Gaining momentum: Increasing foreign investment and improving local infrastructure can boost growth potential

With the global tourism industry hit hard during the financial crisis and growth slowing in larger markets, international hotels and tourism experts are looking at new opportunities for expansion. The historically small industry in West Africa in general, and Nigeria in particular, looks set to become a more attractive destination for foreign investment, with capital investment in the country’s tourism sector expected to rise by 7.6% in 2013 to a total of N299.3bn ($1.89bn), according to a 2012 report from the World Travel and Tourism Council (WTTC). Enticed by the size of the country and potential market growth, global hotel chains are expanding across the country, with the number of large hotels in Lagos predicted to double in the next five years.

The impressive economic growth in Nigeria is partly a product of the industry’s small size. Though total travel and tourism spending accounted for N1.24trn ($7.81bn) in 2012, or 3% of GDP, the West African nation ranked 181 out of 184 countries in terms of the relative contribution of tourism and travel to the overall economy. While the Nigerian market has its share of challenges, including security concerns, limited infrastructure and a complex visa process, the travel industry is all about growth potential.

Indeed, the same trends driving 6-8% quarterly GDP growth are increasing the demand for hotel rooms, airline flights and cultural activities. International passenger travel through Murtala Muhammed International Airport (MMIA) in Lagos rose by 17.4% between 2011 and 2012. Total travel and tourism spending in Nigeria, including indirect spending such as government expenditure and tourism investment, went up by 8.7% in 2012, according to the WTTC report. The WTTC forecasts travel spending in the West African destination to increase by 13.9% in 2013 and register 6.8% annual growth over the next decade.

PROFILING THE VISITORS: The growing number of business travellers headed to Nigeria remains the primary clientele for hotel chains and airline services. Reliable statistics are difficult to track down in Nigeria, and while the WTTC claims 61% of Nigeria’s tourism spending came from leisure travel in 2012, most general managers of internationally branded hotels told OBG that business travellers comprise upwards of 90% of their clientele. Despite WTTC statistics indicating that international travellers accounted for just 11.4% of total travel spending in 2012, at the large hotels the customers are in fact almost half foreign.

Visitors working in the oil and gas sector or supporting services have long contributed to Nigeria’s travel industry. The Lagos-Houston flight, for example, is one of three direct routes between the oil-rich country and the US, although these days, Lagos hotels are increasingly hosting travellers in town for business in telecoms, consumer retail, IT and financial services.

“Demand is growing at a very high rate and it is not just customers from the oil and gas sector. Growth now is also coming from consumer-related industries,” Alexander Gassauer, general manager of Starwood West Africa, told OBG. The general manager of South African-owned Federal Palace Hotel and Casino, David Kliegl, has also noticed his clientele is often project based. When the government began privatising banks, for example, the Federal Palace saw an influx of British bankers. When IBM Global undertook a Lagos-based project, the hotel hosted a number of groups from IBM’s Indian headquarters.

NEW OPPORTUNITIES: Indeed, with its large population and growing economy, tourism experts often talk of Nigeria as a future hub for West African meetings and conferences. Matthew Dawes, CEO and founder of business conference firm All Amber, has managed conferences across sub-Saharan Africa, including two events in Abuja and, for the last three years, the Mobile Web West Africa event in Lagos. “There is a lot of potential in the market,” he told OBG. “Nigeria is a huge powerhouse. Lagos is the size of Ghana.”

Nigeria’s conference industry, of course, faces the same factors that limit international travel to the country: a complicated visa system, limited connectivity between African cities and the nation’s poor safety reputation. But one of the biggest challenges, according to Dawes, is the price of hotel rooms. An event at a Victoria Island hotel can be more expensive than an event at one of Cape Town’s top hotels. Nonetheless, Mobile Web West Africa has attracted an increasingly international crowd over the last three years, with Ghanaians comprising 5-10% of attendees in 2013.

THE HOTEL LANDSCAPE: A visible sign of growing investment in Nigerian travel is the changing landscape of the hotel segment. Starwood’s Sheraton Hotel was Nigeria’s first internationally branded hotel when it opened in the Ikeja neighbourhood of Lagos in 1986. The group now operates five hotels in the country and plans to double that number in the next three to four years; according to sources at the Sheraton hotel group, the country is the chain’s largest growth market in Africa. As of April 2013, Lagos alone had 20 internationally branded or large independent hotels, with a total of 3101 rooms and 27 additional hotel projects at various stages of development. In describing Lagos, Mark Loxley, general manager of the Southern Sun Hotel in Ikoyi, told OBG, “It is what Singapore and Hong Kong were in the 1980s, and what Dubai was in the 1990s”.

The West African country also hosts international hotel chains including US-based Carlson Rezidor and Hilton Worldwide; South Africa’s Protea, Southern Sun and Sun International; and Europe’s Accor Hotels.

The pool of hotel offerings is expanding: the Southern Sun is increasing capacity at its Ikoyi property in Lagos and is constructing a new facility in the capital, Abuja. Carlson Rezidor has Radisson properties in construction from Lagos to Abeokuta. Best Western is building in Lagos, Abuja and Makurdi. Meanwhile, the InterContinental Hotels Group is pursuing a number of properties for its Crowne Plaza and Holiday Inn brands and is scheduled to open the doors of its Lagos InterContinental by the end of 2013. At the higher end of the market, Fairmont has proposed a project in Lagos, while Kempinski will focus on Abuja.

According to research by the W Hospitality Group, a major tourism and hotel consultancy firm, the number of major hotel projects in progress would increase available rooms in Lagos alone to 8022 by 2017. However, given the numerous challenges confronting Nigeria’s business environment, at least 40% of the additions are unlikely to come to fruition. “All these rooms will not come on-line,” W Hospitality Group CEO, Trevor Ward, told OBG. “Building a hotel in Nigeria is very profitable if you get it right. A lot of people do not.”

THE PITFALLS: Like many industries in Nigeria, the hospitality business has been plagued by infrastructure challenges, limited financing and land access. While in many other countries developing a hotel project might take 18 months, in Nigeria it can often take more than four years. “For most new hotels, the delays are measured in years, not months,” said Ward.

With the exception of two South African properties, Sun International and Ikoyi Southern Sun, Nigeria’s international brands have signed management agreements with local investors who own the property.

Securing capital in a country where local interest rates hover at 23% and project finance is a developing industry can also prove a key challenge. Hotel managers frequently relate stories of projects as having been stalled as investors try to raise enough capital to finish construction. Other projects end enmeshed in struggles over land titles and acquiring necessary permits and licences. A project at the international airport in Lagos involving the Holiday Inn and Crowne Plaza has been on hold since the Federal Aviation Authority cancelled the licence. Both concessionaries are appealing the decision in court.

In addition, operating costs run considerably high due to the cost of electricity, imported products and private security. Running generators 24 hours a day to make up for the country’s lack of publicly available electricity adds as much as 30% to operating costs. Hotels hoping to attract international business must therefore invest in security personnel and technology. Because Nigeria’s weak agriculture sector yields sub-standard products, operators are also required to import a significant portion of food ingredients to cater for guests.

THE REWARDS: Nigerian hotels offer early investors high returns. Room rates in Lagos are the second-most expensive in the world behind only Moscow, according to the Hogg Robinson Group’s (HRG) annual global hotel survey. Sky-high rates partly reflect significant operating costs, but in an under-supplied market where the bill is usually paid on a corporate card, hoteliers can maintain high margins.

While it generally takes 14 to 16 years to recoup the initial investment in a branded hotel, investors in Nigeria can see returns within seven years, Loxley told OBG. As new hotels open across the country and competition increases, there has been some price dilution. HRG reported a slight 1% year-on-year decline in average room rates in Lagos, from £229.72 in 2011 to £227.82 in 2012. Lagos-based hotels are beginning to see seasonality in occupancy rates for the first time, David Kliegl, general manager of the Federal Palace, told OBG. During August 2012, for example, traditionally a month of holiday for European businesses, occupancy rates in Lagos hotels fell dramatically.

When the InterContinental’s 360 rooms come online in Lagos at the end of 2013, analysts will be watching for an effect on pricing in the market. However, in such a capital-intensive industry, most hoteliers are focused on long-term prospects and the continued projected growth of travel spending. The Federal Palace, operated under the Sun International Group, for example, is not lowering rates. “It is easier to build occupancy than to lift rates in the future,” Kliegl told OBG.

Even once new pipeline projects come through there will continue to be an under-supply of mid-market hotels, according to the W Hospitality Group. “It is easy to be cynical about the country,” said Ward, “but we remain very bullish on the hotel industry in Nigeria.”

AIR TRAVEL: The airline industry offers both significant opportunities and key challenges for investors in Nigerian tourism. Across Africa, and in Nigeria particularly, limited air routes, poor quality roads, large populations and growing economies offer a potentially huge market for air travel. International carriers are getting big returns from ferrying business travellers and Nigeria’s elite in and out of Lagos. Similar to international chains, the airlines benefit from serving a heavy corporate customer base with deep pockets and limited options. The Heathrow to Lagos flight, for instance, is British Airways’ (BA) most lucrative route, according to consultancy group African Aviation.

Notwithstanding these gains, connectivity between Lagos and surrounding Nigerian and sub-Saharan African cities remains limited in offering opportunities for expansion. Among the most frequent connections between Lagos and, say, Luanda in Angola, are those operated by BA, Egypt Air and SAA. Daily flights between Lagos and Accra are run by Arik Air. Some employees of multinationals, however, are not allowed to fly with local airlines because of their sub-par safety records. Turning Lagos or Abuja into a West African conference hub will thus require increased sub-Saharan routes.

Nigeria’s airlines face an array of challenges. Air Nigeria is once again bankrupt after a $200m government loan was improperly directed to cover debts of another business line. After a crash in 2012, Dana Air has struggled with concerns regarding the airline’s safety record. Arik Air is expanding long-haul routes, but is saddled with expensive loans. At the same time, MMIA in Lagos offers limited infrastructure for airlines or passengers.

At the Nigeria Aviation Summit early in 2013, speakers called for African airlines to increase consolidation. In total, Nigerian airlines have just 57 carriers, as compared with SAA having a single fleet of 67. Even so, the combined annual revenue of the continent’s three largest carriers – SAA, Ethiopian Airways and Kenyan Airways – is less than one third of the revenue of Dubai-based carrier Emirates Airlines.

In a sign that the Nigerian federal government is embracing a move toward consolidation, plans have been announced to offer another loan to Air Nigeria conditional on a merger with Arik Air. To date, however, both airlines have publicly denied plans to merge.

LEISURE TRAVEL: A significant proportion of international travellers visiting the country are in fact Nigerians living abroad, who return to see family, according to an international hotel managers’ report. These visitors may stay in a hotel for a night or two, but most will travel on to family homes.

One hurdle to attracting would-be tourists is the underdeveloped tourism infrastructure. The limited sites in Lagos and Abuja rarely tempt weekend business travellers, much less international sightseers. The private sector is encouraging the government to take a greater role in developing educational sites like museums and national parks. “The tourism industry can never be government led, but the government needs to provide a tourism infrastructure,” Alexander Gassauer, manager at Starwood Hotels & Resorts, told OBG.

In May 2013, the Federation of Tourism Associations of Nigeria (FTAN) hosted an investment forum for two days in Abuja and asked the federal government to establish the tourism intervention fund that has been discussed for years. "Several billions have been pumped into other sectors of the economy,” FTAN president Sam Alabi told local media. “But the tourism sector is yet to get anything. This sector has created so many job opportunities and is still doing so.”

The Nigerian Tourism Development Corporation (NTDC) has announced plans to solicit investment in the sector, with NTDC director-general Olusegun Runsewe recently pitching to investors at the Arabian Travel Market in Dubai in May 2013 for over $200bn of investment for Nigeria’s transportation, ecotourism and hospitality infrastructure. In 2012, Nigeria hosted Africa-focused travel expo the Akwaaba African Travel Market. And for the first time, in June 2012, the country hosted the UN World Tourism Organisation’s (UNWTO’s) annual Africa meeting in Calabar, promoting the country and the Cross River region.

TOURISM RESOURCES: A recent UNWTO report outlines opportunities for expanding tourism, specifically identifying opportunities around the country’s cultural, natural and human resources, and authenticity.

The vast and varied natural landscape of Nigeria provides potential for eco- and adventure tourism, according to UNWTO reports. The country boasts waterfalls, beaches and eight national parks, and is home to more than 1300 animals and 885 bird species, according to the Nigerian National Park Service. The Cross River National Park, a tourist-friendly park in the Niger Delta, includes one of the world’s oldest rainforest habitats.

Home to over 250 ethno-linguistic groups with an array of customs and beliefs, Nigeria can also offer diverse historical sights and local culture. In line with the government’s commitment to developing cultural attractions, the minister of tourism, Edem Duke, publicly celebrated an international “Day for Monuments and Sites” in April 2013 and highlighted the country’s six oldest cultural sites, including the Kano City walls and Idarne Hills, a collection of sites that include a 17th-century palace dedicated to gods and goddesses. The government is particularly focused on preserving the historic sites associated with the slave trade and promoting Nigeria as a tourist destination for people of Nigerian descent now living in the US, Latin America and the Caribbean. According to some estimates, DNA tests have revealed that up to 70% of black Americans may be of Nigerian descent. To this end, the Lagos state government is partnering with the UNWTO to upgrade tourism sites and services in Badagry, which is close to the border with Benin, and was once a key port in the slave trade, as well as now being a major historical site in Nigeria. The government is in the process of upgrading the Badagry Heritage Museum and preserving walkways along the former slave routes.

The Lagos Black Heritage Festival, set up in 2010 to celebrate cultural links between Nigeria and the Diaspora, is the largest festival in the city. For the 2013 festival, which took place in late March, the weekend of dance, music, parades and a boat regatta attracted millions of visitors, including Lagosians and guests from further afield both domestically and internationally.

If effective, the government’s investment in touristic sites and cultural festivals is likely to pay off. When Lagos hosted “Fela”, the Broadway musical inspired by the sounds of Nigerian afro-beat pioneer Fela Kuti, people travelled from across Nigeria and neighbouring countries to attend. There is a clear market for carnivals, festivals and the kind of sporting events attracting people to Qatar and Dubai, Ward told OBG.

However, many observers are looking for the government to roll out much stronger rhetoric and more innovative measures to encourage foreign investment in tourism in the near to medium term, as well as for the federal government to boost international travel with less complex visa processes and improved security. At present, obtaining a Nigerian visa, for either business or leisure, is a complicated and expensive process. That said, ECOWAS citizens can travel more freely to Nigeria and are likely the best targets for tourism at this stage in the country’s development. While African tourism comprises 6% of the global market, according to the UNWTO, African citizens tend to travel within the continent itself owing to current air connections and more favourable visa requirements.

INSECURITY: Incidences of armed conflict in the north and in the Delta continue to deter travellers and investment in tourism. Business travel is more inelastic and tends to weather the ups and downs of the country’s security situation. “Traffic in Lagos hotels has grown consistently over the years regardless of news from other states. Most of our clients are repeat customers,” Kliegl told OBG. “These travellers understand that Lagos is beyond the purview of the regional risk.” When the Niger Delta experienced several high-profile cases of kidnapping, business travel suffered considerably in Port Harcourt, but the area recovered once the violence abated. After a 2011 bombing at the UN headquarters in Abuja, specific threats were made against certain hotels and the city’s occupancy rates took a big hit. Nevertheless, investment continues to pour in.

OUTLOOK: Tourism in the country will continue to be driven by business travel in the near future, tying the fortunes of internationally branded hotels to industry. In the long term, with the help of an improved travel infrastructure, the large market and growing economy, business tourism will be able to offer significant rewards.

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The Report: Nigeria 2013

Tourism chapter from The Report: Nigeria 2013

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