South Africa’s hotel sector stands to benefit from a resurgence in global hotel lending and investment. This is expected to offset a shortage of finance that impacted the sector during 2012.
According to a new international Grant Thornton report, the global financial crisis has given birth to a superior environment for hotel finance. Lenders, learning from past mistakes, have undergone significant changes and are ramping up their levels of sophistication to better understand hotel businesses.
The report, entitled “Hotel Investment 2014 – Finance on a different level”, describes an evolution in the financing environment for hotel businesses.
“The findings are particularly relevant for the South Africa hospitality sector which experienced a near total freeze in investment since 2011 due to a combination of factors including oversupply and recessionary markets,” says Gillian Saunders, Principal and Head of Advisory Services at Grant Thornton Johannesburg.
“In South Africa, 2005, 2006 and 2007 were boom years for the hotel industry. This continued through the normal hotel sector cycle to a period of overcapacity that was exacerbated by the Football World Cup in 2010, although this global event did help to sustain the industry for that year. All this took place at the same time as the global financial crisis impacted on the country,” says Saunders.
Drawing on interviews with banks, private equity houses, advisers and hoteliers, the Grant Thornton report recommends that hotel investors up their game when they deal with lenders and investors if they are to raise money in the new environment.
Saunders says the data indicates that overall confidence was back in the hotel sector globally and the performance of hotels has improved significantly, almost to pre-crisis levels, especially in the rest of Africa and the USA.
Local hotel industry respondents say that South Africa will not attract the same levels of funding expected in other parts of sub-Saharan Africa, but that confidence is certainly increasing.
“There are huge opportunities in the rest of Africa and there are still some in South Africa. Our appetite for investment in Africa is positive while we are still cautious locally,” said a survey respondent from a South African development finance institution.
Saunders says that while Africa is a bit behind the curve, respondents indicate that African banks are becoming more sophisticated and are now starting to look at the sector seriously.
“One bank in Egypt, for example, has specific programmes, projects and structuring to tackle the hotel business on the African continent. They have what they call a construction tourism loan where they help a local bank, in Ghana or Kenya for example, to do the construction funding,” Saunders adds. “They give the guarantees for the construction funding loans. It’s basically really smart executives in Africa looking at clever ways for African banks to invest.”
Saunders says that across the continent institutional investors and especially pension funds are becoming increasingly interested in the hospitality industry as opposed to the historic funders, like the HNW investors for example.
“The world of hotel finance has changed massively in a short time,” she says. “Emerging as a result of the financial crisis is a more sophisticated and ultimately more effective understanding between investors and lenders as well as the hotel businesses. This new environment is welcome and comes at a time when there is a resurgent appetite to invest and lend to the sector. It’s promising for the intelligent financing of sustainable future growth in the sector.
“Pre-2008 many banks treated hotel businesses like real estate,” Saunders continues. “Now they’re viewing them as business enterprises. Instead of the historical focus on loan to value ratios (LTVs), specialist hotel finance teams are analysing EBITDA and leverage multiples. In short, checking whether debts can be serviced and cash flows sustained. It’s a more grown-up dialogue.”
Grant Thornton advises growth-focused hotel businesses to step up their finance proposals if they are to be successful in meeting the demands of increasingly measured lenders. The five areas for companies to address are: branding, management, finances, the business plan and marketing.
Gillian Saunders says: “Banks and private equity investors want much more insight. The days of turning up with a one-pager are over. Among other things, they want to hear a good equity story with aligned investor interests. It’s also vital to demonstrate an experienced, committed management team with a business plan that shows knowledge of target market segments and has a business case aimed at them.”