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Hospitality Sector Report – “Sailing through the storm’’

By Cytonn Research Team, October 16, 2016

Kenya’s real estate sector has continued to attract both local and international investors who aim to tap into the potential brought about by robust economic growth of 6.2% as at Q2’2016 and projected to be an average of 5.0% over the next decade, the growing middle class with higher disposable incomes, and improving infrastructure, which has opened up satellite towns for development. The hospitality sector in specific has recorded increased investment as seen through the establishment of hotel and serviced apartment developments. Hotel bed supply has been increasing at a 3% CAGR over the last 5-years, while the supply of serviced apartments in Nairobi alone has grown at a CAGR of 23.6% over the last 4 years. Some of the hotels in the development pipeline include Park-Inn by the Carlson Rezidor Hotel Group in Westlands, Best Western’s Premier Collection, The Alba and the City Lodge at the Upcoming Two Rivers Mall, which are expected to add 253 hotel beds to the supply over the next 1 year. This is an indication of appetite for investment in hotels in Nairobi.

However, the performance of the hospitality sector in Kenya has been on the decline with occupancy levels, international arrivals and Total Revenue per Available Room declining by CAGRS of 7.8%, 10.3% and 5.8%, respectively, over the last 5-years. The decline is attributed to insecurity brought about by terrorist attacks, which in turn led to issuance of negative travel advisories, thus lowering demand for accommodation and other hotel-related services. Other challenges affecting the sector include heightened competition from both local and emerging markets in the region such as Ethiopia, with relatively low room rates.

We therefore conducted a research focused on hotels in Kenya and serviced apartments in Nairobi, to inform the market of the current trends in the industry pertaining to occupancy, demand and revenues, the outlook for the sector and thereafter to identify the ideal regions and sectors for investment.

From our survey, the best opportunity for investment lies in serviced apartments in Nairobi due to high occupancy. In addition, 3 and 5-star hotels in Maasai Mara stood out as the best performing in Kenya.

Performance of Hotels according to Star Rating was analyzed with the following results achieved;

Kenya Hospitality Sector Performance according to Star Rating

Hotel Category

Average Daily Rate (USD)

Daily Total Revenue Per Available Room(USD)

% of TRevPAR relative to the ADR

3 Star

140

61

43.0%

4 Star

199

86

44.0%

5 Star

368

176

48.0%

Average

236

108

45.0%

• Three star hotels in Kenya charge USD 140 per night, Four-Stars USD 199 and 5 Stars USD 368 per night on average

• Five star hotels generate the highest revenues per available room with an average Trev PAR of USD 176 as compared to USD 61 and 86 for 3 and 4 star hotels, respectively

TRevPAR is the Total Revenue Per Available Room

ADR is the Average Daily Rate  

Source: Cytonn Research

We also compared occupancy, rates and Total Revenue Per Available Room per region as shown below;

Kenya Hospitality Sector Regional Performance

Regions

Occupancy Rate

Average Daily Rate (USD)

No of Rooms

TRevPAR(USD)

Maasai Mara Region

37.0%

395

397

182

Nairobi

51.0%

229

4,389

149

Mt Kenya Region

29.0%

256

485

133

Nakuru Naivasha Regions

29.0%

218

614

81

Coast

29.0%

152

1,909

57

Nyanza

28.0%

140

501

50

Eldoret

25.0%

92

           341

32

Market Average

33.0%

212

8,636

98

•  The best performing market is Maasai Mara Region, which has an ADR of 395, a TRevPAR of USD 182 with an average annual occupancy of 37.0%. This is due to the high room rates charged in Maasai Mara being host to the 7th Wonder of the World

•  Eldoret is the worst performing market in our sample as region has little economic activity revolving around tourism and business meetings as it is predominantly surrounded by an agricultural hinterland

Source: Cytonn Research

Serviced apartments have become increasingly popular in the market, with Nairobi alone having more than 60 brands of serviced apartments with more than 2,500 apartment units. Increased supply of serviced apartments has largely been boosted by a number of factors including their relative affordability compared to hotels, home away from home feel, security and the fact that they tend to have more space than hotel rooms.

In Nairobi alone, Westlands has the largest supply of serviced apartments with a 38.7% market share, followed closely by Kilimani at 24.0%. These areas are attractive to both clients and investors due to the proximity to CBD and the presence of several corporate offices hence availability of a ready market especially from the expatriate community.

An analysis to find serviced Apartments Performance by Region in Nairobi is shown below;

Nairobi Serviced Apartments Performance

Node

Occupancy

Average Daily Rate (USD)

TRevPAR (USD)

Upperhill

97.0%

172

172

Lavington

90.0%

150

135

Kileleshwa

89.0%

145

129

Gigiri

97.0%

132

128

Westlands

85.0%

151

128

Kilimani

79.0%

141

111

CBD

90.0%

95

85

Average

90.0%

141

127

•  Upperhill is the best performing market with an average Total Revenue Per Room of USD 140, the high revenues are as a result of the high occupancy in the market of 97.0%

•  CBD has the lowest total revenue per available room of USD 85.  This is as the area is not prime with the serviced apartments in the node being relatively old hence unable to a fetch a premium in the market

Source: Cytonn Research

To establish the most lucrative investment in the hospitality sector, we compared the Average Daily Rate, Total Revenue Per Available Room as well as Occupancy Rates between hotels and serviced apartments.

Hotel vs Serviced Apartments Performance

 

ADR (USD)

Total RevPAR (USD)

Occupancy Rate

Hotel

212

98

33.0%

Serviced Apartments

141

127

90.0%

Average for the Hospitality Sector

177

113

62.0%

•  Serviced apartments outperform hotels in terms of revenues earned per room, earning on average USD 127 against hotels average of USD 98 per room. This is despite the fact that on average a serviced apartment is 50.0% cheaper than a hotel room

•  This can be attributed to the high occupancy rates of serviced apartments of 90.0%, against hotels average of 33.0%

•  Serviced Apartments thus present the better investment opportunity in the hospitality industry

Source: Cytonn Research

Consumer Sentiments

We went further to find out consumer’s sentiments on both hotel and serviced apartment use.

On hotels’ consumer sentiments, the following were the key take outs:

  • Most of the respondents were Kenyans with 39.7% visiting hotels on monthly basis with most visits being for business and leisure activities.
  • 9% of the users visit gym, swimming pool & spa, bar and restaurants with Wi-Fi being pointed out as an important consideration in hotel rooms
  • 1% of the hotel services consumers find the prices affordable with the 15.9% who find the prices high, suggesting affordable hotel charges to be less than Kshs 10,000 per day

On serviced apartments’ consumer sentiments, the following were the key take outs:

  • Majority of the respondents are Kenyans and had one bedroom as the most preferred serviced apartments, at 44.0%; three bedrooms is the least preferred at 2.0%
  • 0% of respondents cited gym, swimming pool & spa, restaurant & bar as the most visited sections in a serviced apartment, while business lounge is the least visited
  • Bar & restaurant, business services, conference facilities, gym, swimming pool & SPA are the basic facilities sought in serviced apartments
  • The average charges per night are mainly between Kshs. 10,000 – 20,000
  • 0% of the consumer’s book for their services online, a process they deem convenient as compared to manual bookings

Hospitality Sector Outlook

We used hotel supply, market performance, consumers’ sentiments and investment opportunities to determine the hospitality sector outlook.

Summary of Hospitality Sector Indicators

Measure

Sentiment

Outlook

Supply

There is an oversupply of hospitality space with an annual bed capacity of 20 mn of which only 5.8mn was occupied in 2015

Negative

Hotels Market Performance

Occupancy rates and revenues have been declining over the last five years.  2016 is however bucking the trend with expected higher international arrivals and hence higher occupancy levels. This is expected to be sustained if the security situation continues as is

Positive

Serviced Apartments Survey

Serviced apartments currently enjoying high occupancy rates of on average 90% and high returns, with TRevPAR of USD 127 against USD 98 for hotels

Positive

Consumer Survey

Most find the prices affordable and the services relatively good though feel there is need for innovation in service provision

Positive

Opportunity

Serviced apartments are good investment opportunity especially in Upper hill and along Kiambu Road. This is as they have high demand and occupancy rates and relatively high returns

Positive

MICE Tourism

The number of delegates between 2011 and 2015 increased translating to demand for accommodation for these delegates

Positive

Source: Cytonn Research

In conclusion, hotels are struggling to recover from insecurity challenges that have caused a decline in occupancy and revenues while increasing costs especially with regards to security and marketing; while serviced apartments are thriving, recording high occupancy levels and high returns. The opportunity in this sector thus lies in serviced apartments in Nairobi given the high returns to investors. For hotels, the 3 & 5-star rated hotels in Maasai Mara as well as 4 Star rated hotels in Nairobi offer the best investment opportunity. They should however be differentiated by either product offering, location or customer service to attract high occupancy levels as there is an oversupply in the market.   Cytonn Hospitality Report


 

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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.

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© 2017 Cytonn Investments Management Ltd