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More hospitality outfits are likely going under receivership for their growing default in paying back loans obtained from creditors, especially banks for the construction, renovation, or operation of the hotels.
At the moment, Lagos Continental Hotel is battling its receivership under Skye Bank, as well as, Best Western Hotel on Allen Avenue, Ikeja, The Hardley Apartments in Victoria Island and over 10 hotels across the country that are awaiting court order for The Asset Management Corporation of Nigeria (AMCON) to take over their management.
The difficulty in refinancing the loans is mainly due to the impact of the economic recession of 2016, which witnessed the worst revenue generation and occupancy rate of below 40 percent in the last two decades, and exchange rate devaluation that doubled both the value of the loans and the cost of building hotels in the last two years.
Although the Nigerian economy is fast recovering from the recent economic meltdown, some hoteliers still lack the capacity to service their loans due to the challenges of high cost of operation amid average revenue generation, multiple taxation, and recently, the exit of some international brands.
According to a lawyer with AMCON who pleaded anonymity, the Corporation is never happy taking over investments to turn them around from insolvency if the owners and managers were prudent in their management, observed financially probity and met the agreements they signed with their creditors.
Speaking on the issue, Ademola Oni, an economist and hospitality consultant, noted that since the modernisation of its insolvency framework with the advent of the AMCON Act of June 2010, the Nigerian banking sector is stronger on recovering debts, and they do not waste time in pointing AMCON to the direction of their debtors, including hotels.
“I always advise my hotel clients to offer their debtors some equity to offset part of the loans. It worked for Agura Resort, which called on one of its investors to pay off the bank loan and become a major shareholder, though other shareholders kicked,” he explained.
Michael Eluma, a hotelier, said with 23 percent interest rate, nobody can borrow enough funds to complete a good hotel. According to him, instead of bank loans, hoteliers should pull resources together to put up more modern and functional hotels than having a thousand 20-room hotels on a street in Victoria Island.
“To avoid bank traps and seeing your investments go under receivership, one should not invest alone; look for credible partners to share the risks, profits and success with. There is no need for the many mushroom hotels around,” Eluma said.
Oni, who is also an expert in risk analysis, said that there are lots of money that are idle in the banks and at home of some people, especially politicians and all hoteliers need do is to get closer to these people and sign watertight partnership agreement that would guarantee release of the fund for hotel projects.
He however noted that the average Nigerian investors has to change the mindset of short term investment for any investment in hospitality to work.
“Hotel business is long term. You have to give the business ample time bearing in mind maintenance, tax, franchise fees, management charges, training among others,” Oni said.
Proffering solution, Trevor Ward, CEO, W Hospitality, noted that the challenge of finance is a genuine problem worldwide as hotels are difficult to finance because they are long term businesses and need long term debt.
“Hotels will not return money to shareholders quickly, and they will not be able to pay back debt quickly. Starting a hotel project without having raised all the finance or at least half the commitment is probably not a very good idea,” Ward said.
He explained further that, “Interest rates from commercial banks are very high and in fact, they are too high for a long term business. It may be alright if you are a trader who needs short term loans. Hotels cannot survive at 23 percent interest rate, it is not tenable and hoteliers should not go for such loans. If that means you cannot build your hotel, so be it. There are foreign debts available from the likes of Afrexim Bank and IFC at much lower interest rates but they are only viable and sustainable if you can raise foreign currency to pay interest and repay your debt.”
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