The future of the hotel sector in Africa after Covid-19

Our panellists:

Paul Milton, Founder of The Milton Group, which works with leading African UHNWI conservationists and hotel groups

Ramsay Rankoussi, VP, Development, Africa & Turkey, Radisson Hotel Group  

Ali Manzoor, Head of Hospitality, Knight Frank Africa & Middle East

How badly has the pandemic affected the wildlife-based tourism sector in Africa?

The pandemic has had a devasting impact. For the over 300 million hectares of protected areas under African government control, of which National Parks constitute the largest area, tourism was a major component of the economies these areas relied upon. Evidence suggests the annual cost of ‘keeping the lights on' for Africa’s National Park system alone by providing basic security management could be in the region of US$1 billion. This estimate doesn’t include privately managed conservation areas that have, in many cases, used tourism as a monetization method to aid in their conservation efforts.

Job losses have been significant and the positive impact of the downstream multiplier effect that tourism revenues provide has all but been lost over the past year. Recovery to pre-pandemic levels will be slow and reliant on the international airline industry’s recovery and vaccination programs. According to WTO figures, conservation tourism accounts for 80% of international travel to Africa, generating 24 million jobs and annual revenues exceeding US$40  billion. Domestic tourism has helped augment losses but falls woefully short of providing replacement revenues to pre-pandemic levels.

Has there been a knock-on effect on the wildlife itself?

Poaching has increased as anti-poaching budgets have been cut or, in some cases, put on hold as governments, investors and operators have had to determine the best use of funds due to the far-reaching economic impact of the pandemic. The loss of conventional employment for already impoverished communities on the edge of protected areas contributed to the likelihood of increased poaching activity.

We have all read about the positive impacts of many at-risk global species recovering or flourishing during lockdown periods across numerous countries, but the poaching challenge in Africa has seen a significant increase both in the illegal wildlife trade markets and in the bushmeat trade as communities struggle with the economic impact of the tourism market compression.

It’s even more critical today that funding can help maintain the baseline security of wildlife required and this needs urgent intervention and public and private partnership, significant private capital will be required to help the recovery process.

Post-Covid, how quickly, if at all, do you think the sector will recover to previous levels?

As the market compression has taken place, certain domestic tourism markets have flourished, the US, parts of the UK and Asia have seen high demand for drive-to products that are in wilderness areas and provide access to nature and the environment. It’s difficult to predict whether the traditional source markets for Africa, the US and Europe will in fact ever provide the same pre-pandemic demand.

Most industry commentators agree that the growth for African conservation-based tourism is likely to emerge from Asian market demand. The local domestic tourism market demand from within Africa is anticipated to continue as an area of market demand in the 2 to 4-star market range, with less demand from this market for top of the market products.

Ease and cost of access, given distances and airlift requirements, to recognized destinations could be seen as restrictive to domestic market growth as many destinations are fly-in products only. Demand in the drive-to parks close to major population centres may begin to see increased domestic market demand.

Singita Serengeti House, Grumeti Reserves, Tanzania

Will operating models change – for example, will we see the top end of the market become even more exclusive?

I am not sure that the top end of the market will become more exclusive; I think this market segment is more robust and well-resourced to survive this period of compression. That said, the demand at the top of the market will, in our opinion, soften from current source markets while the predicted Asian market demand increases. 

Will the model change? Yes, I think as we look into the future, conservation-based tourism is going to expand its baseline investment thesis and consider other integrated revenue streams within future investment models. We are seeing market evidence of interpreted investment models that include investment in agriculture, forestry, carbon and aquaculture as supporting livelihood projects directly linked to tourism conservation programs.

The growth in population and human-wildlife conflict management pre-pandemic had in many jurisdictions brought investors, operators and communities closer together in for-profit partnerships and operational agreements that were not purely tourism focused. In the future, we foresee this trend to continue to de-risk overreliance on purely tourism generated revenue models.

The top-of-the-market consumer wants to see positive and sustainable impact being created, in fact measured, demonstrating a commitment to community, sustainability and long-term conservation management, attributes that continue to attract the market in the first place.

For investors what do you see as the biggest emerging opportunities in the sector?

We are clearly seeing evidence of distress emerging due to the compression of conservation funding, a rise in land dispositions, consumer market compression and the inevitable increase in wildlife poaching activity. Private and institutional capital is vital to help safeguard Africa’s natural and social capital.

Tourism investment into Africa is a long-term investment model and has the potential to play a key role in securing biodiversity. Governments and the private sector need better alignment and a broader mindset with regards to how the biodiversity crisis is addressed and the conditions required to improve the investment climate for tourism.

These conditions can range from public-private partnerships structures, the granting of longer-term and secure lease concessions, infrastructure investment support, incentives on duties and imported goods, and joint management agreements.

Concessions and leases will come up for renewal and there will be fewer investors and operators available to take on these renewals moving forward in this recovery period. Opportunities may exist to consolidate areas of management and increase the scale and relevance of concession areas for more coordinated protection and larger wildlife management corridors.

I don’t believe we have seen the full impact of the pandemic and this will take a number of years to truly emerge. The fact of the matter is the high-end eco-tourism industry is in crisis and we are going to see the need for significant reinvention and innovation in how investment in this market sector is undertaken and delivered.

Ramsay Rankoussi

How has the pandemic affected your expansion plans for Africa?

It has reinforced our priorities on conversion opportunities and less on new builds. We anticipate a more prudent approach from financial institutions and the investment community which will translate in the short- and medium-term to a focus on take-over, leaner development with a focus on upscale and more cost-effective operations.

We, therefore, expect most of our growth to be driven by our Radisson brand while we continue to secure strategic properties across key destinations in both cities and resort locations. Serviced apartments have also demonstrated a stronger resilience and we, therefore, foresee a positive trend with our new extended-stay offering which will be very relevant in key cities across the continent. 

The new Radisson Red, Rosebank, Johannesburg, the second of the firm's trendy lifestyle Red brand in Africa

Which segments are you focusing on – business travellers or tourists?

Our current presence mostly covers city and business hotels. Africa still remains a strong business destination given the emerging profile of the region and we still believe in that sector. 

In the short-term, we expect a rise in leisure and intra-regional demand which will drive domestic tourism in some cities and in particular on the leisure side. Despite this trend, once the ease of travel regains its momentum, the region will remain business-led and most of our properties are positioned to cater for both segments with a focus on business and urban city hotels. 

We have however accelerated our development plans across leisure facilities in key resort destinations to complement our offerings and further leverage the growth of regional leisure demand. 

Will the ratification of the Africa Free Trade Agreement have a significant impact on intra-continental business travel?

The trade pact will ease activities around procurement, logistics and sourcing of supplies. Accordingly, we could indeed anticipate a positive stimulus of regional economic activities which will lead to a new source of business demand for the hotel industry. Many industrial sectors and other service industries will benefit from the AfCFTA which would increase free movement of goods and people which is the basic fundamental of travel and tourism.

Geographically, which areas of the continent have the most potential for growth?

We have established a clear growth strategy that is tailored around two angles. The first angle is on four key focus countries which are namely Morocco, Egypt, Nigeria and South Africa. Those countries represent the largest growth potential where each country can easily welcome ten additional hotels within the next three to five years and across all our brands.

We are committed to creating scale in those countries in order to further translate synergies and operational efficiencies. On the second angle, we are reinforcing our presence across neighbouring countries to equally leverage those synergies and economies of scale. Most of our portfolio has been across English Speaking countries in Sub-Sahara Africa and we are now also balancing our presence with a reinforcement of resources and growth across French Speaking Africa. 

Do you think Covid-19 will have an impact on the design of hotels and the type of accommodation and services offered?

Not really. The focus is on regaining consumer confidence and ensuring proper hygiene protocol. Our priority is to welcome our guests in a safe environment. We have taken various initiatives at Radisson Hotel Group in developing a label of safety with WTTC and SGS to reassure the travellers of the positive measures in all our properties. We don’t anticipate a change in design but we certainly witness positive growth in more efficient design, upscale properties as well as serviced apartments, especially when catering to business travellers. On the leisure segment, we foresee more facilities on the outdoor and stronger use of privacy. 

Ali Manzoor

What are the greatest hurdles to hotel investments in Africa today?

The hotel investment market in Africa has always had its challenges. While we have seen pockets of innovation in response to changing market conditions, the underlying barriers to hotel investment remain the same today as they were a decade ago. First, the enforceability of contracts is an issue in many African markets and, as such, robust due diligence checks that go far beyond those typical of more developed markets are essential.
 
Second, obtaining finance remains a challenge due to prohibitively high-interest rates. Inbound investments are typically funded from abroad, with foreign assets as collateral. Third, ease of access remains a challenge and while there have been efforts to ease visa requirements for both inbound and domestic travellers in recent years, the lack of inbound connectivity to many African markets is problematic.
 
There is also a tendency for inbound investors to have a distorted sense of risk because they view Africa as a single unit rather than a collection of individual nations. As a result, what sometimes happens is that perceptions of one nation are reflected on all nations. For example, when considering political risk, an investor may believe that risk is high in one market because there is political unrest in a completely unrelated one. 

What solutions do you think should be in place to address these hurdles?

Given the setbacks that the industry as a whole has faced in recent years, it is now more critical than ever for these underlying constraints to be addressed for the long-term health of the sector. Of these, a strong regulatory framework designed to protect inbound investment and increased accessibility of development finance should be a priority.

Please contact Ali if you need advice on any hospitality real estate issues in Africa or the Middle East  Ali.Manzoor@me.knightfrank.com