Hospitality Sector Set to Experience Growth Due to Improved Security in the Country

The hospitality Sector in the country is set to pick up due to improved security and government incentives.

These incentives from the government include heavy marketing, with Kenya Tourism Board being given a budgetary allocation of 1.5 billion shillings for marketing, star rating of hotels, facilitating the streamlining of service provision, promotion of domestic tourism, and last week, the ministry of tourism hired a Spanish Consultancy firm – Innovative Tourism Advisers (THR) to evaluate and advice the National Government on how to reinvent tourism in Kenya.

Due to the above factors and the unique tourism product bouquet offered by Kenya of beach, safari, business, and ecotourism, Cytonn Investments has the opinion that the sector will pick up and that the tourism numbers are likely to increase in and revenues too. In the next 2-years, domestic tourism will thus be a key driver for the sector.

Simba Corporation, the organization behind the Villa Rosa Kempinski, announced plans to open a 3-star hotel in Naivasha under their Acacia Hotel Chains to cater for business travelers. The hotel will have 72-rooms and 3-suites and will go by the name Acacia Express Hotel. The group launched the Acacia chain of hotels in last year with the Acacia Premier being opened in Kisumu. Hoteliers have remained bullish on the hospitality sector despite the challenges facing it.

This is evidenced by the fact that room supply bucked the declining trend in the industry, increasing by a 4-year CAGR of 3.8 percent, despite a decline in international arrivals, total revenue per room and occupancy by 4-year CAGR’s of 10.3 percent, 5.8 percent and 7.8 percent, respectively.

On the other hand, the industrial real estate theme continues to grow with the International Finance Corporation (IFC) planning to invest 1 billion shillings in equity in Africa Logistics Property (ALP), an integrated commercial property investment platform based in Nairobi.

ALP is raising 7 billion shillings to invest in three industrial parks: Tatu City in Ruiru, Tilisi in Limuru, and Embakasi area in Nairobi.

The company has acquired 71-acres of land, and is set to begin construction on the three sites Q1’2017.  The company plans to deliver Grade-A warehouses to attract key international players in the fast-moving consumer goods, importers of construction equipment and players in the nascent oil and gas industry in Kenya, which is the long-term strategy for the firm. The move comes as the government and other players have increased their focus on industrial development, driven by an improvement in infrastructure and growth in the economy, which have created a demand for specialized logistics and industrial parks.

Other firms in the logistics business seeking to expand include Bollore Transport and Logistics Ltd Company, which aims to invest 2.2 billion shillings to create a logistics hub as part of its expansion efforts. County Governments are also picking up the trend, with the Nakuru County Government announcing that it is set to open two industrial parks in the county, one in Nakuru and the other in Naivasha.

Industrial parks as a real estate theme is growing in Kenya due to several factors including:

1. Improved infrastructural development especially road networks such as the Lappset Project, the Standard Gauge Railway (SGR) and the bypasses (Eastern and Northern), as well as the Thika Superhighway. These infrastructural developments have increased ease of access of warehouse zones such as Mombasa Road, Industrial Area, Ruai, Ruiru and Baba Dogo, which are close to the Jomo Kenyatta International Airport in Nairobi,
2. Growth in the retail and Fast Moving Consumer Goods (FMCG) segment, which has resulted in increased demand for warehousing space. Retail space in Nairobi alone has grown by a 17 percent CAGR over the last 5-years,
3. Government support through provision of infrastructure including electricity and water and establishment of Export Processing Zones, and,
4. Growth of master planned cities which factor in industrial precincts and offer land at relatively lower prices attracting investments such as Tatu City, Konza Tech City, Tilisi and Northlands City.

The above factors have made the industry, initially full of owner-occupation, become more institutionalized with the ratio of owner occupiers to developers being 35:65 according to Mentor Management Limited. The industry has also witnessed increased standards of quality and specialization with higher, better equipped warehouses such as the Imperial Logistics Warehouse for Pharmaceutical products along Mombasa Road. Currently the sector earns average returns, but with increased institutionalisation, competition and innovation we are likely to witness higher rents being charged on warehouses.

From a  research conducted by Cytonn Investments Company, on average, the rental yield in warehouses in Kenya as at February 2016 was 6.2 percent with average rental rates of 37 per square foot, prices of 5,749 per square foot and occupancy rates of 82 percent.

Related: Kenya’s Ministry of Tourism, Amadeus and UNWTO sign pact to promote travel and tourism