Since 2011, shortlet apartments have demonstrated strong profitability potential. Quickly after the pandemic in 2020, the short let business became a gold mine for operators in Nigeria. With no end date in sight for the pandemic at the time, it was clear that the typical hotel model could not sustain people who needed stay options with the feel of being at home. This resulted in a rise in the short let business model, especially within the Nigerian market. But this seems to have taken an opposite turn, and it appears that the bed is not as rosy as it used to be. We want to assess the drivers of this turn, but before we dive deep into the conversation, let’s answer one really important question. What differentiates shortlet apartments from typical hotels?
The traditional hotel business model has several disadvantages; some of which the short let model aimed to solve. Some of these shortfalls are:
High overhead costs: Running a hotel requires significant investment in real estate, staffing, maintenance, and amenities. This often translates to high overhead costs, which can eat into profits and make it challenging to remain competitive with alternative lodging options.
Seasonal fluctuations: Hotels tend to experience significant fluctuations in demand based on seasonality, leading to periods of high occupancy and low occupancy. This makes it challenging to maintain a consistent level of revenue throughout the year, which can impact profitability and make it challenging to plan for the future.
Limited flexibility: Hotels often have strict policies regarding check-in and check-out, cancellation policies, and other restrictions that can be frustrating for customers. This lack of flexibility can lead to a negative customer experience and decreased customer satisfaction.
Increased competition: With the rise of alternative lodging options such as vacation rentals, home-sharing platforms, and other forms of accommodation, the traditional hotel business model faces increased competition. This makes it more challenging to attract and retain customers and can lead to decreased profitability.
Short-stay apartments and hotels are both usually used when people are travelling, going on a vacation or a short get-away, but there are some significant differences between them:
Space: Short-stay apartments are typically larger than hotel rooms and offer more space, including separate bedrooms, living rooms, and kitchen facilities. This can make them more comfortable for families or groups of travellers who need more space.
Amenities: Hotels typically offer a range of amenities, such as swimming pools, gyms, restaurants, and room service. Short-stay apartments may have fewer amenities, but they often provide more self-service amenities, such as a kitchen, a washer and dryer, and free Wi-Fi.
Cost: Short-stay apartments may be more cost-effective than hotels, especially for longer stays. This is because short-stay apartments often have a lower nightly rate for long stay than hotels that usually have a fixed rate per night.
Privacy: Short-stay apartments provide more privacy than hotels. Since short-stay apartments are typically designed for more extended stays, they are often more private, with fewer staff members coming and going into the unit.
Location: Hotels are typically located in busy areas with easy access to tourist attractions, restaurants, and shopping. Short-stay apartments, on the other hand, may be located in more residential areas, which can be quiet and more peaceful.
Ultimately, the choice between a short-stay apartment and a hotel comes down to personal preference and the specific needs of the occupant. Short-stay apartments are ideal for people who value space and privacy, while hotels may be a better option for those who prefer more amenities and a central location.
As mentioned in the opening paragraph, the short let model has been a gold mine in Nigeria for more than a decade now. The recent economic landscape in Nigeria, however, has tested the sustainability of this model, especially since 2022. The short let market recorded 19.05%, 19.50% and 13.96% increases in prices in Lagos, Abuja and Port Harcourt respectively. In States like Oyo, Enugu and Kano, the percentage increase in prices was around 11.87%, 13.64% and 6.60% over the past calendar year. Despite this, a number of operators have backed off the short let business owing to revenue and occupancy sustainability concerns.
Generally speaking, the short let business model can be very profitable, depending on a variety of factors such as location, market demand, competition, pricing, and operational costs. Speaking of operational costs, it has been almost impossible for operators to stay in business from the past year till date.
2022 saw the average Power Tariffs grow over 80%
We tracked data on power tariffs in some of the estates in Victoria Island, Ikoyi, Yaba, Magodo, Ikeja, Surulere, and Chevron axis. The data gathered suggest that the cost of power tariffs has increased by over 80% in most estates. Early in the year, the power tariff averaged ₦90/KwH, however, our analysis shows that the power tariff has increased to more than ₦190/KwH in most estates. This includes estates like Ocean Bay Estate in Orchid road which is considered far from the Central Business hubs. An increase of this magnitude makes it difficult for short let operators to stay in business. Shortlets typically agree to a high service level to make their guests comfortable. This includes 18 to 24-hour power supply.
Rising inflation and an over 150% increase in diesel prices make it even worse.
Nigeria’s inflation growth saw a steady rise throughout 2022. Diesel prices rose dramatically over the 12 months period in 2022, from ₦330 at the beginning of 2022 to ₦850 in December 2022, an increase of 158% on a per-litre basis. The consequence of this level of increase for shortlet operators is severe. Additionally, the inflation rate across other expenditure items is also at an all-time high of over 21%. When you consider all of this, the cost of running short let business model has made it difficult for operators to survive.
In general, the shortlet apartment business model are lucrative because short-term rentals can often be priced higher than long-term leases. In areas like Lagos, the demand for shortlet apartments can be high due to the high level of tourism and business activity within the state. Profitability of this model, however, depends on factors such as the cost of acquiring and maintaining the apartments, marketing and advertising expenses, and expenses related to operations and management.
While we cannot foretell the long term sustainability of the short let business in Lagos, the current economic outlook presents a gloomy future, atleast in the short to mid-term. We will be happy to discuss some of our findings better with you. Let us know what you think about the sustainability of short let apartment business model in Nigeria. You can send us an email on research@buyletlive.com or join the conversation on LinkedIn and Instagram.