How to make a success of hotel investment?

In Djibouti, the 177 room Kempinski Hotel was built in just nine months.  In Accra, the 100 room Labadi Beach Hotel took a little longer, all of 10 months, but still a record-breaking length of time, that would be the envy of any developer in the west.

So why is it that so many hotel projects in sub-Saharan Africa take such a long time to become reality, with several years’ delay by no means unusual?  Examples include the Holiday Inn in Accra, in its sixth year of construction, the Radisson SAS in Lagos, due to open in November 2004 and still on-site, and the Hilton in Kampala, due to open in 2007 and still some way from completion.

And what could, what should be done by investors to stop such a waste of opportunity happening on their projects?

In my experience, so much can be laid at the door of a lack of planning.  I believe it was Conrad Hilton who said that the three main success factors for a hotel are location, location, location.  Well, that’s a good soundbite, oft repeated in the industry, and it does have much to say about the operational success of a hotel.  But I think it is planning, planning, planning that marks the success or failure of your development project.

Here are the four main areas where, in my experience, proper planning brings success:

  1. Creating The Development Team

Hotels are difficult, hotels are complex, hotels are big projects.  Like in any endeavour, from preparing a meal to landing on the moon, a multitude of skills is required, and the secret of success of projects like the Kempinski in Djibouti is to leverage off the skills of the individual team members.  Every developer knows they need an architect – but hotels are not big houses, they are far more complicated, and the architect must have previous experience of proper hotel design.

The project needs managing, and the project manager needs to be involved from the very early design stages.  Project management is a skill which requires experience, and rarely, in my experience, does the investor or the architect have that skill, leading to some of the serious delays that we see.  Do the maths – a year’s delay in opening a 200 room project, because the project is not properly managed, could mean a loss of in excess of US$10 million in revenue [YOU MIGHT WANT TO PUT A BOX IN TO SUPPORT THIS – SEE THE END OF THIS DOCUMENT].

  1. Design Issues

The international hotel chains have years of experience in hotel design, knowing what works and what does not.  The basic objectives of a hotel design are: to deliver what the guest wants; to maximise the revenue-generating possibilities of the building; to minimise the non-revenue generating areas, whilst still providing sufficient support space; to minimise operating expenses; and thereby to maximise the return on the owner’s investment.

When an architect puts the bathrooms on the outside wall, instead of the corridor wall, “for ventilation”, or a toilet in the middle of the kitchen “for when the chef gets caught short”, or omits any staff facilities, you can be sure that the experts have rejected such design elements long ago for good reason.  Architects who insist on ignoring conventional wisdom are ensuring that your hotel will be obsolete when it opens, hugely vulnerable to competition.

I know of several hotels, including the Radisson SAS in Lagos and Le Meridien in Port Harcourt, where expert design experience was sought only after starting construction, which brought substantial delays in completion, and cost overruns, which could have been avoided.

So the management company, if one is to be engaged, must be on the team from the get-go – there is absolutely no logical reason why their appointment should be delayed.

  1. Funding

As difficult as it may be (and it is arguably getting easier, with new sources of debt and equity available) to fund hotel projects, it is even more difficult to raise money for a half-completed hotel.  There are dozens of hotels around Africa, possibly hundreds, where the cost of construction has been underestimated, and funds have run out, or where construction has started without all of the funding in place.

Disruption of the construction due to lack of funds leads to demobilisation of the contractor, the loss of skilled workers, additional cost, completion delays, and lost opportunities.  All of which could have been “planned-out” of the process by ensuring from the outset that sufficient funds are available.

  1. Location

And finally, I can come back to the issue of location (times 3!).  Many investors seem to believe that, because they own a site, it is suitable for hotel development.  Well, not necessarily!  Selecting the correct site is part of the planning process – just because demand is high today, and land is hard to come by (a feature of many, many markets in Africa), these are not good reasons to go ahead with a hotel development on a secondary site.  Markets are never static, changing over time, and a location which will “do” today, because of high demand and lack of customer choice, is likely to be

at a disadvantage in the future when supply: demand imbalances are evened out.  Conversely, locations can change – look at the decline (and subsequent slow reawakening) of the centre of Johannesburg, where the city’s main 5 star hotels were once located – but this tends to be in mature markets.

Many of Africa’s hotel markets are experiencing a shortage of supply in the face of high and increasing demand – e.g. Lagos, Accra, Cape Town, Luanda – and as a result entrepreneurs are rushing in to exploit the situation.  Those that plan properly from the outset – getting the design right, putting the funding in place and having the right development team on the project – are creating sustainable businesses.  Those that fail to plan, plan to fail.

A hotel with 200 rooms, achieving 50% occupancy in its first year of operation, will sell 36,500 roomnights.  At an average daily rate of US$200, that’s rooms revenue of US$7.3 million.  With other revenues from meals, drinks and other services, that’s at least US$10 million in total revenue.

Trevor Ward

W Hospitality Group, Lagos