News 2008


Hotels come under siege


February 15, 2008

By Kenneth Kwama

Two weeks ago, a large hotel chain that was planning to expand and hire more employees was forced to do the opposite.

The hotel retired 281 employees and suspended the renovation of its major facility because it could not afford the costs involved.

Roughly, this is the picture of events in the hotel industry. The dwindling number of tourists has not only reduced revenue, but is now threatening to derail a number of large construction projects that had been earmarked to take place in the country this year.

"Only three months ago, we were worried whether we were going to cope with the high number of tourists we were expecting because the number was bigger than bed space, but things have now changed. We have now to worry about who will occupy the empty rooms in our establishments," says the hotel manager who did not want to be named.

This is as a result of the insecurity and violence that followed the announcement of the disputed presidential poll results, which have kept tourists away.

There are now doubts whether global hotel chains like Kempinski Hotels Worldwide and Accor Hotels, which had expressed willingness to invest billions into the hotel industry in the country, will continue with those ventures.

"It is upon these investors to state whether those deals are still on or not, but as things stand now, it will not be feasible to carry on with the ventures. Nobody wants to invest billions in a place where you are not sure to get returns," says the hotel manager.

As it stood then, the country’s hotel industry was a strong contender for foreign investors interested in emerging market segments.

But the lack of enthusiasm had left a few investors competing amongst themselves until the foreigners expressed their willingness to invest in the sector.

It could be the wrong turn for a former booming industry, but the significance has not been lost to property industry insiders who used to view hotels as the next frontier of development in the country’s property market.

"The number of tourists coming to visit in the past few days has gone down to insignificant levels and rooms in most hotels are vacant. Realisation that tourism could continue to slump has made investors to start looking in other directions," says the manager.

Before the slump, investment in hotels was being driven not only by tourists looking for holiday homes for their own use, but also investors who thought property prices were pocket-friendly and hope of rapid returns.

The growing interest was reflected in the tourist numbers. Late last year, the Kenya Tourists Board (KTB) announced that earnings from the tourism sector had jumped 26 per cent to Sh34 billion in the first half of 2007, compared to similar period the previous year.

But while most investors maybe lamenting a property market that used to offer high yields and capital growth, but now experiencing difficulties, for foreign investors like Kempinski Hotels and Accor Hotels, identifying the right market is usually very vital to realising such dreams.

The two investors first saw the opportunity about three years ago when tourism numbers started shooting up. By then, other investors were still hesitant, but they went ahead and started planning on how to establish their presence in the country.

A manager with property management company Fitz Hazal Ltd, Mr James Obora, says that it is still too soon to speculate whether investment in hotels will continue or stop. But the appetite for quality properties, he says, could still be there.

"For some time, the industry has been encouraging more investors to put money in the hotel business because insiders thought the facilities which were available would not be enough to support the high number of tourists expected," says Obora.

The change in focus to hotels had been attributed to an influx of tourists, and the country’s newfound status as suitable venue for international conferences.

Although not healthy, to some extent, the small number of investors in the hotel property business had driven demand, especially during high seasons, to outstrip supply.

That is why investors with extra bucks to spare were capitalising on the seasonal changes to temporarily let and sub-let properties to tourists at exorbitant rates, especially in hotspots like Coast and Nairobi.

Before the lull, other investors were buying land in prime areas like Muthaiga, Lavington, Upper Hill and Hurligham, which they would develop and later lease out for use by tourists.

Besides the land, they would also buy old single-dwelling premises, which they would demolish and replace with tourist dwellings.

Both developers and management consultants agree that areas formerly frequented by tourists were the new hot spots for commercial development.

Before the violence, these areas had not only witnessed high activity in large building constructions, but had also welcomed myriads of tourists who used to rent housing space for short time use.