Effective risk mitigation in African hotel and resort development: Lessons from Africa

April 8, 2025

The rapid expansion of Africa's hospitality sector remains promising. This is clearly indicated throughout the W Hospitality Group's 2025 Hotel Chain Development Pipelines in Africa Report. The report, considering inputs from 50 international and regional (African) hotel chains, identifies future openings of 577 new branded hotels and resorts as of early 2025, comprising 104,444 rooms across 42 African countries. Further consideration of the W Hospitality Group's report highlights the significant legal and regulatory considerations within the industry. Hotel development in Africa requires careful navigation of multiple legal frameworks, including construction, real estate, hospitality licensing, FDIs and employment. This calls for an integrated approach to risk management, combining legal expertise with on-the-ground advisory experience.

Comprehensive risk management strategies

Pre-development

Market and financial feasibility studies form the cornerstone of risk mitigation in hotel development. These studies extend beyond conventional market analysis to incorporate and address Africa-specific risk factors, including political stability, currency volatility, infrastructure reliability, market seasonality and competition from both formal and informal sectors. Financial modelling must incorporate sensitivity analyses for key risk factors such as construction cost overruns, timeline delays, currency fluctuations, market demand variations and escalations in operating costs.

Pre-development risk assessments begin with verifying land titles. Diverse land ownership systems across African jurisdictions range from traditional ownership structures to freehold and various forms of leasehold structures, necessitating comprehensive due diligence. Developers must verify title and ownership history, ensure zoning compliance and adherence to land use restrictions, conduct environmental impact assessments, address traditional rights and community claims, and ensure access to utilities and infrastructure.

Development

The development phase demands the meticulous structuring of legal entities and contractual frameworks. The choice of corporate and project structure influences legal and regulatory compliance obligations, with structures including direct ownership, joint ventures with local partners, management contracts and franchise agreements - 95 per cent of the hotels and resorts in W Hospitality Group's pipeline report are management or franchise agreements between a hotel chain and an owner. Each structure requires specific contracts to address risk allocation between parties, performance obligations, default scenarios, dispute resolution mechanisms and exit strategies.

Construction documentation should incorporate strong legal protections through detailed technical specifications and compliance requirements, quality control and inspection protocols with binding consequences, and performance security instruments including bonds, guarantees, and letters of credit. The documentation must also establish milestone-based payment mechanisms with corresponding lien rights, contractor warranties and defect liability provisions, force majeure and delay provisions; and must ensure compliance with local content requirements and labour laws.

Operational management

Operational risk mitigation in African hotel development requires strong legal frameworks governing operator relationships and performance standards. The operator selection and management process must be supported by management agreements that address performance benchmarks, operational controls and compliance obligations, including demonstrated capacity in African markets, mandatory training protocols, quality assurance systems and brand standard compliance. The agreement should establish financial and operational requirements, including working capital obligations, revenue management protocols, cost control procedures, currency risk allocation and mandatory insurance coverage, while specifying termination rights, cure periods, and transition obligations to protect owner interests while maintaining operational continuity.

Legal and regulatory considerations

Legal and regulatory compliance varies widely across African jurisdictions, necessitating careful attention to operating licenses and permits, employment regulations, health and safety standards, environmental compliance and foreign exchange controls. Effective dispute resolution mechanisms are crucial, emphasising the importance of considering aspects such as choice of law principles and the availability of alternative dispute resolution methods as well as the impact of local legal practices and court processes on disputes and their outcomes.

Case study: The development of the Lagos luxury hotel

The Lagos Luxury Hotel Development ("LLH") serves as a prime example of effective risk mitigation in the African hospitality sector. This 250-room luxury development, launched in 2021, encountered numerous challenges typical of major urban developments in West Africa. The LLH development team's early engagement with local authorities proved crucial, as they established a dedicated liaison office six months before breaking ground. This proactive strategy enabled them to navigate complex local building regulations and secure necessary permits without facing the significant delays which often accompany projects of this nature. Additionally, the team commissioned an environmental impact assessment to identify and address potential community concerns from the outset of the project.

The project's phased development approach proved particularly beneficial when supply chain disruptions threatened the proposed construction timeline. By dividing the development into three distinct phases - first the main building, then the conference facilities, and finally the leisure amenities - the team maintained flexibility in their construction schedule and cash flow management. This approach further enabled the hotel to commence partial operations and generate revenue while later phases were being completed.

The LLH project's development team created a structured scorecard system to evaluate potential operators against various factors: their existing presence in Africa, local market knowledge, training capabilities, and financial strength. This methodical approach resulted in the selection of an operator whose brand standards were well-suited to local market conditions while upholding international quality expectations. The operator agreement featured carefully negotiated force majeure clauses and performance metrics that protected the interests of both parties.

Local partner relationships were crucial to the project's success. The LLH development team formed a joint venture with a respected local real estate developer who had deep community ties and a strong understanding of local business practices. This partnership facilitated smooth interactions with contractors, assisted with navigating local labour laws, and provided insights into the market's supply chain.

Case study: The East African resort project

In contrast, the East African Resort Project ("EARP") encountered significant challenges that could have been avoided through more thorough initial planning. Title due diligence issues emerged six months into construction when competing claims to portions of the beachfront property surfaced. The EARP development team discovered that historical community land rights had not been properly documented or addressed in the initial title search. This oversight resulted in a nine-month construction delay and required substantial legal interventions to resolve the issues.

The EARP project's construction contracts, which were relatively inflexible, became problematic when local currency depreciation impacted material costs. The contracts lacked adequate provisions for price adjustments and currency fluctuations, leading to disputes with contractors and subsequent delays. The EARP development team had to renegotiate several key contracts mid-project, underscoring the importance of incorporating flexibility into construction agreements from the outset.

The importance of experienced local counsel became evident when navigating the complex zoning changes that impacted the project. The initial legal team, while competent in general commercial law, lacked specific expertise in local hospitality development regulations. Consequently, the project required further engagement from specialised hospitality sector lawyers who were well-versed in both local regulations and international hotel management agreements.

Currency risks had a significant impact on the EARP's profitability. The development was financed in US dollars (debt and equity), while a substantial portion of operating revenues was in local currency. The lack of adequate currency hedging mechanisms and provisions in the operator agreement for sharing currency risk led to considerable pressure on operating margins during the initial years of operation.

Perhaps most significantly, the project faced resistance from the local community due to insufficient early engagement. Local communities expressed concerns about beach access rights and environmental impact, resulting in negative publicity and strained relationships with local authorities. The EARP development team eventually had to implement a comprehensive community engagement program, which included local employment guarantees and beach access agreements. However, these reactive measures proved more costly and less effective than a proactive approach would have been during the planning phases.

Key takeaways

These case studies show the need for pre-construction due diligence, as well as how crucial early stakeholder engagement can be, engagements with local authorities, communities and potential partners from the inception of a project, as well as during construction and operation. Another critical takeaway comes from implementing flexible, yet well-structured contracts that account for both local market conditions and potential disruptions. The local considerations required to draft and conclude these agreements emphasise the value of engaging experienced local counsel with hospitality-specific expertise. It is important that due consideration is given to currency risk management, and that governing provisions are integrated into project planning.

Concluding remarks

The evolving landscape of hotel development across Africa presents both opportunities and evolving risks. Key legal considerations include the impacts of climate change, fluctuations in consumer preferences, technology disruption, market saturation in key cities and evolving regulatory frameworks. Success in African hotel development requires thorough due diligence, expertly prepared market and financial feasibility studies, carefully structured contractual frameworks, adaptable development planning mechanisms, documented stakeholder engagement protocols and systematic risk monitoring procedures.

Trevor Ward: Shaping Africa's hospitality industry

Trevor Ward has played a key role in developing Africa's hotel and resort industry. As Managing Director of W Hospitality Group, he brings valuable experience to the sector.

Ward specializes in market analysis, feasibility studies, and strategic planning, helping both international and local hotel chains understand African markets. His company provides practical guidance on legal, regulatory, and operational aspects of hotel development.

Through his focus on sustainable growth and risk management, Ward has become an important figure in expanding Africa's hospitality sector.

Authored by Deepna Desai (Associate), Monique Bezuidenhout (Candidate Attorney) and Trevor Ward.