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Hotel development opportunities in the Nigerian recession 11 Apr 2017

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 oil-related 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, full-service 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 intra-Nigeria 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 mid- as 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.