A home away from home: Numerous new hotel projects are slated to come on-line

West Africa is the new frontier for international hotel chains, and, as home to over half the region’s population, Nigeria is right at the centre of this trend. While the industry has long been dominated by a small number of large business hotels, the past few years have seen a significant increase in international hotel brands, particularly in Lagos, the country’s commercial centre. Some examples of recent openings include Southern Sun Ikoyi, Four Points by Sheraton, Radisson Blu, Ibis and Legacy. And the end is not yet in sight.

NEW HOTELS: The W Hospitality Group, a pan-African consultancy, announced in an annual survey that Nigeria tops the list of new hotel developments across the continent. At present, 43 hotels and 6808 rooms are under contract, representing an increase of 2000 rooms compared to 2011, with announcements made for thousands more. With an almost 1000-room difference, Egypt comes in second place. Although not all projects may break ground, physical construction is progressing gradually, with the likes of Accor, Hilton, IHG and Protea leading the way. The first project that will come on-line is IHG’s InterContinental, scheduled to open in 2013. With 358 rooms, it will be the third-biggest hotel in Lagos and another addition to the city’s limited number of five-star properties.

Other brands that have signed deals but are yet to start construction include Le Méridien, Holiday Inn and Crowne Plaza, while newcomers hoping to get their foot in the door include Kempinski, Mantis, Marriott and Wyndham. Besides new projects, a number of incumbents are renovating or expanding. Eko Hotel, Lagos’ oldest and biggest, is bringing another 180 rooms to the market, while the more recent Oriental Hotel is expanding with 200 rooms.

Outside of Lagos, development unfolds at a significantly slower pace. The main area of investors’ attention is the Federal Capital Territory; specifically the country’s capital, Abuja. International chains such as Hilton, Sheraton and Protea have an established presence in the city, boasting over 2300 rooms in the business category. But with mid-week occupancy rates at 75-80% for 2011, there is room for more.

AGREEMENTS: While physical construction of new accommodation units is yet to start in Abuja, various management agreements with international hotel chains have been signed. One such example is Carlson Rezidor, which has signed concessions for a 125-room Park Inn and a 200-room Radisson Blu, while Kempinski and Marriot have both said they signed management agreements with executive apartments.

Meanwhile, the Nicon Luxury Hotel is scheduled to bring a further 225 new rooms to the market, while South Africa-based Mantis will manage a 31-room hotel as part of new commercial development; both are due to come to market in 2013.

In other parts of the country, Carlson Rezidor has signed a management agreement for a Park Inn in Abeokuta, Ogun State, while Starwood has signed for the establishment of a Four Points by Sheraton in Benin City. Best Western has made commitments to opening facilities in Makurdi and Asaba.

FINANCING: Nigerian banks have thus far been slow to catch on to opportunities presented by the hospitality sector. “The short-term duration and high cost of loans are a mismatch with the hospitality industry as it starves hotel operations of cash and prioritises servicing loans over ensuring value for money for guests,” said Trevor Ward, the managing director of W Hospitality Group. External funding also remains limited, and in the few cases where it does happen, debt financing is still the preference over equity, marking investors’ scepticism as a result of the industry’s limited track record. “Foreign equity investors still prefer real estate, where the revenues are more secure and visible, over hospitality,” Ward told OBG.

Lagos-based financial outfits take a more bullish stance. ARM, one of the country’s leading brokerage and asset management firms, after successfully financing high-end hotels in Lagos such as Four Points and the Moorhouse Ikoyi, has set up a hospitality fund targeting high-end four- and five-star hotels, as well as mid-tier two- and three-star hotels outside of Lagos. “The current demand in the hospitality sector exceeds the supply of international standards, pushing business travellers in the secondary cities to seek accommodation in hotels and guest houses which are not always up to standard,” Vernon Page, the managing director of ARM, said at the launch of the fund in December 2011. The country’s positive growth prospects and the predicted expansion of the agriculture sector, which will help drive growth outside of the main urban centres, make for a positive outlook for the hospitality sector.

RATES: Given the supply deficit, particularly in Lagos, hotel rates are among the highest in Africa, despite having fallen over the past two years. For example, a standard room with breakfast at the Southern Sun Ikoyi Hotel Lagos was $455 in September 2012, compared to $250 at its Nairobi property and $175 in Johannesburg. Going forward, the increasing supply is bound to have a deflationary effect. The InterContinental’s opening in Lagos is expected to affect prices, with estimates of the drop ranging between 10% and 15% and further openings may have a similar impact.

Aside from competition, rates will be increasingly affected by location. In Lagos, to access the primary business districts on the islands south of the city, where most of the international hotels are located, visitors must cross substantial traffic. As a result, price becomes a factor for these hotels to compete with properties closer to the airport.

However, rates are unlikely to be on par with other African markets anytime soon, according to Ward. “I would expect a rate reduction to last for two years at most, after which they will gradually plateau until the start of the next cycle.” This can be primarily contributed to the high costs of operating a hotel in the country. Across the spectrum of economic sectors, a shortfall of power necessitates reliance on expensive diesel-run generators. High-end hotels often require several units of the highest quality to minimise disturbance to their corporate clientele. In addition to that, large sums are spent on water and sewage treatment units, security personnel, food imports and in-house personnel training.

PROFIT POTENTIAL: Nevertheless, running a business hotel is a potentially profitable business in Lagos. According to estimates by the W Hospitality Group, hotel investments can be recouped, on average, in seven to eight years, compared to up to 10 years in advanced economies, whilst operations break even at around 25% occupancy. At present, most international hotels in the northern and southern commercial areas of Lagos run at about 75% occupancy, while the number of international arrivals continues to grow.

Besides the competition on the rates, service and comfort levels are rapidly becoming a determining factor. “As the rates are among the highest on the continent, hotels have to make sure service and comfort are above par. Given the constraints in supply of skilled hospitality staff, this is a real challenge,” Mark Loxley, the general manager of Southern Sun Ikoyi, told OBG.

International chains regularly bring in foreign consultants to upgrade the skill-set of the locally hired labour force and provide staff with lengthy training periods. The Wheatbaker Hotel, which opened in late 2011, claimed that its staff underwent training for six months prior to opening. “Despite the many misconceptions that exist outside of the country, Nigerians are very accommodating and cheerful, which is essential for working in hotels. But it is up to the hotels themselves to nurture the hospitable mentality into skills applicable to the high-end hospitality industry,” said Simon Grindrod, the hotel’s general manager. As more and more international brands continue to try and outdo each other, established hotels that lag in service quality will be the first to feel the pinch.

CHALLENGES: Security concerns have not left the hotel industry unscathed, particularly in the north. While actual numbers are unavailable, leading business hotels in Abuja such as Transcorp Hilton and Sheraton have witnessed a drop in the length and frequency of stays, often to the benefit of mid-sized hotels deemed less prone to terrorist attacks. International airlines such as British Airways, Lufthansa and Air France, of high value to both Hilton and Sheraton, have temporarily shifted their crews to Lagos or Accra.

While it is still too soon to tell what impact this will have on plans for hotel development in Abuja and other cities in the country’s north, delays can be expected. The commitment of investors and operators to the already announced plans will hinge on the success of the government in curbing the threat of terrorism. At the time of writing, however, it was not yet clear how much progress – if any – had been made on this front.

In the meantime, hotel developers are expected to focus on the south where past experiences with militancy and crime have been largely overcome thanks to effective state and federal government policies, including the amnesty programme for the Niger Delta and employment creation policies in Lagos State.