I commented last month about the high prices in Lagos hotels, and the reasons for that – high development costs, high operating costs, and so on. Maybe you took pity on the poor hotel owners and managers? Well, despite all those issues, hotels in Africa can be highly profitable at the operational level, partly because other costs such as payroll are, in many cities, low compared to the rates charge, and because of high occupancies.
If that is the case, why aren’t more people building more hotels to take advantage of this “golden goose”?
Well, you see, because hotels are expensive pieces of kit, with high up front capital costs, they take some years to repay the investors their money. The hotel industry is competing for that money with other sectors, such as commercial real estate and housing, which may not be so attractive in the long-term, but return capital much quicker, either through sales or rentals. And African investors, generally (never, ever generalise about Africa, but here goes!) are looking for shorter-term returns than the typical 7 to 10 years of a hotel – in trading, government contracts, oil and gas trading, etc.
Compound that with the high interest rates and short repayment terms quoted by local banks, the difficulties associated with a lack of professional expertise and experience in the development teams, the climate, bureaucracy and corruption, and it’s really tough to get new projects off the ground.
But they are happening – a survey we carried out at the beginning of 2012 shows that the regional and international hotel chains have signed contracts to manage over 38,000 new rooms in 208 hotels in Africa, up from 31,600 rooms in 159 hotels the year before. Of these new rooms, 55 per cent are under construction, meaning that in the next three to four years we can expect in excess of 20,000 new rooms to open.
So far, so good, but do the arithmetic – that pipeline is in 35 countries (which means that there are 19 countries on the continent with nothing happening!), a measly 571 per country! It’s just not enough!
W Hospitality Group, Lagos