Why hotel room rates may not reach the $300 mark soon

With a seeming scramble for market share by international brands, the Nigerian hotel market is truly burgeoning.

The market features over 10 international brands, scores of domestic investors with 8,000 standard available rooms and leads hotel pipeline for West Africa with 61 out of 114 hotels and 10,000 out of 20,790 rooms.

Also, PricewaterhouseCoopers, in its 7th edition of the Hotels Outlook: 2017-2021, projected that the market would grow by 14.7 percent compound annual increase in revenue in the next five years, hence offering more investment opportunity to players in the sectors, especially international brands who look to the country for expansion.

Despite the growth, the Nigerian hotel market has often been regarded as overpriced by both local and foreign guests over the years.

In the third quarter of 2014, the average rate for standard room across most international branded hotels was as high as between $300-$350 per night when exchange rate was at N160 per dollar and same room costs between $100-$200 in Johannesburg, Cape Town, Nairobi and Cairo.

At the height of it, the once celebrated Intercontinental Hotel Lagos, which left Nigerian in January, pegged its standard room at $400 per night. After months of unsustainable occupancy rate, they reduced the rate.  Of course, guests who decried the high rates were often told that the high cost of operation in Nigeria was the major reason for the hike.

“We pay over 10 taxes to all the three tiers of government and other agencies, yet we provide our security, electricity, water and pay franchise and management fees. The only way to stay afloat is to pass on the charges to the guests”, Mike Osakwe, a hotelier, said in support of the high rates.

Also, there was a sort of gang-up against the likes of Southern Sun Ikoyi Hotel in 2013, when it crashed rates from $300 to $200 for standard room and other hotels managed by South African brands in Nigeria followed.

At the peak of the recession in 2016, occupancy went down to below 40 percent and room rate crashed to as low as $100. Since then, rates are struggling to increase despite the fact that the economy is said to be recovering fast after the recession.

As at the first half of 2018, the average standard room rate hovered around $150-$200.

According to Ikechi Uko, CEO, Akwaaba African Travel Market, the economic downturn played a role in crashing room rates from its former untouchable height. The West African hospitality expert noted that hotels would rather mull crashing rates than increasing with the economic reality that is already impacted by the fear of political instability.

As well, hoteliers fear that the rate may even crash as the 2019 general election draws close. For most of them, occupancy rate, which stabilized at the average of 65 percent in the second quarter of 2018, may decline in the third quarter resulting in revenue loss and consequently crashing of rates to sustain operations.

“Usually, there is panic among investors during any election year in Nigeria and 2019 is not different. We are already feeling it”, Osakwe said.

But the reason the rates may crash, according to Olumide Ajibade, a franchise owner, is the fact that the hotel sector has had many setbacks in recent times, which it faced amid the challenges of high operation cost and lack of access to cheap loan. “My concern is that the Nigerian hotel market has had many blows concurrently in the last four years. Despite the normal low seasons, we have had set backs from the Ebola saga, lull in business courtesy of the 2015 election, the 2016 recession and now another election”, Ajibade said.

International brands are also concerned that the inability to meet revenue targets courtesy of low occupancy rate will impact their business negatively, especially expansion plans in partnership with local investors who are also struggling to service bank loans.

A source at Marriot International who pleaded for anonymity, noted that with the termination of franchise agreement by some international brands with owners in Nigeria, the brands are more careful now and are also patient with local investors. “There will be less pressure on local partners by Marriot on the delivery of pipeline hotels because the economic outlook is not stable and political tension is also mounting. Definitely, the hotel market will follow the laws of demand and supply. You don’t expect rates to remain high when few people use the hotel”, the source said.

However, many hospitality observers think rates may never get to $300 soon. For them, rates are beginning to crash already for bookings later in year and early 2019, which are close to the election and most hoteliers, will not make noise about the crash.