of terrorism. The Algerian government, however, adopted a plan in 2005 to address the lack of infrastructure to support tourism in the nation, encouraging hotel development and encompassing plans to increase the number of foreign visitors to 1.2 million by Although the Gulf Cooperation Council markets of Oman, Bahrain, Kuwait and Riyadh witnessed declines in occupancy in 2009, all were able to maintain their rate integrity or in some cases achieve significant increases in ADR. It is anticipated that these markets will have the distinct advantage of a relatively quick recovery once demand recovers, although some markets will face pressures from new supply. Dubai experienced the most significant decline in performance across the region, marked by a 35% reduction in RevPAR. Decreases in corporate spending coupled with leisure travelers seeking discounted packages and booking at the last minute placed significant downward pressure on occupancy and ADR. Furthermore, new supply additions are further exacerbating the declines in performance and will most likely postpone the recovery in Dubai. A key concern for Dubai is the emirate s proposed supply pipeline which is anticipated to substantially increase by 26% in 2010 and further increase by 19% in Even after taking into account the hotel projects which have been announced as cancelled or put on hold, it is anticipated that Dubai will still have an additional 37,500 rooms by 2013, which represents an increase of 74% from its current inventory today. Although the Dubai government has been successful in further developing its infrastructure in order to accommodate additional tourists, many private developers have faced liquidity problems and their tourism projects for Dubai have been either significantly delayed or put on hold for an unspecified time frame. The delay in developing these tourism generators coupled with the plethora of hotel rooms presently under construction in Dubai, is likely to lead to significant oversupply in Dubai s lodging sector and delay the speed of recovery. The effects of the financial crisis have been less severe on Abu Dhabi s lodging market compared to Dubai, mainly due to a shortage of hotel rooms in Abu Dhabi. Abu Dhabi is moving close on the heels of Dubai s strategic positioning as a tourism destination through its cultural and entertainment tourism projects along with an expansion of its airport. This is anticipated to create a shift in demand from corporate traffic to a more balanced mix of corporate and leisure visitors. However, an additional 21,000 rooms across the city by 2013, which represents an increase of 165% from its current inventory today, may prove to be challenging for Abu Dhabi hoteliers. Overall, Saudi Arabia, Libya and Iraq still offer significant development opportunities due to strong underlying fundamentals in each country and limited product. In Dubai, there may be potential opportunities for investors to acquire under-construction or operating assets at attractive rates in the coming year. For hoteliers across the region, cost containment initiatives coupled with maintaining (and in some cases rebuilding) rate, while still offering value for money, will be the key focus in Asia The hospitality sector in Asia is characterized by the following: According to Smith Travel Research, the Asia Pacific region experienced a RevPAR decrease of 19.4% in 2009 versus ERNST & YOUNG 20

21 According to Smith Travel Research, the Asia Pacific region accounts for approximately 2.2 million hotel rooms in nearly 16,000 hotels throughout the region, 61% of which are not affiliated with a major brand or management group. Only 6% of all hotel rooms are in the luxury segment and 4% are economy hotels. As of April 2010, over 310,000 hotel rooms in nearly 1,300 hotels were in the development pipeline, with the greatest majority in the upscale chain scale (e.g., Courtyard by Marriott, Hilton Garden Inn, Crowne Plaza, Four Points by Sheraton, Hyatt Place, etc.), followed by unaffiliated, upper upscale (e.g., Marriott, Sheraton, Hilton, Hyatt, etc.), luxury (e.g., Four Seasons, Ritz-Carlton, St. Regis, Fairmont, Conrad, etc.) and midscale (e.g., Best Western, Holiday Inn, Ramada, Fairfield Inn, Hampton Inn, etc.), and finally economy (e.g., Days Inn, Econo Lodge, Motel 6, Red Roof Inn, etc.). This total pipeline represents a 14.5% supply increase over existing supply in the next four to five years. Approximately 64% of the total pipeline in Asia Pacific is contained within China and India. The Indian hotel industry witnessed unprecedented growth during the Indian Financial Years 2003 through 2008 due to significant economic growth, resulting in an increase in business and leisure travel and visible growth in inbound tourism. The increase in business travel in the country during this phase can be attributed to rising trade flows and the entry of an increasing number of international players into the country. According to the Ministry of Tourism, during this period foreign tourist arrivals to India grew at an annual rate of 14.5% as the country emerged as an attractive tourist destination. Attracted by India s rapidly growing hospitality industry, several international hotel chains, including Hilton, Marriott, Starwood, Shangri-La, Carlson, InterContinental, Accor and Hyatt strengthened their market presence in the country. This led to a significant increment in revenue (room rentals and food and beverages receipts), with the industry turnover tripling from EUR 949 million in 2003 to EUR 2.73 billion in 2008 (per annual review of the hotel industry, CRIS INFAC, September 2009). Smith Travel Research estimates that, based on the current development pipeline, India will add over 62,000 hotel rooms to its market over the next four to five years, representing an increase of 51%. According to Jones Lang LaSalle Hotels, Japan s tourism and hotel market experienced one of the most challenging periods in history in 2009 due to decreasing visitation. Domestic corporate demand decreased as a result of substantial reductions in business activity and the imposition of tight corporate cost saving measures, while domestic leisure demand decreased due to weak consumer confidence. International visitation decreased for the first time since 2003, reflecting the general economic slowdown and strengthening of the Japanese Yen. Thanks to the recent recovery of the stock market and Asian economy, Japan s hotel and tourism market began to experience signs of recovery in early United States/Western Europe The hospitality sector in the United States and Western Europe is characterized by the following: The US lodging industry experienced a sharp decline in RevPAR in 2009 as a result of the continued economic recession exacerbated by the financial crisis in the fall of According to Smith Travel Research, RevPAR in the US was down 16.7% in 2009, the most significant drop in more than two decades. These declines were driven by sharp declines in demand coupled with continued supply increases. YTD July 2010 RevPAR in the US is reflective of improved lodging performance and is up 3.3%, primarily as a result of gains in occupancy, which increased 2.7 percentage points over the same period in ADR continued to decline by 1.4% over the same period the prior year. According to Lodging Econometrics, US hotel construction starts for projects already in the development pipeline were at the lowest in over 10 years. As of the second quarter of 2010, 3,325 projects were in the pipeline (under construction, starting in the next 12 months or in the early planning stages), a 43.5% decline as compared to the peak in the second quarter of In this downturn, larger (150 rooms or more), high-end projects were affected the most, as institutional-sized lenders halted real estate lending. Only a few new projects are being started, due to depressed levels of hotel profitability, a lack of development financing and the ability to acquire hotels at discounts to replacement cost as an alternative. After significant declines in RevPAR in 2009 in the US, there have been signs of improvement during the first seven months of Overall US occupancy levels increased by 4.8% as of YTD July 2010 versus the prior year. The most significant increase in occupancy was in the luxury segment. As a result, RevPAR for the luxury segment was up 9.1% as of YTD July 2010 versus the same period last year. However, all segments experienced decreases in ADR compared to the prior year. ERNST & YOUNG 21

22 Peak US RevPAR was achieved in 2007 when it reached approximately US$66. Based on market participants and analysts, RevPAR is not anticipated to reach this level until at least 2013 on a nominal dollar basis. This represents a six year period to return to prior peak levels. The estimated compound annual growth rate for RevPAR from 2009 to 2013 is anticipated to range from 4.0% to 6.0%. The global economic downturn has had a significant effect on the German hotel sector. According to the Federal Statistics Authority, in the first half of 2009, overnight stays were down by 1.6% compared with the same period in Foreign visitor overnight stays fell by 7.1% to 23.4 million and domestic overnight stays fell by 0.6% to million over the same time frame. Germany is, however, a prime target for acquisitions, particularly the cities of Munich and Hamburg. These two cities are, alongside London, Paris and Rome, among the most desired investment locations in Europe, confirming the appetite of investors to remain in the traditional European hotel markets. Spanish households saw their economic power fall through 2009, although their discretionary income increased, mainly due to the fall in inflation caused by reduced economic activity and the fall in interest rates. The Euro Interbank Offered Rate, fixed by the European Central Bank, has experienced its lowest levels ever in recent months and over 95% of Spanish mortgages have variable interest rates. This increase in discretionary income resulted in the highest level of savings in recent years rather than greater consumption. Meanwhile, the unemployment rate has increased over the last 12 months to over 19%. The main tourist feeder markets of Germany, the UK and France have also suffered, meaning that foreign demand has continued to fall, accentuated by competition from lower-priced Eastern Mediterranean countries. The UK has seen a significantly sharper drop in GDP than in previous economic downturns, with a consensual view that GDP will not return to pre-recession levels until Although the hospitality sector tends to lag the onset of a recession, UK hotel consumption has historically tracked GDP, suggesting that there is a way to go until a recovery. Corporate travel accounts for around 60% of UK hotel demand, and has driven a UK RevPAR decrease of 22.1% in 2009 (in US dollars, according to Smith Travel Research). This was originally occupancy-driven as hoteliers sought to maintain rates, but strong price competition in the early part of the year resulted in a 19.6% room rate decline in 2009, with occupancy down 3.1%. The three- to four-star field continues to be the key battleground as operators flex their rates to compete with the budget offerings. While corporate rates are low and business was lost to the budget segment due to reduced expense budgets, many three- to four-star hotels, led by the brands, have benefited from a refocus on leisure business and the successful packaging of rate offers. As a result, and with the current stay-at-home attitude of British travelers and a weak sterling, the three- to four-star hotels have outdone the budget operators on quality and value for money. ERNST & YOUNG 22

23 6. Additional characterizations of SSA Nearly all respondents indicated that the most appropriate way to look at hospitality development in SSA is on a country-by-country basis. The most frequent response when asked what differences exist was that no matter what country you are considering developing in, it is essential to develop relationships with the key decision makers in those individual countries, partner with individuals who know how to do business in those countries and have patience and tenacity. Based on interviews, however, the countries in SSA are able to be categorized based on language (e.g., Francophone or Anglophone), geographic region (e.g., West, East, South or Central) and visitor characterization (e.g., commercial or leisure destinations), in addition to the country-by-country characterization indicated in the previous section of this Report based on level of hospitality development. 6.1 Francophone and Anglophone countries Though numerous languages and dialects are spoken throughout SSA (even the official language of a country is sometimes not the most widely spoken language in that country), the two most frequent official languages are French and English. The countries where French is spoken as an official language or an otherwise primary language include (primarily in Western and Central Africa): Benin* Chad* Gabon* Mali* Burkina Faso* Congo* Guinea* Niger* Burundi Djibouti Ivory Coast* Senegal* Central African Republic* DRC Madagascar (with English) Togo* *Uses the CFA franc as a primary means of currency The countries where English is spoken as an official language or an otherwise primary language include (primarily in Southern and Eastern Africa): Botswana Kenya Nigeria Swaziland Cameroon Lesotho Seychelles Tanzania Ethiopia Liberia Sierra Leone Uganda Gambia Madagascar (with French) South Africa Zambia Ghana Namibia Sudan Zimbabwe In addition, Arabic (throughout SSA, but primarily in Mauritania and Sudan), Creole (in Mauritius and Seychelles), Spanish (in Equatorial Guinea) and Portuguese (in Angola, Cape Verde, Guinea Bissau, Mozambique and Sao Tome and Principe) are common languages, as are several African dialects (e.g., Chichewa in Malawi, Somali in Somalia and Swahili in Tanzania). Given the predominance of English and French as languages, respondents were asked to comment primarily on the differences (if any) between Francophone and Anglophone countries. Overall sentiment from respondents indicated that doing business in Anglophone countries is more favorable than Francophone countries due to more savvy investors and industry players. Key characteristics of hospitality development in Francophone countries include: ERNST & YOUNG 23