For over ten years now, I’ve heard stories about oversupply in the Lagos market, because of “all those hotels that are under construction”. And, they continue, that means Lagos’ room prices are going to come down.
Well, consider the following.
Since 2003, the number of “acceptable” quality hotel rooms in Lagos has increased from about 1,100 to 4,000 today, and increase of almost four times. Occupancies have come down from the dizzy heights, that’s for sure, but are still a perfectly acceptable 70 per cent. And average room rates, net of all taxes and service charges, are about US$280, with little or no increase for the last five years. Granted, that means that, in real terms, the average rate has decreased, because of inflation, but they haven’t crashed like we’ve been told was going to happen.
And I forecast that we will see some big increases in room rates over the next three to four years, if revenue managers are prepared to take advantage of the likely future supply-demand imbalance. Because it’s a myth. There are not “all those hotels under construction” any more. The building boom has been and gone.
We track new supply coming into the Lagos market very carefully, counting the major projects with signed management deals, and other significant developments. And we can find only 188 new rooms due to open in the rest of 2014, 515 rooms in 2015 and 307 in 2016. In three years, that’s just over 1,000 rooms, or 25 per cent of the existing supply. If they all happen in that timescale - I’m not aware of any hotel in Lagos that has opened on time, with delays typically measured in years.
The experts say that Nigeria’s economy is growing at 7 per cent per annum. If that is the case, then the economy of Lagos must be growing by at least 10 per cent each year, probably more, being the economic powerhouse of the country, and with little or no growth in other parts of the country. Demand for hotel rooms has grown at an annual compound rate of about 14 per cent since 2003. Supply growth of 25 per cent in the next three years could therefore be matched by demand growth of almost 50 per cent, and that means that prices will go up – it’s market forces, it’s supply and demand.
Is this good for the customer? Well, none of us want to pay more, but the hotel products available today are of a much higher standard than 10 years ago, and we have a right to demand much more for our money.
And spare a thought for the owners and general managers of the hotels. Visitors to Lagos will know all about our “epileptic” power supply, with the lights on-off, on-off throughout the day and night. Since the privatisation of the power industry, it has got worse. One general manager told me that before privatisation, he had a power bill of about US$150,000 per month, of which about US$90,000 was diesel to power his generators, and the remainder the cost of power from the grid. Now, after the much-lauded privatisation, he is paying almost US$250,000 per month (an eye-watering US$3 million a year!), of which almost US$200,000 is for diesel.
Operating costs in Lagos are high. As in other parts of the world, the industry is a target for government taxes and licences, so just to keep the hotel open, multiple levies must be paid. Here’s the latest one – a “Merriment Tax”. You can just imagine it, can’t you, the government officials sitting there thinking “what can we get them for next?”. “I know, Mr Chairman, people get together in hotels and have fun, and that must be taxable”.
So beware – Lagos hotel prices are going to increase again, a lot of the money you pay for your room is being fed into the furnace to keep the lights on, and whether you’re happy about that or not, you’ll still get hit with the Merriment Tax. Enjoy (or not).
W Hospitality Group, Lagos