1. THE EFFECTS OF HOTEL EXTERNALITIES
ON
HOUSE RENT IN SELECTED LOCALITIES IN LAGOS METROPOLIS.
BY
AKINWANDE TIMOTHY OLUGBENGA
(090502018)
DEPARTMENT OF ESTATE MANAGEMENT,
FACULTY OF ENVIRONMENTAL SCIENCES,
UNIVERSITY OF LAGOS, LAGOS STATE.
A PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT
FOR THE AWARD OF BACHELOR OF SCIENCE (B.SC) DEGREE IN ESTATE
MANAGEMENT TO THE DEPARTMENT OF ESTATE MANAGEMENT,
UNIVERSITY OF LAGOS, LAGOS STATE.
FEBRUARY, 2014

2. TABLE OF CONTENT
CERTIFICATION.....................................................................................................................................................I
DEDICATION..........................................................................................................................................................II
ACKNOWLEDGEMENT.......................................................................................................................................II
I
ABSTRACT............................................................................................................................................................VI
TABLE OF CONTENT............................................................................................................................................2
CHAPTER ONE.......................................................................................................................................................5
1.0 INTRODUCTION...............................................................................................................................................5
1.1 Background to the Study.....................................................................................................................................5
1.2 Statement of Research Problem..........................................................................................................................7
1.3 Aim and Objectives of the Research...................................................................................................................8
1.4 Research Questions.............................................................................................................................................9
1.5 Research Hypothesis...........................................................................................................................................9
1.6 Scope of Study..................................................................................................................................................10
1.6.1 Study Area.................................................................................................................................................10
1.6.2 Map of the Study Area...............................................................................................................................11
1.7 Justification for the Study.................................................................................................................................11
1.8 Limitation of the Study.....................................................................................................................................12
1.9 Research Method...............................................................................................................................................13
1.10 Definition of Terms.........................................................................................................................................13
CHAPTER TWO....................................................................................................................................................15
2.0 LITERATURE REVIEW..................................................................................................................................15
2.1 Introduction.......................................................................................................................................................15
2.2 Externalities Defined.........................................................................................................................................16
2.2.1 External Costs and Benefits.......................................................................................................................18
2.2.2 Causes of Externalities..............................................................................................................................19
2.2.3 Classification of Externalities....................................................................................................................19
2.3 Factors Affecting Property Value.....................................................................................................................20
2.4 Externalities and Property Value (on a general note).......................................................................................22
2.5 A Brief look at Hotels.......................................................................................................................................23
2.5.1 The Evolution of the Hospitality and Lodging Industry............................................................................25
2.6 Hotel Externalities.............................................................................................................................................28
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3. 2.6.1 Creation of Employment as a Hotel Externality........................................................................................28
2.6.2 Traffic Congestion as a Hotel Externality.................................................................................................29
2.6.3 Crime as a Hotel Externality......................................................................................................................30
2.6.4 Prostitution as a Hotel Externality ............................................................................................................32
2.6.5 Juvenile Delinquency as a Hotel Externality............................................................................................33
2.7 Hotel Premises and the Environment...............................................................................................................34
2.7.1 Impact of Hotels on the Residential Property Value.................................................................................35
2.8 Hedonic Price Model.........................................................................................................................................36
2.8.2 Hedonic Models and Real Estate Valuation..............................................................................................38
CHAPTER THREE.................................................................................................................................................41
3.0 RESEARCH METHODOLOGY......................................................................................................................41
3.1 Population Design.............................................................................................................................................41
3.2 Research Design................................................................................................................................................42
3.3 Restatement of Research Questions and Hypothesis........................................................................................42
3.3.1 Research Questions....................................................................................................................................42
3.3.2 Research Hypothesis..................................................................................................................................42
3.4 Sources of Data.................................................................................................................................................42
3.5 Primary Sources................................................................................................................................................42
3.6 Secondary Sources............................................................................................................................................42
3.7 Research Instrument..........................................................................................................................................43
3.8 Validity of the Instrument.................................................................................................................................43
3.9 Area of Study....................................................................................................................................................43
3.10 Method of Data Analysis................................................................................................................................44
CHAPTER FOUR...................................................................................................................................................47
4.0 DATA ANALYSIS AND EMPIRICAL RESULTS .......................................................................................47
4.1 Data Analysis....................................................................................................................................................48
4.1.1 Table 1: Effects of Zest Hotel Externalities..............................................................................................48
4.1.2 Table 2: Effects of Mevron Hotel Externalities.........................................................................................50
4.1.3 Table 3: Effects of Hotel Royale Externalities..........................................................................................51
4.1.4 Table 4: Effects of Nymph Suites Externalities........................................................................................52
4.1.5 Table 5: Effects of Bobby Guest House Externalities...............................................................................53
4.2 Empirical Results..............................................................................................................................................54
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4. CHAPTER FIVE.....................................................................................................................................................55
5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS.............................................55
5.1 Research Findings.............................................................................................................................................55
5.2 Conclusion.........................................................................................................................................................57
5.3 Recommendations.............................................................................................................................................59
5.4 References.........................................................................................................................................................61
5.5 Appendices .......................................................................................................................................................65
5.5.1 Questionnaires..........................................................................................................................................65
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5. CHAPTER ONE
1.0 INTRODUCTION
1.1 Background to the Study
An externality exists when the consumption or production choices of one person or firm
enters the utility or production function of another entity without that entity’s permission or
compensation (Asafar-Adjaye, 2000). Economically, an externality or transaction spill over, is
a cost or benefit that is not transmitted through prices in that it is incurred by a party who was
not involved as either a buyer or seller of the goods or services causing the cost or benefit.
The cost of an externality is a negative externality or external cost, while the benefit of an
externality is a positive externality, or external benefit. In real estate parlance, the notion of
externalities states that external factors to a property can have either positive or negative
effects on its value (Appraisal Institute, 2008; Do et al., 1994) as cited in (Babawale,
Adewunmi, 2011). Because of its physical immobility, real estate tends to be affected by
externalities more strongly than most other economic goods, services, or commodities
(Babawale, Adewunmi, 2011). Babawale et al,(2011) further established that ''If an externality
is truly a nuisance, then values of properties within close range will be adversely affected in
proportion to the distance from it. If on the other hand an externality is an amenity, then
property value will increase the closer a property is located to it''.
Noise from loud speakers particularly at party times, people moving in and out of premises,
traffic and parking problems, air pollution from exhaust of generators and vehicles,
environmental pollution from waste disposal, late night activities, moral decadence (sex
workers, junkies and addicts, sellers of alcohol and hard drugs) and people from different
walks of life trooping into the neighbourhood are parts of the negative externalities generated
by hotels. In Nigeria, 'happy hours' (A time to merry) are known to start on Friday evenings to
last through the weekend and mostly involving overnight activities, sex workers are numerous
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6. and a lot of jobless youths who are into drug and alcohol consumption usually loitering, this
however enhances criminal activities in a hotel environment. Recently, the Oyo state
government banned brothels in residential areas (Punch Agency Reporter, 2013); this justifies
the fact that hotels generate negative externalities. Kuo (2003) observed that hotels in certain
regions contribute to irritating noise levels in the neighbourhoods, increase levels of fear,
contribute to more violent and aggressive behaviour and encourage commercial sex activities.
In a similar study on churches in Chicago (Do et al., 1994 as cited in Babawale et al, 2011)
established that noise from church bells, loud speakers and musical instruments, people
arriving and departing the premises, traffic and parking problems, pollution from automobiles,
operating hours extending from morning till evening, and people of different shades and
characters trooping into the neighbourhood are parts of the negative externalities generated by
neighbourhood churches. Additionally, on the issue of noise, Nelson (1978) argued that
environmental noises that exceed ambient levels can disturb valuable activities such as
conversation, TV viewing, leisure, work or sleep and that in several cases can have adverse
effects on long-term health and thereby reduce productivity and quality of life, while
according to Babawale et al, (2011) Irritating noise level in the neighbourhood also
contributes to more violent and aggressive behaviour. Expectedly, such environments repel
rentage, purchase or acquisition of properties thereby lowering the economic values of such
nearby residential properties.
Hotels on the other hand generate positive externalities in the likes of employment
opportunity, goodwill (landmark, which enhances accessibility), provision of infrastructure
amongst others. Kuo (2003) revealed that hotels which host tourists and international
dignitaries add to the value of nearby residential properties, while Laverne and Winson-
Geideman (2003) in their study found that rental rates of properties were found 5% higher on
sites having a quality landscape and surrounded by hotels and bars. When hotels are located
within residential areas, the residential properties become subject to hotel externalities; which
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7. consequently affect the value of such properties, depending on the nature of the externalities.
This implies that if hotel externalities are disamenities, substantial amount of money secured
with high interest rates are being tied down without generating the desired income for the
respective investors (Olujimi and Bello, 2009). Hence the need for the enforcement of and
adherence to zoning regulations.
The major aim of zoning regulations are to restrict and isolate commercial development from
immediate proximity to residential areas. Besides zoning, which typically tries to distance
these land uses from residential areas, buffers are sometimes required by public sector entities
to form natural or artificial barriers to protect nearby residents from the noise, traffic,
excessive night lighting, and aesthetic deterioration generated from commercial activity
(Recai et al, 2010). Unfortunately, in a city like Lagos which is subject to a high rate of
metropolitan explosion (Mabogunje, 1968), in Nigeria where laws are barely enforced; zoning
regulations and planning laws are paper tigers. These zoning laws are not obeyed, and this
leads to conflicting land uses and indiscriminate location of developments.
This study being a perfection study, investigates hotel externalities and the influence these
have on house prices. This study is however broken down into sections. The first section
introduces the project, the introductory section is followed by a literature review; where
related literature were critically reviewed. The Research methodology adopted and the data
analysis followed respectively. Finally, this study concludes with a summary of findings and
sensible recommendations.
1.2 Statement of Research Problem
Zoning regulations are often times disobeyed as cities grow in developing countries like
Nigeria, where planning regulations are not effective. This leads to indiscriminate location of
commercial developments in residential areas. A hotel which is of commercial use in the same
locality as residential properties, can have both negative and positive influence on the
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8. environment. Such impact in the negative may include traffic congestion, high crime rate,
insecurity, high late night population, moral decadence, environmental pollution etc. While
positive influence may include provision of infrastructures such as tarred road (accessibility),
employment opportunity and the likes. These externalities generated from hotels,
subsequently have an impact on the value of neighbouring residential property. Hence, the
need for an investigation on the effects of these externalities on property value.
There is paucity of studies on the effect of hotel externalities on the value of neighbouring
properties. The paucity of studies on the effect of churches on the value of nearby residential
properties can be attributed to effective planning in developed countries; which curtails
indiscriminate location of religious premises as observed by Babawale and Adewunmi (2011).
This possibly could be the reason why there are very few studies on the effect of hotel
externalities on property value. Hence the cogent need for this study, as there are, but a few
studies carried out on the study area, as regards the effects of hotel externalities on
neighbouring property value. It is against this background that this study was conceived to
attempt an investigation on the relationships between hotel externalities and the value of
neighbouring residential properties in a congested metropolis like Lagos state, Nigeria; where
zoning regulations are rarely obeyed.
1.3 Aim and Objectives of the Research
The aim of this research is to ascertain the effects of hotel externalities on the rental value of
neighbouring residential properties in selected localities in the Lagos metropolis, while the
specific objectives are to:
1. To identify the activities of the sampled hotels as well as the services they render.
2. To ascertain all relevant factors surrounding the establishment of the hotels as it
affects the hotel's impact on the adjoining residential properties.
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9. 3. To measure the influence of the hotels on the rental values of adjoining residential
properties.
4. To proffer solutions to the problems of hotel externalities as they relate to residential
property value.
1.4 Research Questions
The afore-mentioned objectives have generated a number of questions in terms of hotel
externalities and values of residential properties, to which answers are to be provided. The
relationship between externalities of a hotel and the values of neighbouring residential
properties cannot be determined without due consideration given to variables that make up
these externalities. Some pertinent questions to enable the study attain its stated objectives are
as follows:
1. What are the types of activities and services rendered by the sampled hotels?
2. How do the layout, size, activities, location etc. of the hotels impact on the adjoining
residential properties?
3. What is the influence of externalities generated by the hotels on the rental values of
adjoining residential properties?
4. What are the implications and solutions to the externalities generated by hotels within
residential neighbourhood?
1.5 Research Hypothesis
Consequently, the following hypothesis was postulated:
H0: Hotel externalities have no significant effects on the rental values of adjoining
residential properties.
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10. 1.6 Scope of Study
The investigation will be limited to the impact of five hotel premises in the Lagos metropolis
on the rental value of residential properties. The choice of five hotels is made so as to provide
an acceptable spread of data from different parts of Lagos in order to avoid bias in the final
conclusion, and additionally to provide sufficient specimen to discover and report both
positive and negative effects of hotel externalities on the rental value of residential properties.
The localities to be selected are (Akoka) Yaba, Berger, (Mile 12) Ketu, Alagbado, and Ajah
areas of Lagos. The hotels sampled will be selected using purposive sampling, in order to
arrive at a convincing conclusion. Accordingly the findings will be analysed and a conclusion
will be drawn from this.
1.6.1 Study Area
Lagos State is an administrative division of Nigeria, located on latitude 6°35' N 3°45' E in the
south-western part of the country, it was created on the 27th May, 1967, it has Ikeja as its
capital city, Lagos was the Federal Capital Territory of Nigeria from amalgamation at 1914 up
until 1991 when the Federal Capital Territory was moved to Abuja . The smallest in area of
Nigeria's states, Lagos State is arguably the most economically important state of the country,
containing Lagos, the nation's largest urban area. The actual population total is disputed
between the official Nigerian Census of 2006, and a much higher figure claimed by the Lagos
State Government. The census puts the population of Lagos state at a total of 9,013,534
people. (Website: lagosstate.gov.ng)
The increased relative economic influence of Lagos being the centre of excellence, and the
bedrock of commerce in Nigeria is responsible for its continuous vast expansion since 1898
when railway construction was first completed in the state (Mabogunje, 1968). This has
created greater opportunities especially for residential and commercial property
developments. As a result of the railway and airports like the Murhitala international airport
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11. (Nigeria's chief airport) a large number of hotels have been built in Lagos, to service
travellers; making Lagos the seat of most extensive hotels in the country. The map below
shows the different local governments in metropolitan Lagos.
1.6.2 Map of the Study Area
SOURCE: Google maps
1.7 Justification for the Study
This study will help the government, planning authorities, real estate practitioners, the
academic body, residents, investors and other stakeholders to access a vast knowledge of the
effects of hotel externalities on the rental value of neighbouring residential properties.
This research work will equip the government and planning authorities with the needed
knowledge to make the right decisions with regards to zoning of land use and development, it
will identify the effects of hotel externalities, thereby helping all stakeholders to know if these
land uses are complementary or conflicting. It will encourage the government to work
towards the enforcement of zoning regulations, so as to ensure residential properties
command their full rental value; as well as enhance real estate practitioners in carrying out
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12. adequate advisory services for their clients. This research work will further help to fill the gap
in the existing body of knowledge about the effects of hotel externalities on nearby residential
properties in Nigeria as there is minimal study on this research work.
The increased relative economic influence of Lagos being the centre of excellence, and the
bedrock of commerce in Nigeria is responsible for its continuous vast expansion since 1898
when railway construction was first completed in the state (Mabogunje, 1968). This has
created greater opportunities especially for residential and commercial property developments
to cluster in Lagos. As a result of the railway and airports like the Murhitala international
airport (Nigeria's chief airport) situated in Lagos, a large number of hotels have been built in
Lagos to service travellers; making Lagos the seat of most extensive hotels in the country.
This offers access to richer information on hotels than most other states in Nigeria, justifying
the choice of Lagos where several samples of hotels could be drawn for proper investigation
purposes.
1.8 Limitation of the Study
Some challenges were encountered during the study. As a result of the “carefulness” of staffs
of the sampled hotels, there was considerable reluctance on their parts to volunteer
information; while some avoided stating the absolute truth. Some of the respondents who are
residents of nearby residential properties, delayed in completing the questionnaires
administered on them. However, the researcher took time to allay the fears of respondents by
educating them about the essence of the research; that it would in no way expose them to
imposition of levies or charges or any liability to the Lagos State Government. Another major
challenge was the unavailability of sufficient data and information from books, text-books,
journals and the internet.
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13. 1.9 Research Method
The primary source of data for this research work include Oral interview and Questionnaire,
while the source of Secondary data include relevant texts, journals, magazines,
seminar/workshop papers and articles. The instrument used to capture data in this research
work were Questionnaires structured to investigate the effects of hotel externalities on the
neighbouring residential property value; this was designed by the researcher and authenticated
by his supervisor. There were two Questionnaires, one addressed to the sampled hotels, while
the other was addressed to the residents of the hotel neighbourhood. The data captured is
however analysed using the standard hedonic pricing model, as studies on the impact of
externalities are traditionally investigated; using the hedonic pricing model (Rosen, 1974;
Kohlashe, 1991).
1.10Definition of Terms
Return of capital: The point or level of financial activity at which expenditure equals
income, or the value of an investment equals its cost.
Return on capital: A profit made on an investment or business venture.
Externality: The beneficial or adverse effects an activity or a particular land use has on other
adjoining land uses.
Spill over: The overflow of the activities of an organisation or land use out of proportion to
affect nearby land uses.
Amenities: Amenities can be defined as additional fixtures such as high quality fixtures,
proximity to shopping complexes or schools, striking or unique design, good roads, and other
infrastructures that enhance the desirability and often the appraisal value of the property.
Disamenities: Disamenities can be defined as disadvantages or drawbacks especially of a
location that reduces the desirability and often the appraisal value of a property.
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14. Pareto: This refers to an optimal level, a state of economic equilibrium in which it is
impossible to change the allocation of resources without improving the lot of one agent at the
expense of another.
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15. CHAPTER TWO
2.0 LITERATURE REVIEW
This chapter covers issues relating to the research aim and objectives. It involves a rigorous
research into related literature by established authors, to give a clearer understanding of the
research topic. Relevant texts, journals, magazines, seminar/workshop papers and articles
were all jealously consulted to come about the accomplishment of this chapter. The keywords
in this dissertation being externalities, hotel, residential property, property rental value,
hedonic pricing model; related literatures on these subjects were reviewed as it relates to the
impact of externalities on property value.
2.1 Introduction
The real estate investment market is very large, but within this investment market the hotel
business is assuming a place in the world's largest industry (Fennel, 1999. Middleton and
Hawkins, 1998). World Trade Organization (1997) states that it is becoming the most diverse
industry and one of the most important social and economic activities of today's world. The
international tourist arrival numbers increase annually worldwide and based on the WTO
(1997) estimates, by the year 2020 there will be 1.6 billion arrivals, spending over 2 trillion
U.S dollars. This signifies an expected growth at an average of 4.3% globally and spending at
6.7% annually.
As a result of the viability of the hotel business, many countries in the world are now reliant
on this industry, wanting to invest more therein particularly when other forms of investment
are not as viable. The hotel business has grown to become a good source of economic benefits
of foreign exchange, employment, government revenues, infrastructural developments,
amongst others (Edgell, 1990; Laws, 1995; Robert, 1993; and WTO, 1997). Although hotel
business has grown to be of great economic benefits in many nations, it is recognized that the
introduction of hotels in any location will cause some changes (Glasson, 1995), as it relies
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16. directly and indirectly on a range of resources including built environment at destination areas
(Hunter and Green, 1995).
For this research work, the interest is centred on whether a hotel premises has a positive
impact or negative impact, and to what extent. In many parts of Lagos, residents have argued
that a hotel premises can be an amenity where such hotels provide employment opportunities,
recreation facilities, quality property development, and enhance accessibility. On the other
hand, some members of the community pose some resistance believing that this will have
negative impacts on property value, due to possible loss of privacy, juvenile delinquencies,
moral decadence, noise, higher traffic and more crime in the neighbourhood.
It is evident that hotels generate externalities, which can either be positive or negative
depending on the hotel, the size of the hotel and its activities. Hotels can encourage local
artisans by providing employment opportunities. A hotel of good repute will raise the profile
of a neighbourhood and attract investment in nearby residential properties. However, a hotel
of bad repute can scare away prospective tenants and cause the situation of void/vacancy in
nearby residential properties. The effects of hotel externalities on property value should
therefore be investigated.
2.2 Externalities Defined
John Asafar-Adjaye (2000) stated that an externality exists when a person makes a choice that
affects other people in a way that is not accounted for in the market price. For instance, a firm
emitting pollution will typically not take into account the costs that its pollution imposes on
others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the
level that would exist if the market was required to account for the pollution. Laissez-faire
economists such as Friedrich Hayek and Milton Friedman sometimes refer to externalities as
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17. "neighbourhood effects" or "spillovers", although externalities are not necessarily minor or
localized. Similarly, Ludwig Heinrich Edler argues that externalities arise from lack of "clear
personal property definition."
However, Heller and Starrett (1976) who gave a classic definition, defined an externality as “a
situation in which the private economy lacks sufficient incentives to create a potential market
in some good and the non-existence of this market results in losses of Pareto efficiency.” In
economic terminology, externalities are examples of market failures, in which the unfettered
market does not lead to an efficient outcome.
Bishop Matthew (2012) stated that "Externalities are costs or benefits arising from an
economic activity that affect somebody other than the people engaged in the economic
activity and are not reflected fully in prices". Laffont (2008) established that Air pollution
from motor vehicles is an example of a negative externality. The costs of the air pollution for
the rest of society is not compensated for by either the producers or users of motorized
transport. In the case of both negative and positive externalities, prices in a competitive
market do not reflect the full costs or benefits of producing or consuming a product or service.
Producers and consumers may neither bear all of the costs nor reap all of the benefits of the
economic activity, and too much or too little of the goods will be produced or consumed in
terms of overall costs and benefits to society.
For example, manufacturing that causes air pollution imposes costs on the whole society,
while fire-proofing a home improves the fire safety of neighbours. If external costs exist, such
as pollution, the good will be overproduced by a competitive market, as the producer does not
take into account the external costs when producing the good. If there are external benefits,
such as in areas of education or public safety, too little of the good would be produced by
private markets as producers and buyers do not take into account the external benefits to
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18. others. Here, overall cost and benefit to society is defined as the sum of the economic benefits
and costs for all parties involved.
2.2.1 External Costs and Benefits
Standard economic theory states that any voluntary exchange is mutually beneficial to both
parties involved in the trade. This is because buyers or sellers would not trade if either thought
it not beneficial to themselves. However, an exchange can cause additional effects on third
parties. From the perspective of those affected, these effects may be negative (pollution from
a factory), or positive (honey bees kept for honey that also pollinate crops). Welfare
economics has shown that the existence of externalities results in outcomes that are not
socially optimal. Those who suffer from external costs do so involuntarily, while those who
enjoy external benefits do so at no cost.
The person who is affected by the negative externalities in the case of air pollution will see it
as lowered utility: either subjective displeasure or potentially explicit costs, such as higher
medical expenses. The externality may even be seen as a trespass on their lungs, violating
their property rights. Thus, an external cost may pose an ethical or political problem.
Alternatively, it might be seen as a case of poorly defined property rights, as with, for
example, pollution of bodies of water that may belong to no-one.
On the other hand, a positive externality would increase the utility of third parties at no cost to
them. Since collective societal welfare is improved, but the providers have no way of
monetizing the benefit, less of the good will be produced than would be optimal for society as
a whole. Goods with positive externalities include education (believed to increase societal
productivity and well-being; but controversial, as these benefits are generally internalized,
e.g., in the form of higher wages), public health initiatives (which may reduce the health risks
and costs for third parties for such things as transmittable diseases) and law enforcement.
Positive externalities are often associated with the free rider problem. For example,
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19. individuals who are vaccinated reduce the risk of contracting the relevant disease for all
others around them, and at high levels of vaccination, society may receive large health and
welfare benefits; but any one individual can refuse vaccination, still avoiding the disease by
"free riding" on the costs borne by others.
There are a number of potential means of improving overall social utility when externalities
are involved. The market-driven approach to correcting externalities is to "internalize" third
party costs and benefits, for example, by requiring a polluter to repair any damage caused.
But, in many cases internalizing costs or benefits is not feasible, especially if the true
monetary values cannot be determined.
2.2.2 Causes of Externalities
1. Interdependence between economic agents: One person’s activity affects the utility
or production of another. However the market system fails to ‘price’ this interdependence, so
that affected party is uncompensated.
2. Lack of or weak property rights: Due to the lack of property rights, the affected
party is unable to demand or ask the compensation for the damage, which are made by
externality.
3. High transaction costs: The cost of negotiation, implementation and enforcement
between the parties maybe high.
2.2.3 Classification of Externalities
Externalities are further classified into four, and these are as follows:
1. Relevant externalities
2. Pareto relevant externalities
3. Static and dynamic externalities
1. Relevant externalities
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20. An externality is not relevant until the affected person stops being indifferent to it. It will
become relevant when the affected person is suffering by the activity and wants the offending
person to reduce the level of the activity.
2. Pareto relevant externalities
A Pareto relevant externality exists whenever its removal results in a Pareto improvement. A
Pareto improvement is a situation where it is possible to take action, such that the affected
person is made better off without making the offending person worse off. It means that when
the level of an externality is optimal, it becomes Pareto irrelevant.
3. Static and dynamic externalities
To point out the static and dynamic externalities, take the example of two fishers who are
operating under an open access or property rights regime. A static externality is when one
creates an externality for the others by overfishing. However, the externality can become
dynamic if the offending party is harvesting juvenile fish that may have some future value. In
this case, there will be adverse impacts for the future.
2.3 Factors Affecting Property Value
Adjacency variables have a significant effect on the value of any property, the nature of an
environment as well as people's perception of a particular neighbourhood determines the
amount tenants are willing to pay to live in that neighbourhood. There are however other
factors that affect property value asides the adjacency variables. According to Morgan (2010),
the factors below affect the value of residential properties.
Size of plot and structure: The size of the plot on which a residential property is situated as
well as the size of the structure itself are major determinants of the property value.
Condition of the building: The condition of the house also significantly influence the
property value. A property in a good state of repair will command a higher rent than one in a
poor condition.
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21. Extras: The extras here refer to features like a garage, a pool, a barn, matured garden etc.
Any prospective buyer, or tenant who is interested in these extras may have to pay a higher
price.
Public Opinion: The public opinion about a particular neighbourhood's reputation will
drastically improve or reduce the potential for a good offer.
Accessibility: The nearer a home is to necessary facilities such as shopping malls, grocery
store, hospital etc, the more attractive it is to prospective tenants; then it may help increase the
amount a tenant is willing to pay.
Curb Appeal: This is the outward look of a house which is the first impression. It can lead to
a higher offer if it is appealing.
Neighbourhood values: The recent rent or selling price of similar properties in the
neighbourhood is usually a benchmark for property value, except the subject property
obviously has more impressive features.
There are factors that on the contrary decrease the value of residential properties. These are:
Property Deterioration: Improper maintenance of properties results in deterioration, and this
in turn reduce the value of such properties.
Noise: Properties in areas where there is excessive noise usually suffer decrease in value.
Developments such as railway tracks, airports, churches and hotels usually generate excessive
noise which decreases residential property value. Asides the poor property condition and
noise, a decline in the neighbourhood will also negatively affect property value.
Having extensively discussed externalities, and the factors that affect property value, it is
expedient in continuation of this research work to take a look at hotels and how the activities
affect its next environment.
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22. 2.4 Externalities and Property Value (on a general note)
For the purposes of this article, an undesirable land use will be defined as any land use that
creates a stigma for at least some nearby properties. The Dictionary of Real Estate Appraisal
defines stigma as: “An adverse public perception regarding a property with some type of
opprobrium (environmental contamination, a grisly or repugnant crime) which exacts a
penalty on the marketability of the property and hence its value.” (Chicago Appraisal
Institute, 2002 as cited in Bell, 2001). A variety of land uses may create stigma including, but
not limited to: toxic waste sites; landfills; airports; prisons; concentrated animal feeding
operations (CAFOs); petrochemical refineries; nuclear power plants; and, abandoned
manufacturing facilities. The important distinction to be made is that this article only
considers those situations in which the adverse public perception (stigma) of a subject
property is due to the presence of an undesirable land use, and not due to a direct problem
with the subject property itself.
In a study on undesirable land uses Olawunmi, Akinjare and Ayedun (2011) tried to capture
the pattern of residential property rental values around High Voltage Overhead Transmission
Lines (HVOTLs) using a rent comparison basis within Lagos metropolis they established that
there has been a constant debate that HVOTLs facilitate residential property values
diminution. On the 13th of February, 2010 in Port Harcourt, Southern Nigeria, the BBC
online news confirmed that at least ten people were charred beyond recognition while many
other passengers were electrocuted when a power line cable snapped off a pylon hanger and
fell on a commuter bus (BBC News Website, 2010, as cited in Olawunmi, Akinjare and
Ayedun,2011). According to Olawunmi et al, (2011) Several studies including those of
Kinnard (1967), Wertheimer & Leeper (1979), Colwell and Foley (1979), (Savitz et al,1988)
and some recent ones Chalmers and Voorvaart (2009), (Akinjare et al 2012), have for long,
sort to investigate the impact of power lines on the property values and also its probable effect
on the health of residents within close range. Another study by Syms (2001) as cited in
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23. Olawunmi et al, (2011) exposed to the media the issue of power-lines as they affected
property values negatively.
Bello and Ajayi (2010) in their paper which examined the occupants’ satisfaction and rent
paid for residential properties within three neighbourhoods (Olusosun, Abule – Egba, and
Solous) close to waste dump sites and Ketu neighbourhood (not close to dump site) in Lagos
Metropolis, she comfirmed an originally established statement that the value of properties can
be attributable to the nature of property as a package of goods and services (Bello and Bello
2008). Therefore, property extends beyond shelter to include environmental characteristics or
attributes. She cited Bello and Bello (2008) who earlier noted that the influences of
environmental characteristics on value are difficult to assess.
As stated in Babawale, (2011) some externalities are associated with negative effects and
examples of such are externality effects on values of residential properties in close proximity
are landfill (Arimah & Adinnu, 1995); brownfield (Kaufman & Cloutier, 2006) contaminated
properties (Kohlashe, 1991; Kinnard & Geckler, 1991); air pollution (Hamilton & Biggs,
1993; Komarova, 2009); industrial sites (Vor & Groot, 2009); oil and natural gas facilities
(Chan & McMillian, 2004); and nuclear plant and iron and steel plant (Bilbao-Terol, 2009).
On the other hand, land uses that constitute positive externalities include water view (Seiler et
al., 2001; Paterson & Boyle, 2002; Bourassa et al., 2004); open spaces, parks and greenbelt
(Bolitzer & Netusil, 2000; Asabere & Huffman, 2007); golf course (Nichollis & Crompton,
2007); and neighbourhood schools (Ketkar, 1992; Zahirovic-Herbert, 2007).
2.5 A Brief look at Hotels
A hotel is an establishment that provides paid lodging on a short-term basis. In the earlier
days this was limited to the provisions of a room with a bed, a cupboard, a small table and a
washstand, but in the recent years this has largely been replaced with rooms that are furnished
with modern facilities, including en-suite rooms and air-condition facilities. Additional
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24. features that are common to hotel rooms include telephone facilities, internet facilities and
televisions with cable connections; snacks and drinks are usually made available at a mini-
bar. In larger hotels, there are provisions for additional guest facilities such as restaurants, a
swimming pool, conference halls, event halls, casinos, gymnasium centre, spa, bars, and other
facilities. Hotel rooms are usually numbered or named to allow guests to easily identify their
rooms.
Some hotels offer meals as part of a room and board arrangement. In the United Kingdom for
instance, a hotel is required by law to serve food and drinks to all guests within certain stated
hours; this is however not so in places like Japan. In the United Kingdom, Canada, Australia
and Ireland, the word hotel is also used to refer to a pub which might not offer
accommodation; while in India and Bangladesh, the word may refer to a restaurant.
Hotels are usually classified based on the services provided, and such classifications are as
follows:
1. Full Service Upscale
These offer the highest forms of services and examples are Conrad Hotels, Four Seasons
Hotels etc.
2. Full Service
These are the next category of hotels as regards service provision. Examples are Hilton and
Marriott hotels etc.
3. Select Service
Examples of these are Courtyard by Marriott and Hilton Garden Inn
4. Limited Service
These offer limited services and examples of such are Hampton Inn, Fairfield Inn, Days Inn
etc.
5. Extended Stay
Examples of such Hotels are Homewood Suites by Hilton, Residence Inn by Marriott and
Extended Stay Hotels.
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25. 2.5.1 The Evolution of the Hospitality and Lodging Industry
The Earliest Years
From its inception, the hospitality industry has grown and developed in response to the
changing needs of those who travel for either business or pleasure. Therefore, as modes of
transportation and commerce have evolved, the hospitality industry has been continuously
reinvented to serve travellers. Records dating back to 500 B.C. are the first documenting a
commercial and leisure demand for lodging. In fact, many advanced societies including
Babylonian, Greek, Egyptian, Roman and Asian had inns and taverns located near temples, in
major centres of commerce or along well-established roadways. Throughout the Middle Ages,
religious pilgrimages gave rise to lodging within monasteries, inns and hospices owned by the
Church. It was not until the 13th century that a more formal organization of inns was formed
in Florence, Italy to house the many visitors coming to view the city’s impressive collection
of Renaissance art and architecture. In the 1700s the hospitality industry truly began to take a
new form. The posting inn, created to provide lodging to mail-carrying coachmen,
established the initial network of inns throughout England. Soon, the posting inn gave way to
the traditional English inn and the Colonial inn, both of which preceded the hotel network
which developed throughout Europe and the United States respectively. During this period,
according to Ransley, J. & Ingram, H. (2004), travel by either ship or horse-drawn carriage
created a need for these forms of hospitality to be located primarily in major towns or key
ports.
The Railroad and Depot Hotel
With the advent and rapid expansion of the railroad system in the mid-1800s, lodging
facilities began to locate adjacent to railroad depots. The local inn became a point of pride for
many newly established American cities. As the railroad stretched west, every new outpost
city established an inn or tavern to accommodate visitors. In the major cities of the east coast
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26. (Boston, New York & Philadelphia) hotel innovation was already in full swing. As these
cities grew economically, geographically and in population at a rapid rate, new and elaborate
hotels began to emerge which incorporated the technological advances of the time. Advances
including running water, electricity, telephone and the elevator helped each generation of
hotels push the previous generation into obsolescence. Yet, the most interesting changes in the
hotel industry were yet to come.
The First Hotel Boom and the Depression Years
Throughout the roaring 1920s, the hotel industry boomed and expanded – much like the
American economy in general. Rushmore, S. & Baum, E. (2001), Rutes, W. A., Penner, R. H.
& Adams, L. (2001) stated that this period in time marked the first major hotel development
boom. Unfortunately, also like the American economy, the hospitality industry suffered
immensely with the stock market crash of 1929 and the onset of the Depression. Almost
immediately, the hospitality industry stopped expanding and started to contract. With little to
no commercial demand and even fewer leisure customers, many properties fell into
foreclosure. Yet, for those individuals whose financial resources remained relatively liquid,
the Depression years and the decade that followed offered vast opportunities. Conrad Hilton
was one of these individuals. The boom of the 1920s and the subsequent precipitous drop in
property values of the 1930s allowed Hilton to establish the first hotel chain as he purchased
several landmark hotels in major cities for a fraction of their original cost. Earnest Henderson,
founder of the Sheraton brand, was also able to capitalize on the economic doldrums of the
1930s.
Post World War II and the Prosperous 1950s
According to Rushmore, S. & Baum, E. (2001), Rutes, W. A. Penner, R. H. & Adams, L.
(2001) as the general economy rebounded in the 1940s, so too did the hospitality industry.
When automobiles displaced trains as the preferred means of travel, the rail-side hotels
became increasingly less desirable and less relevant to the needs of the travelling population.
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27. Large-scale expansion in the hospitality industry was constrained due to the material and
resource needs of the military during World War II. Therefore, it wasn’t until the 1950s that
there was another sustained period of growth and further transformation within the industry.
The prosperity of the 1950s provided Americans with the financial means and physical
infrastructure to stretch their legs, which contributed to the second major hotel boom.
The Birth of the Motel
The Interstate Highway Act of 1956 as well as the continued popularization of the automobile
all but eliminated the demand for hotels in near railways. This period of time was defined by
unprecedented suburban sprawl. Proximity to urban areas carried a negative connotation for
many homeowners as suburban neighbourhoods and business parks came into vogue. With
these changes, it made more sense for this new generation of hotel to be located along the
interstate, near cities or major interchanges. This phenomenon led to the birth to the “motel”.
Originally referred to as “motor courts,” the early motels were often a cluster of cabins along
the side of the interstate. In 1954 the Ramada was introduced in Flagstaff, Arizona. The first
Ramada was called a “motor hotel” and literally translated from Spanish meant “a shaded
resting place''. As Route 66 grew in popularity as a means of cross-country travel, motor
courts became more sophisticated “fully integrated buildings under a single roof [offering]
rooms that were plain and functional, and facades that took advantage of regional styles.
Originally, the motel was meant to provide business and leisure travellers with a lodging
option that was more economical than the full-service hotels generally located in the city. As
such, the motel was effectively the original “limited-service” hospitality product generally
offering a room and scant amenities. Additionally, motels were typically smaller, located in
secondary locations and built and managed to a lower standard than full-service hotels. Yet,
because of the relative ease of building motels, the competition increased and existing owners
looked for a way to differentiate their motel from others. This was accomplished through
adding amenities and services, increasing the number of rooms and improving the
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28. construction quality. By the late 1960s, the characteristics that defined a motel had blended
with those of that defined a hotel, and the two were becoming somewhat indistinguishable
hotel product types. Over time, the term motel became synonymous with low-end Spartan
lodging which spurred a movement within the lodging industry to eliminate the use of the
term all together. In the present day, there are few facilities that carry the motel moniker as
presented in Rushmore, S. & Baum, E. (2001).
2.6 Hotel Externalities
It is evident in the preceding sub-topic just discussed that hotels generate externalities both in
the negative and the positive. In that regard this section of the literature review discusses in
details both positive and negative externalities generated by hotels as observed by established
authors.
2.6.1 Creation of Employment as a Hotel Externality
Local participation in tourism in developing countries is primarily in employment rather than
the tourism business where the high capital costs of entry, language, education, and skills are
constraints as stated in Healy (1994). In 2001, accommodation facilities in the Okavango
Delta employed 1658 people which is 16.6% of the formal tourism employment in Botswana
as observed by Mbaiwa (2002). In total 10,000 people are employed in the tourism industry in
Botswana, which is 4.5% of the total employment in the country (BOB, 1999, CSO, 1998). In
enclave tourism, citizens and local people usually hold poor and unskilled jobs while
management and better paying positions are held by expatriates (Britton, 1982; Healy, 1994;
Ceballos-Lascurain, 1986; Oppermann & Chon, 1997). In the Okavango Delta, the jobs
occupied by local people in the tourism sector are mainly unskilled and attract low salaries.
These jobs include manual labour and work as drivers, maids, cleaners, night watchmen,
gatekeepers, and cooks. These artisans employed for unskilled labour will however, be most
grateful for an opportunity to earn themselves s living. The moment a hotel provides
Page 28

29. employment opportunities to local artisans, these artisans will most likely seek
accommodation in close proximity to their work place (the hotel). Consequently, the demand
for residential properties particularly tenement building increases, resulting to an increase in
rental value. The creation of employment hence has a positive externality effect on property
rental value.
2.6.2 Traffic Congestion as a Hotel Externality
Ukpata and Etika(2012), stated that many urban cities in Nigeria are bedevilled with traffic
congestion which tends to defy various remedial measures adopted by different governments
over the years. Journey times from one point to another within a town have remained
unreliable and residents have continued to face disturbing inconveniences in transportation.
These are accompanied by noise and air pollution and the high costs associated with burning
of fuels from stationary vehicles. The contributions of road transportation to environmental
degradation in urban cities of Nigeria have been highlighted by Onokala (2008). The problem
is no longer limited to traditional cities such as Lagos, Abuja, Ibadan etc (Ogunsanya 2002;
Ogunbodede nd). Virtually every state capital city in Nigeria today faces the problem of
traffic congestion (Moses 2011). However, a survey of 26 cities by Ukpata and Etika (2012),
displayed that Lagos city suffers the most traffic congestion in Nigeria, while it is followed in
order by Port Harcourt, Abuja, Ibadan, Aba, Kano and Onitsha. Some of the major causes of
traffic congestion include: poor parking habits, poor road network, inadequate road capacity,
lack of parking facilities, poor traffic control/management, poor drainage, presence of heavy
vehicles, poorly designed junctions/roundabouts and lack of efficient mass transport system
(Ukpata and Etika, 2012). These tend to agree with earlier findings from a number of studies
such as (Bashiru and Waziri 2008; Aworemi et al 2009; Aderamo and Atomode 2011, etc).
Lagos state has the largest concentration of hotels in Nigeria, due to several reasons such as
the presence of the Murhitala international airport (Nigeria's chief international airport), its
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30. highly commercial nature, amongst others. The problem of congestion in Lagos will partly be
due to the presence of the many hotels with inadequate parking facilities e.g. hotels in Ajao
estate, Isolo. Traffic congestion as a hotel externality has a negative impact on residential
property value, particularly on flat apartments where most occupants are car owners; who
would find it difficult to access their apartments due to road congestion. Beyond the
inaccessibility of their apartments is the stress and its consequent health deterioration.
Considering this, prospective tenants will rather choose to occupy an alternative vacant
property farther from a hotel premises. Hence, traffic congestion as a hotel externality can
cause a situation of void in neighbouring residential properties.
2.6.3 Crime as a Hotel Externality
In a study of the relationship between gambling and crime in Western Canada. Using a
qualitative approach (interviews, content analysis, etc), they determined that gambling venues
in Western Canada act as magnets that attract certain types of crime" (Smith and Wynne,
1999). Smith and Wynne (1999) also reported that the crimes most likely to be committed by
gamblers included theft, fraud, credit card scams, and breaking and entering, and that legal
gambling had a variable impact on illegal gambling, sometimes increasing illegal gambling
and sometimes decreasing it. According to Grinols and Mustard (2006), a casino itself may
also bring a crime and hinder economic development. However, they do not provide an
appropriate economic theory to support this assertion. Instead, Grinols and Mustard (2006)
simply list reasons why casinos can increase crime in a community. Grinols and Mustard
(2006) perform an extensive econometric analysis that controlled for unobservable county-
specific characteristics, local economic conditions, and other factors that could confound the
relationship between the opening of casinos and crime, and conclude that approximately 8%
of the crimes occurring in US counties with casinos is attributable to the presence of casinos.
The crimes affected by casino openings include several types of violent crimes (aggravated
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31. assault, robbery, rape), burglary and auto theft. Reece (2010) also examined the relationship
between the presence of a casino in a community and a crime. He also asserts that crime rates
depend on opportunity costs and concentrates on the role played by public accommodation in
determining opportunity costs. In addition, Reece (2010) casts serious doubt on Grinols and
Mustard's (2006) conclusion that casinos cause crime to increase. Reece (2010) posits that
new hotels associated with new casinos could reduce crime rates by supplying more legal
opportunities to work in the local labour market or could increase crime rates by bringing
potential victims and criminals together.
Apparently, property values are influenced by environmental factors and property specific
attributes. These attributes according to Bello and Bello (2007) can be classified into external
and internal. External variables include the state of the economy, population, employment,
immigration, finance, location, transportation, and neighbourhood amenities; while the
internal factors comprise of the size, accommodation details, condition, design, layout, age,
etc.
Crime is an environmental menace that affects urban liveability globally (Monk, 1993;
Danbazau, 1994, Nyabvedzi and Chirisa, 2012 as cited in Recce, 2010). A popular view
shared by criminologists is that crime is dynamic, new forms of crime emerges and old forms
assume new dimensions. (Nyabvedzi and Chirisa, 2012 as cited in Recce, 2010) assert that
residents of a neighbourhood are very sensitive to safety issues and occurrence of violence
and crime in a particular place affect travel pattern and in extreme cases, property values are
affected. Residents prone to crime and violent conflicts have an increase probability of
moving (Dugan, 1999 as cited in Recce, 2010), and households that have already decided to
relocate will consider safety issues in choosing new locations (Frey, 1979). Crime is a local
issue and its manifestation affect residential formation in a particular neighbourhood.
Understanding the relationship between property values and crime risk is important in
determining the willingness of residents to live in the neighbourhood and how much to pay to
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32. remain safe. Neighbourhoods with high profile crime experience decrease demand from home
buyers which subsequently affect the prices of residential property in the neighbourhood
(Flippen, 2004 as cited in Recce, 2010).f
2.6.4 Prostitution as a Hotel Externality
The phenomenal increase in social problems across the globe and especially in developing
countries is worrisome. The situation becomes serious when the problem is multi-dimensional
in nature. Prostitution has been identified by scholars (Dworkin, 1992; Raymond, 1999;
Farley, 2000; Cockayne, 2001) as a global social and urban problem which has pervaded
every dimension of human survival. The phenomenon is not peculiar to developing countries;
the enormity of prostitution throughout the world is overwhelming. Across the globe, it has
become prominent social problem. The presence of prostitutes in the major urban centres of
the world especially the industrialized countries has transcended the level it was viewed as
strictly uncommon occurrence to a worrisome global problem. The figures from a European
regional reports show that 80,000 of 60 million population of United Kingdom are engaged in
prostitution while Germany has 300,000 of its 80 million populations in sex industry. In
Africa where the problem of prostitution is relatively new unlike the situation in Europe and
other industrialized countries, the presence of large number of prostitutes has now become a
major issue. The unprecedented growth of sex industry in Africa may not be unconnected
with rapid and wide ranging socio-economic changes and globalization which has affected the
value structure of African Society. Nigeria is not spared of this scourge and prostitution has
become so prominent that Nigerians refer to it as “the Italian Connection”, “sex working”,
“Ashawo business” (Obinna, 2009). The outburst of prostitution in Nigeria, in a way, is
comparable to Western societies, where sex trade has posed a moral challenge. The alarming
dimension of this menace can be seen not only through the proliferation of brothels and hotels
for sex workers in most urban centres but also in the increasing of prostitution rings in the
Page 32

33. country (Adesina, 2001). It is evident that the rise of prostitution is linked to the hotel
industry, as many of its customers usually patronize resident prostitutes or come into the hotel
premises with mobile prostitutes or road side prostitutes.
This phenomenon has not only attracted public concern but has also become a matter of
academic concern (Ausbeth-Ajagun, 2005; Obinna, 2005; Adesina, 2006; Uzokwe, 2008;
Adeyinka, 2008 Accusy, 2009). However, with few exceptions on socio-cultural and socio-
economic issues, most of these scholars focused on health dimensions of the problem while
neglecting the environmental implications of prostitution. This may be responsible for the
failure of most policies or efforts aimed at addressing the problem of prostitution. Supporting
the words of Jelili (2009), it is important for government, non-governmental organizations,
stakeholders and general public to be educated that the analysis, assessment, control and
management of most sociological problems or social vices (prostitution inclusive) without
recourse to their spatial and environmental implications may not yield any positive result. In
view of this, this study investigates the effect of hotel externalities (which includes
prostitution leading to moral decadence) on the rental value of residential properties. The
moment prospective tenants discover that there is a hotel or brothel in close proximity to the
property they intended to occupy, it is only rational for such intending tenant to choose a
better alternative property. This is a negative externality of a hotel on rental value of
residential properties.
2.6.5 Juvenile Delinquency as a Hotel Externality
According to the results of a. study by Clifford, Shaw and Mckay (n.d), some areas are not
appropriate for the development of children. It is a matter of common knowledge that the
neighbourhood casts important influences upon the child. Using the statistical method, Mailer
(n.d) came to the conclusion that in New York, juvenile delinquency was greatest in those
quarters, where the level of life was very low, child immorality was very high, there were no
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34. means of recreation, and residences were not permanent. In a community that is unstable
where there are no social laws pickpockets are found in great abundance in and around hotels
and other places where travellers stay since there is always one traveller or the other there.
Clifford et al studied juvenile delinquency in nearly 15 towns to discover that the rate of
juvenile crime was highest in the centre of the town and lowest at its further reaches. From
this they concluded that the social traditions of backward and low economic status areas
distinguish the pattern of crime from the average groups. And these patterns are maintained in
juvenile delinquent groups. In this way, big towns have certain areas where there is an
abundance of criminals and these areas are called criminal areas or crime dominated areas.
According to the famous criminologist Sutherland (n.d) criminal behaviour is acquired
through interactions with other criminals. He says that an individual becomes a criminal when
there is excess of conditions that promote the infringement of law over conditions that prevent
such infringement. And among children, some get good company while others do not. The
Child in bad company progresses towards crime while the child who gets into good company
progresses to become an able and useful member of society. An individual behaviour is
influenced to a considerable extent by the conduct of his companions. In order to induce the
children to accept and respect the values and assumptions of adult society around them, it is
necessary to create such an atmosphere in which inspiration to criminal behaviours is reduced
to the absolute minimum. In the light of this, prospective tenants who would not want their
children exposed to the immoralities and crime associated with hotel neighbourhoods would
rather consider an alternative property which is farther from a hotel. This adversely influences
the rental value of residential properties in close proximity to hotels.
2.7 Hotel Premises and the Environment
Hotel and the environment are inter-dependent as hotel location and business involves and
relies on natural or human resources as part of its product especially in a relatively
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35. undeveloped state (Buckley, 1999). The high quality of the environment is frequently the
primary attraction for tourists (Ceballos-Lascurain 1996a). The built environments provide
many of the attractions for tourists as well as supporting tourism by serving other functions
(Hunter and Green, 1995). In terms of the relationship between hospitality industry and the
physical environment, Budowski (1976) indicates that the relationship can be classified into
three types: conflicts, coexistence and symbiosis. Conflict when the uses are totally
contradictory, coexistence where tourism and environmental conservation can exist side by
side and with little interaction; and symbiosis where tourism and environmental conservation
can be mutually supportive and beneficial. Under symbiosis, tourists benefit from the visitor
experience and the environment receives improvements in management practice. According
to Hall (1998), tourism and hospitality industry impacts on the integrity and quality of the
environment can be classified into two categories: natural and cultural environment and
infrastructure environment. The impacts of hotel can be examined in terms of positive
benefits as well as negative effects on both the natural and cultural environments of a
destination. Real estate being an immobile commodity in an environment becomes subject to
the externality effects of hotels. The value of such properties are consequently influenced
relative to the extent of the hotel externality, which depends on the distance of the property
from the hotel.
2.7.1 Impact of Hotels on the Residential Property Value
There is considerable literature on the impact of hotels and hotel related investment on
property value. However the focus is usually on the social and environmental adjacency
impacts that hotels bear upon their locality. It was recognized by Haley et al (2004) that hotels
induce impacts both beneficial and adverse. The presence of a hotel in a locality is a potential
for further economic development, which could impact the value of nearby residential
properties through increase in curb value of the area, attraction of tourism related businesses
Page 35

36. in the area, improvements in local infrastructure, increased employment opportunities and
increased recreational opportunities (Davies et al, 1988). These factors are likely to cause an
increase in demand for residential accommodation in the area which would in turn result in an
increase in residential property value.
However on the contrary, hotels and other tourism related concerns have been known to
impact negatively on nearby residential properties. Pizam (1978) as quoted in Haley et al
(2004) suggested that such negative influences are evident when there is a concentration of
hotels in the area. Rotham (1978) enumerated the negative impacts to be increase in noise
levels, litter, traffic, crime, overcrowding, and other tourism induced price increases.
The perception that tenants or prospective tenants are likely to have about the presence of a
hotel and other tourism related concern is linked to the benefits that accrue from having a
hotel near to their residential properties compared with the imposition that it places upon them
(Haley et al, 2004). This theory is referred to as the social exchange theory. The attitude and
perception that the individual has about the hotel will also come to play in his application of
the social exchange theory. Therefore if a hotel imbues negative perceptions, it is likely to
impact negatively on the property value of nearby residential homes but if on the other hand,
the hotel draws a positive perception, then the property value of nearby residential homes will
increase. The Literature review of this research work concludes by reviewing literatures on
hedonic pricing. It is the method of data analysis adopted for this research work.
2.8 Hedonic Price Model
The model focuses on markets in which a commodity can be embedded with varying amounts
of each of a vector of utility-bearing attributes (Rosen, 1974). According to Gambo (2012)
Hedonic price model is based on the recognition and treatment of the complexity and
heterogeneity of the housing product. Court (1939) appeared to be one of the earliest users
followed by Griliches (1961, 1971) who utilized the technique for the automobile industry.
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37. However, the housing market is the most prominent in the use of the technique. Lorenz (2006)
observed that the technique has been employed to achieve three main goals in the housing
market to explain the price formation of residential property assets by identifying the main
determinants of property prices; to isolate and quantify the impact of different physical,
locational, and neighbourhood characteristics on property prices; and to account for changes
in the price formation process across region or even time. The basic structure of a hedonic
model takes the market price as the dependent variable and take all the attributes of the
product (house in this case) as independent variables. For the housing market, the independent
variables are classified into locational, structural and neighbourhood attributes. The location
attributes relates to accessibility to CBD, recreational facilities, place of worship etc. The
structural characteristics refers to the physical attributes of the property such as number of
rooms, age of the building, room size, plot size etc. While the neighbourhood characteristics,
covers the socio-economic characteristics of the people living in the neighbourhood such as
social status, racial composition etc. This study considers neighbourhood security, quietness,
and neatness as attributes of neighbourhood characteristics.
In a hedonic regression, the economist attempts to consistently estimate the relationship
between prices and product attributes in a differentiated product market. The regression
coefficients are commonly referred to as implicit (or hedonic) prices, which can be interpreted
as the effect on the market price of increasing a particular product attribute while holding the
other attributes fixed. (Bajari and Cooley, 2010)
Some of the studies that utilize hedonic price model in Nigeria include Megbolugbe (1989);
Afolayan (2006); Bello and Bello (2007), Ajide and Alabi (2010); Otegbulu, Johnson and
Odekoya (2011); and Babawale and Adewunmi (2011) as stated in Gambo (2012).
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38. 2.8.2 Hedonic Models and Real Estate Valuation
In real estate appraisal, it is used to adjust for the problems associated with researching a good
that is as heterogeneous as buildings. Generically, it is difficult to estimate the demand for
buildings, because buildings are so different. Instead, it is assumed that a house can be
decomposed into characteristics such as number of bedrooms, size of lot, or distance to the
city centre. A hedonic regression equation treats these attributes (or bundles of attributes)
separately, and estimates prices (in the case of an additive model) or elasticity (in the case of a
log model) for each of them. This information can be used to construct a price index that can
be used to compare the price of housing in different cities, or to do time series analysis. As
with Consumer price index calculations, hedonic pricing can be used to correct for quality
changes in constructing a housing price index. It can also be used to assess the value of a
property, in the absence of specific market transaction data. It can also be used to analyze the
demand for various housing characteristics, and housing demand in general. It has also been
used to test assumptions in spatial economics.
The Uniform Standards of Professional Appraisal Practice provides for mass appraisal
standards to govern the use of hedonic regressions and other automated valuation models
when used for real estate appraisal. Appraisal methodology treats the hedonic regression as
essentially a statistically robust form of the sales comparison approach. (Kilpatrick, 2000)
Hedonic models are commonly used in tax assessment, litigation, academic studies, and other
mass appraisal projects.
Application of the Hedonic Pricing Method
While studying the application of the hedonic pricing method, the first assumption made is the
value of a house is affected by a particular combination of characteristics that it possesses
given that properties with better qualities demand higher prices as compared to properties
with lower qualities. This is the hedonic pricing function.
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39. The price of a house will thus be affected by the structural characteristics (s1, s2, s3...) of the
house itself, characteristics of the locality/neighbourhood (n1, n2, n3...), and environmental
characteristics (e1, e2, e3...)
Structural characteristics could be anything from size of the house, to the number of rooms,
type of flooring, etc. Neighbourhood attributes include variables like poshness of the locality,
quality of roads, etc, and the environmental characteristics are variables such quality of air,
proximity to parks, beaches, dumping yards, etc.
The analysis takes place in two stages. The first stage involves employing regression
techniques to estimate the hedonic price function of the property. This function will relate the
prices of many properties in the same housing area to the different characteristics.
So price function (P) = f (s1, s2, s3...sj; n1, n2, n3,...nj; e1, e2, e3,...ej) This function could be
linear or non-linear. The prices may change at an increasing or decreasing rate when the
characteristics change.( Gundimeda and haripriya, 2002)
When you now differentiate the price function with respect to any one of the above
characteristics, the implicit price function for that particular characteristic is yielded. It is
considered implicit because the price function is indirectly revealed to us by what the people
are willing to pay in order to obtain better quality or quantities of the characteristic.
In the second stage, these implicit prices are regressed against the actual quantities/qualities
chosen by the people in order to attain the marginal willingness to pay for the amenity. The
results of this analysis will indicate the changes in property values for a unit change in each
characteristic, given that all the other characteristics are constant. Some variables however
may be correlated. This will result in similar changes in their values.
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40. In general, the price of a house is related to the characteristics of the house and property itself,
the characteristics of the neighbourhood and community, and environmental characteristics.
Thus, if non-environmental factors are controlled for, then any remaining differences in price
can be attributed to differences in environmental quality. For example, if all characteristics of
houses and neighbourhoods throughout an area were the same, except for the level of air
pollution, then houses with better air quality would cost more. This higher price reflects the
value of cleaner air to people who purchase houses in the area.
 To apply the hedonic pricing method, the following information must be collected:
A measure or index of the environmental amenity of interest.
 Cross-section and/or time-series data on property values and property and household
characteristics for a well-defined market area that includes homes with different levels
of environmental quality, or different distances to an environmental amenity, such as
open space or the coastline.
The data are analyzed using regression analysis , which relates the price of the property to its
characteristics and the environmental characteristic(s) of interest. Thus, the effects of
different characteristics on price can be estimated. The regression results indicate how much
property values will change for a small change in each characteristic, holding all other
characteristics constant. The analysis may be complicated by a number of factors. For
example, the relationship between price and characteristics of the property may not be linear –
prices may increase at an increasing or decreasing rate when characteristics change. In
addition, many of the variables are likely to be correlated, so that their values change in
similar ways. This can lead to understating the significance of some variables in the analysis.
Thus, different functional forms and model specifications for the analysis must be considered.
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41. CHAPTER THREE
3.0 RESEARCH METHODOLOGY
The focus of this chapter is to explain the methodological approach to the study. It covers:
population design, research design, hypothesis, sample and sampling technique, sources of
data, research instrument, method of administration of instruments and methodologies of data
analysis.
3.1 Population Design
The population of this project comprises of residents of Yaba, Ojodu-Berger, Ketu, Alagbado
and Ajah who are tenants in residential properties within 0-300m away from a neighbourhood
hotel. Hotels were selected in these localities using purposive sampling technique. A
reconnaissance survey was equally carried out which revealed that these hotels generate
externalities, that could influence property rental value either positively or negatively.
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42. 3.2 Research Design
To facilitate valid and acceptable findings, data was collected by general observations, oral
interviews and the use of well designed questionnaires.
3.3 Restatement of Research Questions and Hypothesis
3.3.1 Research Questions
1. What are the types of activities and services rendered by the sampled hotels?
2. How do the layout, size, activities, location etc. of the hotels impact on the adjoining
residential properties?
3. What is the influence of externalities generated by the hotels on the rental values of
adjoining residential properties?
4. What are the implications and solutions to the externalities generated by hotels within
residential neighbourhood?
3.3.2 Research Hypothesis
H0: Hotel externalities have no significant effects on the rental values of adjoining
residential properties.
3.4 Sources of Data
The study used both primary and secondary sources.
3.5 Primary Sources
The primary data were gathered through expert oral interviews and questionnaires
administered on the target audience.
3.6 Secondary Sources
The secondary data includes information gathered from existing literatures, published
professional journals, academic works, textbooks, internet search, and newspapers.
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43. 3.7 Research Instrument
The instrument used to capture data for this research were questionnaires structured to
investigate the effects of hotel externalities on the rental value of neighbouring flat and
tenement buildings. This was designed by the researcher and authenticated by his supervisor.
The questionnaire were of two types. One was administered on the hotel management, while
the other was administered on the occupiers of the adjoining residential properties. Each of
the questionnaires was in two sections. Section A was designed to investigate the effects of
hotel externalities on the rental value of adjoining residential property, while section B
addresses the personal information of respondents. One questionnaire was administered on the
selected hotel premises, while 50 questionnaires were administered on the occupiers of the
adjoining residential properties.
3.8 Validity of the Instrument
After the questionnaire was designed, it was submitted to the supervisor for comments,
suggestions and corrections. All the comments and suggestions made by the supervisor were
noted and necessary corrections were made. The questionnaire was re-submitted for final
approval.
3.9 Area of Study
Five hotels were selected for the empirical investigation as this will provide sufficient data
upon which a reliable conclusion can be drawn. These hotels are: Zest International Hotel
located in (Akoka) Yaba, Hotel Royale located in Ojodu-berger, Mevron Guest House located
in Ketu Mile 12, Bobby Guest House located in Alagbado, and Nymph Suites and
Entertainment Centre located in (Ikota-villa) Ajah.
Zest hotel is located in Akoka which is predominantly a medium density residential
neighbourhood, with tenement houses and rented apartment (flats). Majority of residents are
within the lower and middle income brackets.
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44. Mevron Guest House is located in Ketu-mile 12, which is predominantly residential
neighbourhood intermingled with low and medium density residences. The immediate
surroundings of the hotel under reference is low density with rented apartments, and tenement
buildings being the predominant development.
Hotel Royale situates in Ojodu- berger area of Lagos which is predominantly a low income
neighbourhood, with high population density. The buildings in the neighbourhood are largely
tenement buildings intermingled with rented apartments.
Bobby Guest House situates in Alagbado, a low income neighbourhood. The buildings are
intermingled with tenement buildings and rented apartments (flats). The hotel is located close
to the Daar communications office.
Nymph Suites and Entertainment Centre locates in Ikota Park Estate, Ajah. The immediate
neighbourhood is high income, low density with predominantly detached houses and a few
block of flats.
In each of the study area, distance from hotel premises is divided into two zones: 0-150
metres and 150- 300 metres, respectively. In each of the study area, 50 household heads were
served with questionnaires. A total of 250 questionnaires were therefore administered. The
questionnaire sought information on rental values and residential property attributes, the
survey was conducted over two (2) months (between July and September, 2013).
3.10Method of Data Analysis
The study employs the standard hedonic pricing model to test the null hypothesis that hotel
externalities have a significant impact on the rental values of adjoining residential properties.
The Hedonic Pricing Model is based on multiple regression analysis using the SPSS
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45. The hedonic approach remains the most adequate and well-accepted tool for untangling the
cross-influences between the numerous dimensions affecting property values and for
establishing the implicit price of individual residential attributes (Des Rosiers et al., 2001 as
cited in Babawale et al, 2011). At its simplest, a hedonic equation is a regression of
expenditure (rental or capital values) on characteristics that determine house rent or capital
value. The model assumes that value of houses can be decomposed into the value of its
constituent characteristics (e.g. bedrooms, bathrooms, distance from amenities, age etc.) and
the model provides estimates of the marginal contribution of each property attribute to the
total price (Rosen, 1974 as cited in Babawale et al, 2011).
The empirical specification of the hedonic price model is therefore of the form:
P = ß0 + ßj Xj + ßd Xd + u ………………….. (i)
Where,
P = property value ( the dependent variable).
ß0 = a constant term
ßj = estimated coefficients for continuous variables.
ßd = estimated coefficients for distance variable.
Xj = jth property characteristic.
Xd = distance to hotel.
u = the error term.
Previous research has identified a number of housing characteristics or attributes that impact
on their prices. Accessibility factors, neighbourhood quality factors, specific negative
externalities, public service, taxes, and identity factors are all to be considered according to
Kauko, 2003 (as cited in Babawale et al, 2011). A local study, carried out by Bello (2008)
grouped the attributes into those that are internal and those that are external to the property.
Internal attributes essentially comprise the intrinsic characteristics of the property such as
size, number of accommodation, condition, aesthetics, layout, age, and plot size, while
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46. external attributes include the general state of the economy, population, employment,
immigration, finance, location, infrastructure, transportation and neighbourhood attributes.
Since the externality effects of hotel on rental value of properties is our main focus in this
study, the hedonic equation for this study would be of the form:
RV i = f(X ij , DIST i ) ………………………….. (ii)
Where,
• RV i is the rental value of property;
• X ij is a set of explanatory housing-rent variables (housing/neighbourhood attributes)
for a given property i;
• DIST i is the distance of property i from the nearest hotel measured in meters
(approximately).
• The set of j th housing-rent variables considered relevant to the study area that were
used in this study are:
• D_REG = distance from hotel in meters (approximately).
• PARKING SPACE = Availability of adequate parking lots.
• ROOM = number of bedrooms
• BATH = number of bath/toilets
• DIS-WRK = Perceived nearness to work.
• SECURITY = The perceived neighbourhood security from armed robbers, and other
criminal activities.
• COND = The condition of property in question.
Distance from hotel variable, D_REG, captures the effect of nearness of a hotel on rental
values of nearby residential properties.
A significant positive coefficient value for D_REG in the estimated model is evidenced by
negative externalities associated with the sampled hotel, since such a positive coefficient
value indicates that the rental value of a residential property increases as distance from a hotel
increases. On the other hand, a significant negative coefficient value provides evidence of
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47. positive externalities generated by the hotel, indicating that the rental values of a residential
property decreases as distance from a hotel increases.
CHAPTER FOUR
4.0 DATAANALYSIS AND EMPIRICAL RESULTS
This chapter presents the summary statistics of the analyzed variables from questionnaires
administered on residents of tenement buildings and flat apartments in close proximity to the
sampled hotels. For this purpose, the chapter is structured into data analysis and empirical
results.
The hypothesis formulated for this study guided the arrangement of the tables and each of the
table displays the relationship between housing variables, including distance from hotel and
rental value of residential properties. A summary of the main findings follows each table,
showing the relationship between distance from hotel and rental value of residential
properties.
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48. 4.1 Data Analysis
4.1.1 Table 1: Effects of Zest Hotel Externalities
Model
Unstandardized Coefficients
Standardized
Coefficients
t-value Sig.B Std. Error Beta
(Constant) .153 1.356 .112 .911
Number of bedrooms 1.336 .232 .980 5.763 .000
Number of baths/toilets .133 .168 .101 .795 .434
Adequate parking space -.117 .143 -.136 -.815 .422
Distance from hotel .043 .307 .019 .140 .889
Distance of children's school -.119 .098 -.129 -1.209 .238
Accessibility of work -.002 .101 -.002 -.021 .984
Neighbourhood security .120 .134 .129 .897 .378
Neighbourhood neatness -.053 .142 -.057 -.373 .712
Neighbourhood quietness -.063 .136 -.066 -.463 .647
House condition .243 .213 .315 1.141 .264
Dependent Variable: What annual rent do you pay in the property
R2
= 0.810 (81%); F- Statistics = 11.097 (P > .000); Durbin Watson =1.766
SOURCE: Field survey, 2013
Table 1 above presents the summary for Zest Hotel situated at Akoka. The multiple
regressions equation that relates rental value (RV) to the housing attributes is given by the
constant and the coefficients of the unstandardized beta as:
RV = 0.153 + 1.356Nr + 0.133Nbt - 0.117Ps + 0.43Dh - 0.119Dcs - 0.002Dwk + 0.120Nsc -
0.053Nn - 0.063Nq + 0.243Hcd ---------------------------------------- (iii)
The equation shows that number of bedrooms, number of toilet/baths, distance from hotel,
perceived neighbourhood security, and house condition are positively correlated to rental
value as expected.
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49. The concern of this study which is distance from hotel is positively correlated, which
confirms that the hotel generates externalities that are of negative influence on rental value. It
can hence be concluded that the farther a hotel is to a residential property in this
neighbourhood, the better for the property investors as rental value increases.
The standardized beta coefficients which provide the order of importance or relative
contribution of the housing attributes, however show that number of bedrooms make the
largest contribution.
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50. 4.1.2 Table 2: Effects of Mevron Hotel Externalities
Model
Unstandardized Coefficients
Standardized
Coefficients
t-value Sig.B Std. Error Beta
(Constant) -.878 .145 -6.061 .000
Number of bedrooms 1.593 .185 .843 8.594 .000
Number of baths/toilets .008 .096 .004 .079 .938
Distance from hotel .005 .039 .003 .132 .897
Neighbourhood security .038 .049 .034 .776 .450
Neighbourhood neatness .025 .055 .021 .450 .659
Neighbourhood quietness .328 .079 .286 4.140 .001
Accessibility of work -.055 .020 -.069 -2.741 .015
Distance of children's school .037 .037 .023 1.011 .328
House condition .011 .020 .016 .539 .597
Dependent Variable: What annual rent do you pay in the property
R2
= 0.993 (99.3%); F- Statistics = 219.512 (P > .000); Durbin Watson = 1.599
SOURCE: Field survey, 2013
Table 2 above presents the summary for Mevron Hotel situated at Ketu Mile 12. The multiple
regressions equation that relates rental value (RV) to the housing attributes is given by the
constant and the coefficients of the unstandardized beta as:
RV = - 0.878 + 1.593Nr + 0.008Nbt + 0.005Dh + 0.037Dcs - 0.055Dwk + 0.038Nsc + 0.025Nn +
0.328Nq + 0.011Hcd ---------------------------------------- (iv)
The equation shows that number of bedrooms, number of toilet/baths, perceived neighbourhood
security, neatness and quietness; distance from hotel as well as house condition are positively
correlated to house prices as expected.
The concern of this study which is distance from hotel is positively correlated, though
statistically insignificant, this however confirms that the hotel generates externalities that are
of negative influence on rental value. It can hence be concluded that the farther a hotel is to a
residential property in this neighbourhood, the better for the property investors as rental value
increases.
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51. The standardized beta coefficients which provide the order of importance or relative contribution
of the housing attributes, however show that number of bedrooms make the largest contribution.
4.1.3 Table 3: Effects of Hotel Royale Externalities
Model
Unstandardized Coefficients
Standardized
Coefficients
t-value Sig.B Std. Error Beta
1(Constant) 2.443 .401 6.093 .000
Number of bedrooms .975 .062 .754 15.620 .000
Number of baths/toilets -.214 .030 -.295 -7.113 .000
Adequate parking space -.039 .070 -.030 -.561 .579
Distance from hotel -.264 .113 .116 2.345 .026
Distance of children's school -.051 .174 -.012 -.292 .773
Accessibility of work .086 .064 .056 1.332 .193
Neighbourhood security -.132 .102 -.097 -1.297 .205
Neighbourhood neatness .010 .105 .008 .100 .921
Neighbourhood quietness -.020 .078 -.014 -.257 .799
House condition .175 .087 .156 2.021 .053
Dependent Variable: What annual rent do you pay in the property
R2
= 0.962 (96.2%); F- Statistics = 73.319 (P > .000); Durbin Watson = 1.638
SOURCE: Field survey, 2013
Table 3 above presents the summary for Hotel Royale situated at Ojodu-Berger. The multiple
regressions equation that relates rental value (RV) to the housing attributes is given by the
constant and the coefficients of the unstandardized beta as:
RV = 2.443 + 0.975Nr - 0.214Nbt - 0.039Ps - 0.264Dh - 0.051Dcs + 0.086Dwk - 0.132Nsc +
0.010Nn - 0.020Nq + 0.175Hcd ---------------------------------------- (v)
The equation shows that number of bedrooms, number of toilet/baths, accessibility of work,
neighbourhood neatness as well as house condition are positively correlated to rental value.
The concern of this study which is distance from hotel is negatively correlated though
statistically insignificant, this confirms that the hotel generates externalities that are of
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52. positive influence on rental value. This might be as a result of the hotel examined being
properly planned, more so the hotel is viewed as an amenity as residents claim to enjoy
streetlight and free borehole water supply from the hotel. The neighbourhood security and
quietness are negatively correlated and this is unexpected, it may however be due to the
insecurity that has enveloped the entire nation.
4.1.4 Table 4: Effects of Nymph Suites Externalities
Model
Unstandardized Coefficients
Standardized
Coefficients
t-value Sig.B Std. Error Beta
1 (Constant) -2.379 .855 -2.781 .010
Number of bedrooms 1.157 .165 .828 7.025 .000
Distance of children's school .121 .094 .150 1.286 .211
Accessibility of work .343 .264 .138 1.299 .206
Distance from hotel .214 .162 .159 1.321 .199
Adequate parking space -.250 .357 -.073 -.700 .491
Dependent Variable: What annual rent do you pay in the property
R2
= 0.763 (76.3%); F- Statistics = 15.452 (P > .000); Durbin Watson = 1.394
SOURCE: Field survey, 2013
Table 4 above presents the summary for Nymph Guest House and Entertainment Centre
situated at Ikota Villa, Ajah. The multiple regressions equation that relates rental value (RV) to
the housing attributes is given by the constant and the coefficients of the unstandardized beta
as:
RV = - 2.379 + 1.157Nr - 0.250Ps + 0.214Dh + 0.121Dcs + 0.343Dwk -------------------------(vi)
The equation shows that number of bedrooms, distance of children school, distance from
hotel, and accessibility of work are positively correlated with rental value.
The concern of this study which is distance from hotel is positively correlated, as expected.
This confirms that the hotel generates externalities that are of negative influence on rental
value. It can hence be concluded that the farther a hotel is to a residential property in this
neighbourhood, the better for the property investors as rental value increases.
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