Ho­tel de­vel­op­ment op­por­tu­ni­ties in the Nige­rian re­ces­sion

There are ad­van­tages to in­vest­ing now in Nige­ria, al­beit with cau­tious and more pru­dent strate­gies than be­fore.

Financial Nigeria Magazine - - Contents - By Damilola Ade­poju

In a re­cent com­ment about Nige­ria’s cur­rent eco­nomic re­ces­sion, Eme Essien-Lore, the In­ter­na­tional Fi­nance Cor­po­ra­tion’s Coun­try Man­ager for Nige­ria, was op­ti­mistic the econ­omy would re­bound this year. The World Bank has fore­casted 1% real GDP growth for Nige­ria in 2017, while the In­ter­na­tional Mon­e­tary Fund’s growth fore­cast for the coun­try is 0.8%. Al­though Ms. Essien-Lore ob­served that these fore­casts are mod­est and lower than the Nige­rian gov­ern­ment’s 2017 growth ex­pec­ta­tion of 2.19%, her as­sess­ment was “that the econ­omy would re­cover from last year’s re­ces­sion.”

The coun­try ex­pe­ri­enced its worst eco­nomic per­for­mance in 25 years, record­ing -1.5% GDP growth. This was largely due to low oil prices, low oil out­put due to mil­i­tant at­tacks on oil in­fra­struc­ture, and tight mon­e­tary liq­uid­ity. The ef­fects of this re­ces­sion have been felt in many sec­tors, in­clud­ing in the ho­tel and travel sec­tors.

In the Ho­tel Chain De­vel­op­ment Pipe­line in Africa 2016 re­port, pub­lished by W Hospi­tal­ity in May last year, Nige­ria main­tained its num­ber one po­si­tion on the top 10 list for ho­tel deals signed – with 61 ho­tels and over 10,000 rooms planned. How­ever, when an­a­lyzed by the per­cent­age of deals that were ac­tu­ally un­der con­struc­tion, Nige­ria lost its num­ber one po­si­tion and fell to num­ber four, be­hind An­gola, Egypt and Morocco. Only 40% of the deals signed in Nige­ria had moved to the con­struc­tion phase. This was the low­est pro­por­tion for any of the coun­tries listed in the top 10.

As noted in the re­port, even some of the deals listed as “un­der con­struc­tion” have stalled for some time af­ter work started. The lag in the time be­tween sign­ing a ho­tel deal and its even­tual open­ing con­tin­ues to widen due to var­i­ous fac­tors, in­clud­ing the speci­ficity of ho­tel con­struc­tion, high cap­i­tal in­vest­ment re­quired, lim­ited ac­cess to raw ma­te­ri­als, a re­liance on im­por­ta­tion, and lim­ited tech­ni­cal ca­pac­ity to man­age the de­vel­op­ment project.

Some of the notable im­pact of Nige­ria’s eco­nomic down­turn on the ho­tel and travel in­dus­try are briefly dis­cussed be­low:

• United Air­lines’ can­cel­la­tion of its only African route (Hous­ton to La­gos) in May 2016, due to for­eign ex­change re­stric­tions im­posed by the Cen­tral Bank of Nige­ria, and low per­for­mance of the route. The route had been op­er­a­tional, al­though not prof­itable, as it mostly served the oil and gas com­mu­nity in Hous­ton. But the down­turn in the oil sec­tor, meant sig­nif­i­cantly re­duced oil­re­lated busi­ness travel. Hence, it no longer be­came vi­able for the car­rier to con­tinue op­er­at­ing the route.

• A sub­stan­tial de­crease in for­eign busi­ness vis­i­tors to the coun­try and lower do­mes­tic cor­po­rate spend­ing. The ho­tel mar­ket was left with a sub­stan­tially smaller de­mand mar­ket and ho­tels had to en­gage in price wars to main­tain com­pet­i­tive­ness and at­tract de­mand. Bruce Prins, a La­gos-based hospi­tal­ity con­sul­tant, noted in the Ju­mia 2017 Nige­ria Hospi­tal­ity Re­port that some ho­tels fo­cused on gen­er­at­ing de­mand from the lo­cal mar­ket while main­tain­ing prod­uct qual­ity and stan­dards. Oth­ers fo­cused on cut­ting prices to at­tract for­eign de­mand. The ho­tels in the for­mer group have fared bet­ter in the down­turn. Also, price-cut­ting to at­tract guests has im­pacted ho­tel value neg­a­tively.

Some re­gional ho­tel groups are mak­ing busi­ness de­ci­sions to scale back or stay away from the coun­try due to a tougher op­er­at­ing en­vi­ron­ment. City Lodge, a South African ho­tel com­pany, re­cently an­nounced its US$77 mil­lion ex­pan­sion plan across the African con­ti­nent. The group an­nounced that it will, how­ever, stay away from Nige­ria for now. City Lodge cited the de­pre­ci­at­ing cur­rency and lim­ited ac­cess to for­eign ex­change and in­fla­tion, which has neg­a­tively im­pacted value while in­creas­ing the cost of do­ing busi­ness. Es­sen­tially, it has be­come more ex­pen­sive to op­er­ate a ho­tel in Nige­ria, while the abil­ity to pass on high op­er­at­ing costs to a largely for­eign de­mand, and gen­er­ate prof­its, has be­come lim­ited due to lower oc­cu­pan­cies and price-cut­ting.

The Tourist Com­pany of Nige­ria (TCN), own­ers of the Fed­eral Palace Ho­tel and Casino, Vic­to­ria Is­land, de­clared an op­er­at­ing loss for the sec­ond year in a row in 2016. The com­pany recorded a loss of N5.6 bil­lion in the 2016 fis­cal year, an even higher loss than the N2.6 bil­lion loss recorded for 2015. Gross profit from the ho­tel’s op­er­a­tions fell 11.8% in 2016, com­pared to 2015, ow­ing to lower room oc­cu­pan­cies, re­duced food and bev­er­age rev­enues, and higher op­er­at­ing costs stem­ming from a weaker naira. Sun In­ter­na­tional, the South African in­vest­ment part­ner in Fed­eral Palace Ho­tel and Casino, made the de­ci­sion to exit its in­vest­ment cit­ing low oil prices, Boko Haram, and the weak­en­ing naira, amongst other rea­sons.

On the flip side, BON Ho­tels – a South African hospi­tal­ity com­pany headed by, Guy Stehlik, the son of Otto Stehlik, founder and for­mer Chair­man of Protea Ho­tels – dou­bled down on its ex­pan­sion plans in Nige­ria. The com­pany part­nered with a lo­cal in­vestor to open a new ho­tel in Abuja, adding to the six ho­tels it was al­ready op­er­at­ing in the coun­try. BON Ho­tels com­pleted an ex­ten­sive re­fur­bish­ment pro­gramme in 2016, took over man­age­ment of four Protea Ho­tels, com­menced and con­tin­ued con­struc­tion on three more ho­tels. The com­pany in­tends to bring its Nige­rian ho­tel port­fo­lio to 10 ho­tels by 2018, and has strate­gi­cally part­nered with an­other lo­cal in­vestor to build more ho­tels in 37 lo­ca­tions across Nige­ria over the next few years. Ac­cord­ing to Bernard Cas­sar, Ex­ec­u­tive Direc­tor at BON Ho­tels In­ter­na­tional West Africa, the com­pany po­si­tions “its prop­er­ties as 4-star, in­ter­na­tional, bou­tique-style, fullser­vice ho­tels at af­ford­able prices.”

The ma­jor in­ter­na­tional ho­tel brands are mov­ing ahead with sign­ing deals, and

Nige­ria leads the way as noted in the pipe­line re­port ear­lier. Some of the more ac­tive brands – Mar­riott, AccorHotels, Hil­ton, Carl­son Rezi­dor – are also look­ing to build more mid­scale brands (such as the Park Inn by Radis­son, Abeokuta), and in se­condary lo­ca­tions. This is a much wel­come de­vel­op­ment. The ho­tel groups are plan­ning to sign more deals out­side of the main cities of La­gos, Abuja and Port Harcourt, and in state cap­i­tals across the coun­try.

The re­ces­sion has been chal­leng­ing for ho­tel op­er­a­tors not ad­e­quately pre­pared for a down­turn – whether in terms of the qual­ity of the ho­tel prod­uct and ser­vice ren­dered, strong rev­enue man­age­ment strate­gies, or the di­ver­si­fi­ca­tion of their de­mand mar­kets. But for op­er­a­tors and in­vestors who truly in­tend to be mid- to long-term play­ers, a re­ces­sion is sim­ply part of the cy­cle, and it cre­ates myr­iad in­vest­ment op­por­tu­ni­ties in the sec­tor.

Nige­ria’s re­ces­sion seems to have bot­tomed out in 2016. An up­swing in 2017 and be­yond will mean more growth op­por­tu­ni­ties to in­vest in. For in­vestors who al­ready have ex­ist­ing ho­tels, this is a great pe­riod for strate­gic plan­ning – do­ing the re­search to study the mar­ket, dis­cover de­mand trends, iden­tify and pos­si­bly di­ver­sify tar­get mar­kets, and re­po­si­tion their prop­er­ties, if nec­es­sary, and if fea­si­ble. A pe­riod of down­turn is also a great time to ren­o­vate a ho­tel prop­erty, and this is why long-term cap­i­tal plan­ning is key. The lack of it is of­ten prob­lem­atic for a ho­tel’s op­er­a­tions in the long term (but this is a topic that de­serves to be ad­dressed sep­a­rately).

This pe­riod is also an op­por­tu­nity for in­vestors who are will­ing to un­der­stand the mar­ket and care­fully con­sider the up­sides and down­sides be­fore com­menc­ing de­vel­op­ment. There are ad­van­tages to in­vest­ing now in Nige­ria, al­beit with cau­tious and more pru­dent strate­gies than be­fore. It is im­por­tant to un­der­stand the mar­ket does not ben­e­fit when it is sat­u­rated with ho­tel sup­ply in the high-end seg­ment. There are also op­por­tu­ni­ties in the mid­scale and econ­omy seg­ments that have not been ad­e­quately ex­ploited. When the ex­ter­nal fac­tors, such as low com­mod­ity prices, for­eign ex­change scarcity, and se­cu­rity con­cerns sta­bilise, in­vestors will once again feel more con­fi­dent in the mar­ket and busi­ness travel will pick up. Those who have cre­ated the sup­ply that meets the needs of the de­mand will ben­e­fit when the eco­nomic cy­cle swings back up­wards.

Fur­ther­more, the do­mes­tic leisure mar­ket should not be ig­nored. It is true that leisure travel de­pends – more so than busi­ness travel – on tourism in­fra­struc­ture to flour­ish. But in­traNige­ria leisure travel (par­tic­u­larly be­tween shorter travel dis­tances) is on the rise, and the pro­vi­sion of sup­port­ing in­fra­struc­ture, hospi­tal­ity de­vel­op­ments in­clu­sive, will ben­e­fit from this mar­ket. A dis­guised bless­ing of the cur­rent for­eign ex­change woes is the cre­ation of new do­mes­tic tourist mar­kets, or at least an in­ter­est in do­mes­tic tourism – by in­di­vid­u­als that would nor­mally have trav­elled abroad on va­ca­tion.

A more di­ver­si­fied and dy­namic de­mand mar­ket, with vis­i­tors at the mi­das well as high-end of the spec­trum, will mean that the hospi­tal­ity sec­tor re­quires more com­pet­i­tively po­si­tioned and priced sup­ply at var­i­ous price points. Those ho­tels that truly of­fer good qual­ity prod­ucts and ser­vices, and value for money, will be re­quired. In­vestors would do well to pay at­ten­tion to this fu­ture need now.

Damilola Ade­poju

Park Inn by Radis­son, Abeokuta, Ogun State, Nige­ria

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