Eye on West Africa

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For over 10 years now, I’ve heard stories about the oversupply of hotel rooms in the Lagos market, because, apparently, there are numerous hotels under construction. The people who tell me about the glut of hotels due to open also claim that because of the oversupply of rooms that will flood the market once these hotels begin taking reservations, prices are going to come down.

However, it’s not quite that simple. There are numerous factors to consider.

Since 2003, the number of acceptable-quality hotel rooms in Lagos has increased from about 1,100 to 4,000. That’s an increase of almost four times in just over a decade. And while occupancies have fallen from dizzy heights, they are still sitting around 70%, which means hotels aren’t so desperate for business that they will slash prices to compete for customers. The average room rate, once taxes and service charges have been deducted, is about $280, with little or no increase for the last five years. Thanks to inflation, the average rate has decreased, but there hasn’t been the sharp decline everyone expected.

I forecast room prices going up instead of down, over the next three to four years. That’s because, quite simply, there are no longer many hotels under construction. The building boom has been and gone. Revenue managers just need to take advantage of the likely future supply-demand imbalance.

The W Hospitality Group tracks new supply coming into the Lagos market very carefully, counting the major projects with signed management deals and other significant developments. We can find only 188 new rooms due to open in the remainder of 2014, 515 rooms in 2015, and 307 in 2016. In three years, that’s just over 1,000 rooms, or 25% of the existing supply. That is, of course, if all the builds remain on schedule – I’m not aware of any hotel in Lagos that has opened on time, and delays are typically measured in years.

The experts say that Nigeria’s economy is growing at 7% per annum. If that is the case, then the economy of Lagos must be growing by at least 10% each year, possibly more, as it’s the economic powerhouse of the country and also offsets the little or no growth in other parts of the country. Demand for hotel rooms has grown at an annual compound rate of about 14% since 2003. Supply growth of 25% in the next three years could therefore be matched by demand growth of almost 50%, which means that prices will go up.

So, where does this leave the customer? Certainly, 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.

As unpleasant as it is to think about parting with more cash for a hotel stay, spare a thought for the owners and general managers of the hotels. Visitors to Lagos will know all about our unreliable power supply, with lamps that flick between light and dark throughout the day and night. And instead of making it better, the privatisation of the power industry has made the situation worse. One general manager told me that before privatisation he had a power bill of about $150,000 per month, of which about $90,000 was used to buy 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 $250,000 per month (an eye-watering $3 million a year), of which almost $200,000 is being spent on diesel.

Operating costs in Lagos are high. As in other parts of the world, the industry is a target for government taxes and licences – for just keeping a hotel open, multiple levies must be paid. The latest tax to be foisted upon the hotels is a ‘Merriment Tax’. So, government assumes that your stay is enjoyable and has now decided that you should pay for the ‘pleasure’ of being away from home.

Don’t be sucked into the myth that hotel stays are going to cost you less in the future. Hotel prices in Lagos are going to increase again, and much of the money you pay for your room will be 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).