Financing Hotel Pipe Dreams: Not for the Light-hearted



The future looks promising for the hospitality industry in Ethiopia. But hotel projects are likely to remain pipe-dreams since getting the necessary financing is far easier said than done, writes David Desta (destadavid@gmail.com), a Cornell University graduate from the School of Hotel Administration who has been working in Ethiopia for the past several years.


The idea of building a hotel is exhilarating. The opportunity to be involved in the design and character of a property is like none other. However, as enticing as this might seem, many people forget the main driving force behind these projects – financing the dream project.

Ethiopia has seen an influx in the hotel development pipeline, with 86pc of these deals signed in Addis Abeba, according to an annual report from W-Hospitality. Currently, there are 31 hotels under development, an increase from the previous year’s 20, increasing the number of beds in the country by over 5,000 rooms.

These figures might seem appealing, but hotel pipelines do not mean anything unless the projects are actually completed. While driving in Addis Abeba, one can see the monstrosities of unfinished hotel skeletons across town – a bleak sign that many of these projects will fail to see the light of day.

Africa has a huge potential, but it is not for the fainthearted. Finding the right opportunity is incredibly tough, and finding the right financing partner is just as menacing.

The Ethiopian government has long supported the development of hotels with tax incentives and duty-free privileges for new construction. However, given the unappealing financing market, it has been difficult for most of these properties to open their doors. Some of the challenges facing developers are high borrowing rates and lack of access to foreign currency.

Interest rates in Ethiopia should be approached with caution, as rates are currently floating around 17pc. Couple this with short loan terms and delayed loan disbursements by the private banks, and it can be extremely difficult to see any return on investment from an owner’s standpoint.

Furthermore, the inability to access foreign currency makes it nearly impossible to import all the essential furniture, fixtures and equipment to complete a project. Do not forget that it can take up to a year and a half to open a letter of credit.

Sub-Saharan Africa has high and stable growth potential. However, access to capital is very difficult. Fortunately, there are alternative sources of financing that can help bridge the capital divide – development finance institutions (DFIs) or investment groups.

The Organisation for Economic Cooperation & Development defines DFIs as specialised development banks or subsidiaries set up to support private sector growth.

They are usually majority-owned by national governments and source their capital from various funds. They typically provide credit and a wide range of capacity building programs to businesses, even large private corporations, whose financial needs are not sufficiently met by private banks or local capital markets.

They tend to promote strategic sectors of the economy, such as agriculture, tourism, infrastructure and trade. Some examples of DFIs are the United Kingdom’s CDC Group, France’s AFD Proparco, Germany’s KFW and the International Finance Corporation. These groups engage in hotel investments that have an impact on local communities, including the creation of jobs, sourcing of local produce and providing services.

Hotel brands, on the other hand, are not necessarily a good source of financing. Most international brands are moving toward a “capital-light” strategy, meaning that they are less likely to invest their resources into real estate investments. Their objective is to grow their brands through revenue-generating management and franchising agreements that require significantly less investment on their end.

However, some brands have set up funds to help ease the financial hassle many developers are facing, such as the one-billion-dollar investment fund set up by Accor Hotels and Katara Holdings, a Qatar-based investment group, and the 50 million dollar Hilton Africa Growth Initiative.

But how can one tap into the vast resources of these financing institutions and what do they look for in a hotel project?

The “if you build it, they will come” phrase does not apply.

Hospitality projects are seen as risky investments and need to be thoroughly analysed before a financier deems a project viable. One requirement that is essential is to have a thoroughly vetted feasibility study conducted by a reputable firm with experience in the industry. After all, the devil lies in the details, and one will need to have an extensive, realistic financial report to determine if the project will make it past the financier’s door.

It would also be wise to have a recognisable operator or brand at the helm of the project. Institutions want to be sure that their investments will yield a return and not fail. As a result, they are more likely to rely on the experiences and reputation of a hotel brand or operator that has managed hotel assets before.

If one is a new entrant to the hotel business and does not have a track record, the option to go independent may be a determining factor in a project not receiving financing.

In the long run, by choosing a brand to operate a hotel, one will be required to follow strict brand guidelines and requirements, invest in property improvement plans and handover a significant portion of the revenues by way of management, franchise or brand royalty fees.

If not, one might have the unfortunate fate of having a multi-million-dollar project fail to get past the construction phase unless that person invests more of their own money. And let us be honest, that is not a thing any developer would want to do.

Lastly, the project will need to have an impact on the local environment. DFIs consider how the project will improve the livelihood of the community, whether it be through job creation, building materials, energy and water sustainability, waste management, local supply chain sourcing or education.

If one’s sole objective is to turn a profit, it is better not to bother making an inquiry, because the chances of being turned down are high. On the other hand, if one hopes to add value to the community that hotel will operate in, it is crucial to be sure to illustrate how those goals will be achieved.

I had the pleasure of attending the 2018 African Hotel Investment Forum earlier this month in Nairobi – a leading investment conference attended by the highest calibre of international hotel investors on the continent.

During one of the headline financier and investor panels, the key highlight was that hotel owners and developers seeking capital from development finance institutions or private capital should do four things: come prepared, come early, have a sustainable structure and view the deal as a partnership.

Overall, despite the trouble with accessing financing, the outlook of the African hotel market is positive and bullish.



By David Desta
David Desta (destadavid@gmail.com), a Cornell University graduate from the School of Hotel Administration who has been working in Ethiopia for the past several years.

Published on Oct 20,2018 [ Vol 19 ,No 964]


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