The appetite for hospitality real estate finance from commercial banks and Development Finance Institutions (DFIs) has reduced significantly following the pandemic according to a report by JLL.
Similarly, hotel owners and developers have trimmed down on borrowing in the face of risk and uncertainties.
Most banks and financial institutions have in recent times been more willing to support with working capital as opposed to development financing, acquisitions or other capital intensive arrangements in hospitality.
Earlier in the year, lender appetite for hospitality real estate in Sub-Saharan Africa was improving with banks and DFIs actively looking to increase their exposure in the sector, until the markets were intercepted by Covid.
In the aftermath, Sub-Saharan Africa has been largely exempt from global private equity trends where there have been a number of PE funds seeking to mop up distressed debt in real estate and other sectors.
“Internationally, financial institutions offering equity and mezzanine financing have clients looking to use these instruments to purchase distressed assets when they come to market. This angle is, however, premature in the African context, where distress is only expected to come through the system in a few months,” he report says.
Lending requirements for hospitality real estate is expected to become more stringent as the hotel industry navigates the recovery period. Strong covenants and additional security will prove advantageous in addition to the usual requirements.
“Now, more than ever, banks take comfort in their contracts with international hotel brands, which provide more cover during difficult economic times,” it says.
Commercial banks and DFIs are taking a wait and see approach when evaluating new deals while they continue to favour lease agreements over management agreements, due to the predictability in cash flow that it provides.
“The longer-term thesis for investing in hotels in Sub-Saharan Africa remains, namely the emergence of regional and domestic travellers, where growth is fueled by economic
growth and easing of travel in the region,” the report adds.
However, transaction activity increase in Q4 2020 through 2021 according to the outlook.