Investors flee hospitality sector over trapped $500m

Investors who rushed into the Nigerian hospitality industry during the boom between 2008 and 2014 are now looking to exit, especially as their over $500 million stake are trapped in stalled projects, on account of the economic downturn.
The funds, most of which are Foreign Direct Investment (FDI) are trapped in uncompleted or abandoned hotel projects across the country, as well as franchise deals and brand signages already paid for but yet to take off.
BusinessDay investigations show that the situation is getting out of hand as most indigenous investors who depended on bank loans for their counterpart funding can no longer get bank support due to the high interest rates of between 25 and 30 percent.
Given this background, FDI hardly flows into the hospitality industry, as good return on investment and favourable tax regime on their profit, which hitherto attracted foreign investors, are no longer guaranteed with hotel occupancy rate falling to 40 percent.
Work has longed stopped at Starwood’s Luxury Collection Brand under construction in Ikoyi, Lagos which has already gulped $US350 million.
This is despite assurances from Robert Dyson & Diket Ltd, the promoter of the project and the Starwood Group, managers of the hotel, that the 15 storey twin tower structure with about 340 rooms and 125 choice apartments was nearing completion in 2012.
Investors in the Federal Palace Hotel and Casinos, Lagos are holding back from a USD$450 million mixed-use development plan fund approved at its 2015 Annual General Meeting because returns keep dwindling.
Furthermore, the Sun International which holds 49.3 percent in the hotel is mulling exit because its investment is not yielding the expected dividend.
There is also the case of Aero Marine (West Africa) Limited, the promoter of Hilton Hotel Airport and Hilton Hotels and Resorts, managers of the proposed 250-room hotel, located on the Murtala Muhammed Airport Road, Lagos, who said at the groundbreaking ceremony that the multimillion dollar project was expected to open in the first quarter of 2013.
While Hilton Hotels and Resorts keeps assuring of the delivery of the hotel, Martins Oluboye, a hospitality expert, blamed the little or no work at the construction site to the inability of the indigenous investors to raise the needed funding for the project.
“Imagine getting a loan when the dollar was at N160, and now the $5 million loan a hotelier borrowed from a UK bank is almost $15 million due to a spiralling exchange rate which works against the naira and you are supposed to service the loan also in dollars. Where do you get such money now? The worst is that with the weak naira, even if you sell off the uncompleted project, you will still have a huge debt to pay”, Oluboye explained.
The proposed Transcorp Hilton Ikoyi, Marriot in Victoria Island Lagos, Abuja and Port Harcourt, Radisson Blu in Abuja, another Four Point By Sheraton in Lagos, Sheraton, Kempinski, among other branded hotel projects are yet to take off, while those that have taken off are slowing down due to unavailability of funds.
Furthermore, over 40 unbranded low-budget hotel projects by indigenous promoters have been abandoned across the country. The local projects, according to Oluboye, are worth over $10 million, a huge fund trapped because it cannot yield returns until completed and open for operations.
From a hotelier’s perspective, Emele Uzor, a hotelier, observed that, “Investors’ appetite for good returns is waning because occupancy rate and revenue are dwindling everyday, despite growing cost of operations. Hotels hardly sustain 40 percent occupancy these days, because the harsh economy is taking a toll on the bottom-line of companies and businesses.
“ I have a project which I wanted Swiss International to manage, but I have stopped the project because my bank and co-investor are not willing to give me financial assistance now”, Uzor lamented.
Olukola Balogun, another hotelier said that with 25 percent bank interest rate, hoteliers are no longer attracted to loans from banks, and so called cheap funding from Foreign Direct Investments (FDI) are no longer cheap with the crash of the naira. “Imagine a foreign partner who committed $5 million dollars as his equity share during the hotel boom in 2010 and is now asking for his money in dollars. Where do I get such money from? So, until the business rebounds, I am not investing further”, Balogun said.
While there seems to be no respite for funding at the moment, hoteliers are bemoaning their losses daily. FDI is at standstill, and the target of grossing 20,000 hotel rooms by 2020, expected to yield $US507 million will clearly not be realised, as the economic downturn delays 51 hotels and their proposed 5,000 rooms.