As evidenced by the record number of new hotel deals signed by the international and regional (African) hotel chains (see Ai May/June 2015 edition), there are likely to be more hotels built in Africa in the next five years than in any previous period. There are several markets which are in need of new hotels, either because of a shortage in the face of demand growth or, quite often, the dire condition of the existing supply. Hotels are a vital part of the commercial infrastructure of a city or destination, providing potential investors with places to stay and conduct their business. Without modern hotel rooms up to international standards, all but the most intrepid investors might be tempted to do business elsewhere.
Our pipeline research looks only at the deals signed by the hotel chains, those new properties that will be managed by a hotel group and/or branded by them. That means, therefore, that we do not, we cannot, capture all those hotels planned or under construction which will not be chain-managed or branded. There are too many of them, there is no central register to consult, and oftentimes they are “mushroom hotels”, popping up almost overnight, with no signboards on the construction site, and only those directly involved in the project knowing that it is a hotel they are building!
There’s no universal, reliable estimate for the number of hotels in Africa (and I’m not going to digress into a discussion of the definition of a hotel!), nor is there any estimate of how many are under construction. According to our research, of the c50,000 hotel rooms in the chains’ pipelines, 63 per cent, or around 31,300 rooms, are actually under construction, in 36 countries. That’s fewer than 900 per country.
But of course they are not evenly spread, and in some markets, such as Luanda, the number of non-chain hotel rooms under construction exceeds the branded ones by a considerable margin. The same in Nairobi, a market which has always had a large, unbranded supply of quality hotels, whilst in Kigali the branded supply dominates the development pipeline.
So a close examination of individual markets shows that, whilst the country average in the chains’ pipelines is below 900 rooms currently being built, in some cities the addition of unbranded hotels, some of a considerable size (e.g. the former InterContinental hotel in Luanda, now unbranded, with almost 400 rooms) does appear to indicate that there could be oversupply on the horizon.
Demand for hotel rooms typically grows organically, driven in cities by economic growth, in single digits – 5 to 9 per cent annual growth would be considered very healthy, higher than the
trend growth of c4.5 per cent in international tourist arrivals annually. On a one-off basis, the opening of a new convention centre can result in higher growth, this time supply-led. But hotels
open all at once, not gradually to match demand growth – I call it the “pig-in-the-python” (picture the pig swallowed whole by the python, and slowly absorbed – yes, yuk!), so too a new hotel is slowly absorbed into the market. But on opening, a hotel with 400 rooms can increase the supply in a market with, say, 2,500 existing rooms by 16 per cent, way above “normal” demand growth.
Now, I have been working in Africa for more than 25 years, and I have been told that oversupply is a threat time and time again during that period – but so far it has never materialised. How come?
Well, it is a peculiarity of the African hotel market (much worse in some than in others) that signing a management agreement doesn’t mean that the project will ever be realised. Further, starting construction of a hotel doesn’t mean it will be completed.
Looking at the chains’ pipelines, between 2006 and 2011, no fewer than 60 deals with 13,500 rooms, over 25 per cent of the total, were signed, and really should have opened by now, but for many reasons (most often a lack of finance) they are still just paperwork or, in some cases, unfinished monuments to unfulfilled promise. And again, many independent hotels are also standing unfinished - Abuja, for example, has many half-built hotels, mostly of 100 rooms or fewer, which never got past the concrete-pouring stage, and which have been abandoned, in some cases for several years.
Will they ever open?
That, for any investor, is a critical question. The market for any product or service, including hotel rooms, is a function of supply and demand. If there is too much supply, then each participant’s market share goes down and – sometimes but not always – so do prices, both of which will reduce profitability and therefore viability of the project.
If all the hotel projects in the pipeline for Lagos, plus those currently being studied, were to go ahead, there will be oversupply. There, I have said it, Lagos might be oversupplied. As my home base, it is a market we study very carefully, trying to capture both the chain hotels as well as the larger, known independent projects. Here’s my analysis of the 4,291 rooms in the Lagos pipeline: 52 per cent, c2,200 rooms, are “under construction”; of those, 730 rooms have at one time had work undertaken on site, but are now stalled, the site closed, and in one case it is more than 4½ years since any work was carried out there; that leaves just 35 per cent of the pipeline actively being built; and of the total, we consider that 36 per cent will be built and open to the public, 41 per cent might happen, and 23 per cent are unlikely to see the light of day. All of these are just opinions……..
But oversupply is a temporary phenomenon. Organic growth in demand tends to sort it out, especially as new investors are deterred from the market. Further, more supply can actually create demand, due to the increased spend on marketing the destination by the hotels themselves,
and as the addition of new rooms can mean that larger events, such as conventions, can now be accommodated.
And as I mentioned, oversupply doesn’t have to mean lower prices. Professional, internationally-experienced management who have seen it before will know that reducing prices is a hiding to nothing – in most markets doing so will not attract any more business, it will just result in guests resisting price rises when equilibrium returns.
Hotel investors need to carefully analyse any market, digging down into the detail of supply and demand, understanding the fundamentals of a dynamic industry. The headline figures, those that I quoted above, are far from sufficient as the basis for an investment decision. What type of hotel rooms are planned and under construction? Is everyone building luxury hotels? Then maybe there is the opportunity to develop at the midscale level?
In the hotel industry, it’s the opportunity that lies in the detail, not the devil!
W Hospitality Group, Lagos