> Investing For The Long-Term

Investing For The Long-Term

Ed: This article aims to examine hotel supply and demand dynamics, advise that hotel markets are cyclical, and therefore a long-term view is essential.

Having enjoyed several years of growth, the worldwide hotel industry is now experiencing a significant downturn, along with every other industry.  Forecasts from PricewaterhouseCoopers are for an 8 per cent decline in both occupancies and prices in the USA in 2009 resulting in a reduction in yield of 16 per cent.  A decline of 12 per cent is forecast for the UK in the same period.  Some commentators say that all regions of the world will experience similar double-digit declines in performance this year.

There are no data available for Africa, but we know that no-one is immune from the global recession.  And we also know, as reported in this column previously, that many markets in Africa are currently witnessing a building boom, so whilst demand is decreasing, supply is increasing – a double-whammy, some would say!

I remember as a young consultant, many years ago, denying that the hotel industry was cyclical.  Well, you live and learn, and 25 years later, I know that, as night follows day, the hotel industry certainly IS cyclical, alongside the wider economy.  Whether it is caused by external shocks like the oil price hikes of the early 1970s, and the terrorist attacks of 2001, or from self-inflicted wounds such as the sub-prime mortgage scandal and civil unrest, there is an inevitability that the economy will ebb and flow over the years, on a 7 to 10 year cycle.

In Nigeria, we not only have our own banking crisis, caused by irresponsible lending, but also the downturn in the global economy has brought a reduction in demand for oil, the country’s main export, and therefore demand for hotel accommodation from these two sectors (banking and the oil industry) is down some 20 per cent on last year in central Lagos.  Interestingly, however, this downturn is not uniform across the country – Ikeja, in the north of Lagos State, and the capital Abuja, are both experiencing high volumes of demand, with occupancies in the former regularly exceeding 90 per cent on a monthly basis.  And Calabar, in Cross River State, is also doing well, where the government has a clear focus on expanding the tourism industry in “the Nation’s Paradise”.

Elsewhere in Africa, Accra’s hotel industry remains extremely strong, buoyed by the nascent oil industry, and the international attention following President Obama’s visit

there, Luanda still presents problems to anyone wanting a hotel room, and Harare’s hotel occupancies are edging higher, as investors seek opportunities there.

But I foresee challenges for the industry ahead, as new hotels finally come on stream – 2010 openings include the Four Points by Sheraton and Radisson Blu in Lagos, the Marriott in Accra, and the Sana in Luanda.  Whilst growth in demand tends to be gradual, growth in supply is a once-off hit – a little bit like the pig swallowed by the python, causing indigestion and an abnormal situation at first, but then slowly being absorbed until equilibrium is once again restored.  So occupancies are likely to be lowered once new supply enters these markets, and there could too be pressure to lower prices – although that is not inevitable, and certainly undesirable for hotel owners with loans to service.

Like the inevitability of cyclicality, periods of oversupply also seem to be inevitable.  But this does not mean that investors should shy away from new development – far from it, because the demand trend is also, inevitably, upwards.  What it does mean is that investors must only invest for the long-term – build in periods of flat or declining demand into your forecasts, to see what impact that has on future debt service obligations.  You will always lose market share to a new entrant to the market, at least in the early days of it being open, because of the curiosity factor, and the offer of introductory rates.  How long that loss of business will last is down to management, and their ability to win back lost clients, and attract new business.

The other impact of this is that investors need to seek their niche in the hotel market.  For reasons which often relate more to ego than economics, entrepreneurs in emerging markets tend typically to want to build luxury hotels in the first instance, “gouging” the market in times of short supply of any acceptable alternative.  That provides opportunities to fill in the gaps between the top of the market and the older, outdated stock, which has little or no future in a modern economy.  Accor and Rezidor are leading the way in sub-Saharan Africa, the former with their Novotel and Ibis brands, and Rezidor with Park Inn.  Others are following, as Hilton start to introduce their Doubletree and Garden Inn products, and Holiday Inn Express is making a comeback in South Africa.

And finally, hotels are not only a long-term investment, they are long-term projects, with a minimum of three years from inception to opening.  So if you are planning a hotel now, or just commencing construction, demand should be back to trend by the time you open.  It’s inevitable, isn’t it?

Trevor Ward

W Hospitality Group, Lagos


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