East Africa’s high set-up costs worry hotel chains

Saturday September 29 2012

The Sankara, a 5-star hotel in Westlands, Nairobi. Photo/FILE

When top executives of the world’s leading hotel chains flew to Nairobi on Monday seeking to tap into East Africa’s rising demand for hospitality facilities, underneath the surface optimism were gnawing worries.

East Africa has been on the radar of upmarket hotel chains such as Carlson Rezidor which operates under the brand name Radisson Blu; Marriott which owns the famous Ritz-Carlton hotel chain, and leading global brands Best Western, Accor, Hilton, Kempinski and Dubai-based Emmar.

At the Africa Hotel and Investment Forum held in Nairobi last week, executives of six leading hotel brands — Best Western, Radisson Blu, Park Inn, Three Cities, Kempinski and Lansmore — announced that they are finalising their entry into the Kenyan market.

Long, complex procedures for securing title deeds and construction permits are the biggest challenges for investors in the hotel industry looking to make inroads into East Africa, and could significantly delay planned projects in the region.

As a result, as in the case of Nairobi, hotel chains are charging clients a premium, more than they do in South Africa, as they seek to recoup costly setting-up and operational expenses.



Indeed, executives attending the two-day conference said the costs of obtaining permits and registering property could unsettle their plans. 

In the case of Southern Sun Mayfair hotel in Nairobi, Graeme Wood, the managing director of Southern Sun Hotels, says the costs of getting a title for land, and the construction of the hotel, are the highest in the EAC, far above other African regions.

“We have found that development costs in Kenya, for example, can be one-and-a-half times more than in South Africa,” said Mr Wood.
South African company Tsogo Sun acquired the hotel in late 2010.

“How we mitigate these costs is by charging higher room rates, and working to increase occupancy. That’s why, on average, hotel accommodation in Kenya is more expensive than in South Africa,” he said. 

It costs $255 a night for a standard room at the Southern Sun in Nairobi, according to the hotel’s website. But the same room at Southern Sun Elangeni in Durban, facing the seafront, costs $249.

“The biggest challenge in investing is the time it takes to get property standing,” said Kurt Ritter, president and CEO of Rezidor Hotel Group, which is planning to put up a five-star hotel in Kigali, and a 256-room hotel in Nairobi’s Upper Hill area. “It really takes a lot of stamina.”

According to the IFC’s Doing Business in the East African Community 2012 report, entrepreneurs in the EAC must go through an average of eight procedures, wait 61 days, and pay up to 4.7 per cent of the value of the property in order to register it.

In contrast, it takes six procedures, 55 days, and 7.4 per cent of the property value to register in the Southern African Development Community.

There is a great variation among the EAC economies. According to the report, registering property in Rwanda is the quickest — five procedures requiring 25 days.

Yet Rwanda’s cost of registration is considerably higher, averaging 6.3 per cent of the property value — more than twice the price in Uganda, which is the least expensive in the EAC. Registering property is slowest in Burundi, where it takes 94 days.

“Burundi’s land registry has to perform due diligence for the transfer of property to the buyer’s name, and might do a field inspection of the land,” the report states. “The due diligence alone could take one or two months.”

The demand for hotel space is being pushed up by the increasing number of expatriates working for businesses seeking regional expansion.

Rwanda reportedly needs about 6,000 hotel rooms by the end of the year to accommodate the rising number of tourists, but supply is estimated at just 4,260. In 2010, Rwanda received about 666,000 tourists who contributed $200 million to the economy.

Expansion plans

Recently, much of the focus has been on Marriott’s new $55 million 250-room, 5-star hotel in Kigali. But this is only one of several new developments planned for East Africa.

Hilton Hotels, already a well-established brand in the region, is looking to extend its footprint. “We want to convert existing hotels to bring them under the Hilton brand,” said Patrick Fitzgibbon, the company’s senior vice president for development in Europe and Africa.

“It’s a strategy that has worked in Dar es Salaam and Zanzibar. In Kenya, we’re looking to do the same in Mombasa and Malindi, and probably build another hotel in Nairobi. We also want to expand into Uganda,” he said.

Hilton is planning an additional 19 hotels across sub-Saharan Africa, to add to its existing 33.

The Intercontinental Hotel Group is expanding into Kampala, seeking to cash in on the growing demand for accommodation and conference facilities. The group has partnered with Kingdom Kampala, a company owned by Dubai-based Azure Holdings Ltd, to run the hotel.

The $80million investment, with 303 rooms and 34 suites, is under construction. It joins other international brands already in the city such as Sheraton, Serena, Protea and Hilton.

Kenya’s hotel capacity is estimated at 50,000 rooms, but the growing number of international visitors could strain the supply — meaning that the country must remove the bottlenecks that hold up hotel development.

“Kenya’s strategy is to bring in these big brands who will either set up shop afresh, or buy into existing facilities, ” said Marianne Ndegwa Jordan, the managing director of the Kenya Tourism Development Corporation.

The upcoming hotels are expected to create a bed capacity of at least 4,000 in the next five years. Big hotel chains are said to be interested in buying eight hotels in which Kenya’s government wants to sell its stake.

The government’s stake in another three hotels — Hilton, Intercontinental and Mountain Lodge — is also up for grabs, although priority will be given to the existing shareholders.

READ: Delay in top hotels sell-off causing anxiety

Some 1.8 million international visitors came to Kenya last year, earning the country Ksh97.9 billion ($1.1 billion), up from Ksh73.7 billion ($852 million) in 2010.

In its latest report on economic indicators, the Kenya National Bureau of Statistics data shows that the number of tourists entering the country  through its two main international airports was more than 100,000 in July, the highest in five months.

Additional reporting by Paul Redfern