Hotel Investment, Finance and ROI in Africa
By Michael Procher
What makes a hotel investment profitable – and interesting for an investor?! An ROI (return on investment) of 5 years or less? A GOP (gross operating profit) of 50% or more? The capital gains?
Every owner has their own understanding of successful investments in Africa and beyond. Like anywhere else, there are different types of investments:
- Institutional investors normally look for professional structures with fixed investment terms (amount, period of investment, exit strategy, management company, pre-opening structures, etc.).
- Private investors/owners with hotel experience try to keep expenses low, especially when they believe something is “not necessary”. This causes lots of issues when you don’t have a professional pre-opening, when your FF&E is not ordered in time when your team is not in place to prepare the opening. This group of investors bears the largest risk because it often appears that the knowledge of these owners is not as good as they believe.
- Private investors/owners without hotel experience often trust non-professionals because they promise low expenses and high profits without any real basis. This risk gets higher when an owner sees how “nice” a hotel looks and how many customers there are. Then the belief that “I can do this too” is significant, alongside the potential to believe anybody with unrealistic promises.
What do private investors/operators need to make their investment profitable?
- A really good professional hotel specialist to conduct a feasibility study of the project (try to avoid surprises because you did not want to pay for a professional and hired the friend of your uncle’s brother).
- A written business plan by this person to project the cost, the period and the potential operating profit.
- A tax advisor to calculate the potential profit after taxes and tax saving conditions.
The business plan will become the core of the new business. It needs timelines, architectural setup and design (at least basic at this stage), the positioning of the new property, a rate structure, and most of the target customer spectrum, which has a direct impact on the later operating profit.
The evaluation of which property fits which location is crucial. Sometimes a 3-star hotel can bring more profit than one with 5-stars. Why? That’s where the real hotel pro comes in: investment details, operations cost level, occupancy, availability of region to which type of customers.
In Berlin, e.g., the 5-star hotel market is experiencing such enormous competition that many 5-star hotels are selling for 4-star conditions (I “bought” 5* hotel rooms for less than EUR 60 in large quantities). Your investor will like the idea of much less money for a 4-star hotel with similar revenue.
In Africa, the conditions for any hotel investment are very different.
South Africa has a robust B&B market and international institutional investments in the main cities. Egypt has primarily institutional investors in the cities, the Nile Valley, and the Red Sea. Ethiopia has local and international institutional investments in Addis Ababa but primarily private or small local institutional investors in the countryside.
With enormous business demand in Addis (UN, AU), lots of private investors are trying to participate in this business, but without trusting to invest in the services of a real professional hotel specialist. These are just a few examples, but many countries have similar business situations.
My recommendation for any private hotel investor/owner can only be:
Hire a real professional hotelier with an international background, if possible, who is extremely strong in financial evaluations and feasibility studies. With all due respect, this can only be somebody who brings very strong knowledge in all financial aspects. And – do not get upset if this person is not always agreeing with you. Do you want a “yes-sayer” or somebody establishing a successful hotel business for you?
Together you have to decide which hotel fits the location you have in mind. Let this hotel professional prepare a construction budget together with a local construction company and a budget for the equipment. You can run two or three alternatives (high rise vs. low rise, 4* vs. 5*, different locations, different # of keys, etc.), even different locations.
Don’t forget location and type of hotel strongly determine your type of customers and the revenue. Finally, you will have an overall picture of the kind of hotel, construction cost, FF&E/OS&E cost, pre-opening cost, operational revenue, operational.