Cover Story

Room for more

September 2013
The country's hotel industry is likely to see a jump in the number of properties and investment in excess of $200 billion over the next three years, discovers SHRIKANT RAO and GARIMA P.

India's hospitality sector has long prided itself on the application of the ancient Sanskrit dictum Athithi devo bhava - the guest is God - but seems to have somehow fallen woefully short in the numbers department. For instance, the country has only about 400,000 rooms compared to the 5 million plus rooms in the US. Recessionary market sentiments and increase in supply have definitely laid stress on the players in the industry. According to a recent report by the Federation of Hotel and Restaurant Associations of India, hotel occupancies in 2012-13 dropped to the lowest in a decade at 58.3 per cent and average room rates slumped to Rs 6,214, the lowest in six years, causing worry for the hotel industry. With profits dipping, some players have even been forced to shut shop.

There are indications now that despite the current market slowdown, which has seen the rupee take a severe beating, the situation could change for the better, if not dramatically so, in terms of hospitality infrastructure. Despite the depressing market conditions, a number of players, both Indian and international, sensing long-term opportunities hidden in the present challenges, are gearing up to set up hospitality properties. Cities like Bengaluru, Pune, Chennai, Gurgaon and Noida have already shown a jump in supply.

In 2012-13 alone, close to 12,782 new rooms were added across the country, taking the total supply of branded hotel rooms up to 96,000. According to global hospitality consultant HVS, India is expected to add another 54,000 hotel rooms over the next three to four years and will require over $25 billion to build 180,000 new hotel rooms over the next decade.

Ergo, the hospitality arena is expected to be both tough and crowded.

The Hotel Boomt

According to a recent report by global database and research service for hotel construction projects, Tophotelprojects.com, close to 300 branded hotels will come up in India over the next three years, constituting about 17 per cent of Asia's hotel construction pipeline. This supply will have global players like Accor, Marriott, Wyndham, Starwood, Carlson Rezidor Hotel Group, Fairmont Raffles Hotels International, Intercontinental Group Hilton Worldwide, Hyatt Hotels Corp and Indian Hotels Co that runs Taj Hotels coming up with properties across the country.

There is increasing evidence of the developments on ground. Berggruen Hotels, the parent brand to Keys Hotels, a leading chain of business hotels, has gone upscale, launching its latest high-end hotel brand 'Keys Klub' in the four and five-star categories. The group has lined up plans to expand to 75 hotels with an inventory of 6,600 rooms by 2016 in cities like Pune, Mumbai, Ahmedabad, Chennai, Jaipur, Kolkata and Hyderabad, and the NCR. Hong Kong-based Shangri La Hotels, which operates hotels in Mumbai and Delhi, is expected to see two hotel openings in Bengaluru sometime next year along with a four-star in Chennai. Lebua Hotels & Resorts has recently signed three properties, all of them in Rajasthan, with a total room inventory of 140. The group is also exploring projects in Mumbai, Bengaluru, Goa and New Delhi through a management model following an asset-light route. Meanwhile, with 20 hotels operating currently, Accor is targeting another 50 properties by 2015 and has committed up to $200 million for the developments. Starwood too has ambitions to have 100 hotels under an operation, development and management contract by 2015 in India. Frits van Paasschen, President and CEO, Starwood Hotels and Resorts, says, "From a business opportunity point of view, India is hugely important for us. Unlike other markets, it is decades away from saturation."

Construction Boom

With the need for rooms steadily rising, the hospitality industry is seeing an influx of players from a cross-section of society. High net worth individuals (HNIs), entrepreneurs, politicians, real estate players and anyone and everyone with cash to spare and land to build have forayed into the segment. In most key cities in India, there is still adequate demand for quality hospitality development. While Tier I cities are maturing in terms of their pricing for differently positioned products, the gap is less visible in the mid-tier cities. An estimated 50,000 rooms are currently under various stages of construction across the country. "Most of these are in the midscale to upscale development range with a cost per key ranging from Rs 35 lakh to Rs 80 lakh," reveals Shreenath Shastry, National Director-Hospitality and Leisure, Knight Frank India. "Most hotel investors are real estate developers in India. International brands with the exception of a very select few would not invest as they follow an asset-light management contract model."

Reflecting the increased interest of foreign players in the country's hospitality industry, the hotel and tourism sector witnessed a sudden spurt in FDI in April, attracting $2.32 billion. According to data from the Department of Industrial Policy and Promotion (DIPP), the hospitality industry received $3.25 billion in 2012-13, second only to the services sector in getting FDI.

Despite a flurry in investments in the segment, the rising cost of construction is seen as the ogre, with the cost going up as much as 10-20 per cent. "Investments are still happening, but the number of players investing in hotels has reduced and only serious, established hospitality players are still building hotels," says Sudeep Jain, Managing Director (India)-Hotels & Hospitality Group, Jones Lang LaSalle.

With foreign players setting up shop, Indian players are beginning to feel the pressure. Even well-established names have been realigning their business plans, looking to expand and even getting into tie-ups with global brands. Taj Hotels Resorts and Palaces, which comprises 93 hotels in 55 locations across India with an additional 16 international hotels overseas, is also finding it tough to maintain its top position in the industry. The group recently opened its 100th property, Vivanta, in Gurgaon. Indian Hotels Co, the owner of the Taj brand hotel chain, plans to spend Rs 200 crore in the next 18 months. ITC Ltd, franchisee of the Sheraton brand in India, is looking to develop at least 18 projects. Following the unveiling of its 522-room super-premium ITC Grand Chola in Chennai in 2012, the company is targeting the opening of three more properties in the coming year. And then there are some smaller players that have been making their presence felt by attracting investments. The Rs 2,000-crore Baani Group with three hotels in Gurgaon is looking to raise the count up to 10 in another seven years. The firm's tie-up with the Hilton Group took place courtesy Vijay Thacker of Mumbai-based consultancy firm Horwath who brokered the deal. Indeed, hospitality consultants like Thacker have assumed importance marrying established brands to hotel sector wannabes - going to the extent of acting as negotiators, advising pullouts and offering strategic directions.

It's a truly a busy market out there.

Further investment by private equity players in the hospitality sector has made the zone more focused on return and share value. "Various players in the market have had different exposures to the hospitality industry," reveals Anuj Nangpal, Managing DirectorûInvestor Services, DTZ. "While few are pure-play investors like Xander, most others have additional investment on the operations side also, like Lemon Tree, SAMHI, InterGlobe, which is investing close to Rs 600 crore (exclusive of land cost), and Duet's JV with IHG to develop the Holiday Inn Express brand across India through a planned investment of Rs 650 crore. Lemon Tree has witnessed investments from Warburg Pincus, Shinsei Bank and Kotak Realty and, most recently, Dutch pension fund APG. Other selective investors in the market include Sahara, Capitaland, etc."

With newer players entering the segment, experts believe that these brands will help in better price discovery for the positioning of hotels. "The new supply will create a 'shakeout' in the major markets with the unbranded segment seeing a decline in business," says Anshuman Magazine, Chairman & Managing Director, CBRE South Asia. "The ARRs for all major Indian hotel markets will stabilise and create a good rationale for people to use hotels at competitive prices. In turn, this will see more investments coming in as the valuations of hotels will start to look attractive."

Return On Investment

Rising costs and decline in occupancy are expected to not just subtract from the profitability of five-star hotels but lead to a growing preference for the construction of midmarket and budget hotels. With the industry reporting an occupancy level of 60 per cent this year, many brands have had to reduce room rates by 15 per cent owing to the current economic downturn. The lacklustre state of the Indian economy has already led underperforming hotels to seek avenues to shed dead weight, with 75 branded hotels reportedly up for sale since the beginning of the year. A number of investors and developers have consciously moved away from luxury brands and started focusing on midmarket to budget brands that have a quicker turnaround time in terms of construction and are less capital-intensive. According to industry reports, about 35 per cent of the new rooms being added are midmarket, while luxury constitutes only 14 per cent. Various asset types have different cost parameters. Luxury hotels could be upwards of Rs 1 crore per key (excluding land costs) while budget hotels could be as low as Rs 15-20 lakh per key.

"In the existing situation, while the luxury segment is expected to give around 15 per cent ROI, business hotels should give 18-20 per cent," says Manoj Madhukar, General Manager, Regenta Central-Ashok, Chandigarh. "Meanwhile, the budget segment can give returns of 20-25 per cent depending on city, location and economic growth." It is easy to see why Ginger Hotels, with its focus on the midmarket segment, is currently focusing on aggressively expanding its footprint across various metros. The hotel chain has plans to grow from the current 2,700 to over 8,000 rooms by 2016-2017. Indeed, the new-age business traveller who predominantly seeks short and on-the-move hotel stays is contributing majorly to the growth of the upscale, economy, and budget segment in India. PK Mohan Kumar, Managing Director & CEO, Roots Corporation, which runs the Ginger chain, says, "The next five years will see exponential growth in the budget hotel segment. Overall, India offers enormous opportunity for midmarket and budget brands to spread their wings across nearly 8,200 towns and cities."

Like Ginger, there are many other players seeking to capitalise on the opportunity at hand. For instance, Sarovar Hotels & Resorts, which operates 60 hotels with a room strength of 5,400, is looking to raise its property profile to 100 by 2017. The company is also looking to set up a brand focussed on Indian pilgrimage spots. The Bengaluru-based, Baljees-owned Royal Orchid Group, with 22 hotels and 1,900 rooms in 16 cities, plans to get into tier cities. Lemon Tree Hotels has set its sights on adding 8,000 rooms to its existing inventory of 2,500 rooms from 21 hotels in 14 cities.

Patu Keswani, Chairman & Managing Director, Lemon Tree Hotels, who has created different brands like Lemon Tree Premier, Lemon Tree and Red Fox to accommodate the needs of different sets of guests, says, "There are a lot of people who keep travelling on a daily basis. And there is a requirement for a good place to stay."

Delayed Projects

Keswani's comment serves to underscore the huge requirement of quality hotel infrastructure across the country. The Planning Commission in tandem with the Ministry of Tourism is looking to double foreign tourist arrivals from 6 million to 12 million within the Twelfth Five-Year Plan period (2012-17). In effect this would mean the creation of 180,000 additional hotel rooms across the country at a capital investment of Rs 125,000 crore. It's not just the economic slowdown that has had a negative impact on project implementation. There seems to be very little urgency on the part of the authorities to kick-start development, as evidenced from the continued stonewalling of the Aerocity Project - a hotel district - built on the edge of the New Delhi airport, owing to delays in security clearances for the hotels. The Aerocity hotels together will add 5,400 hotel rooms, or about 45 per cent, to the capital's limited inventory of 11,250 rooms in the branded segment. An investment in excess of Rs 12,000 crore is riding on the 16 planned hotels that will generate employment to over 10,000 people directly and 30,000 people indirectly. Understandably, the delays have led to huge losses being incurred by the hotels intending to set up base at Aerocity. Against that backdrop, the recently awarded clearance by the Cabinet Committee on Investments is a welcome augury for construction work to begin in right earnest.

Realty In Hospitality

The arrival of foreign players into the hospitality sector has rekindled interest in real estate players who are now looking to set up hotels. It may be recalled that real-estate giants DLF and Emaar-MGF stopped building new hotels and took to selling off their proposed prime hotel land plots since the first quarter of 2013.

A few firms have come up with integrated mall-cum-hotel projects. Real estate firm Supertech has tied up with hospitality chain The Leela Palaces, Hotel and Resorts for the management of its luxury hotel in Noida. To be developed at a cost of Rs 450 crore, the 250-room hotel, which is part of a mixed-use, 5-million-sq-ft project called Supernova, will be completed in three years. The tie-up has led to benefits for both parties. "A real estate player's association with a hospitality giant will surely provide unmatched architectural marvels and this trend is definitely going to grow further in future," says RK Arora, Chairman and Managing Director, Supertech.

"Such tie-ups bring great value to the real estate industry; brand association brings credibility to real estate projects. At the same time, it will enhance the overall reputation of the project by providing the best facilities under one roof."

For its part, Parsvnath Group had announced a slew of hotel projects before the economic downturn and had exited from some of them citing lack of funds. "Currently, we have one hotel operational in Delhi by the name of Comfort Inn Anneha in association with Choice Hotels," says Pradeep Jain, Chairman, Parsvnath Group. "Another hotel is coming up at Shirdi and will be operational soon."

Meanwhile, in Bengaluru, luxury property developer Nitesh Estates is making a foray into the hospitality sector via its tie-up with globally acclaimed hospitality brand Ritz-Carlton - a 277-room hotel is slated to open soon in the Garden City. In Pune too, luxury specialist Panchsheel Realty has developed the JW Marriott, serviced apartments and the International Convention Centre, one of South Asia's largest composite trade and convention centres, and is looking to add to its hospitality portfolio.

Experts believe that all major real estate players have historically partnered with well-known hospitality players for hotel management and franchisee contracts. For most, it has been at an asset level and for some it is at a portfolio level, including GVK's JV with Taj, Unitech's association with Marriott (Courtyard by Marriott Gurgaon, Renaissance Manesar, Courtyard Noida, etc), and Bestech's JV with Carlson. For individual assets, HCC tied up with Double Tree by Hilton, Grand Mercure, Novotel, Pullman in Lavasa, Brigade with Sheraton in Bengaluru, etc. Most real estate players moved into hospitality as part of a risk and portfolio diversification strategy. And owing to limited knowledge of the working of the industry, they tied up with major players like Starwood, Hilton, Marriott, InterContinental Hotel Group (IHG), etc.

Domestic players like Sarovar Hotels also provide hotel management and third-party management contracts. "Most real-estate players invest in hotels as a mode to diversify their portfolio; have a marquee asset; or for proper utilisation of land banks," says Nangpal of DTZ. "However, they fail to recognise the different nature of the asset class, which is capital-intensive, has a long gestation time, is impacted by seasonality and other extraneous factors, and requires commitment to the business. Any player who can address the above issues should be able to run the business." Rajeev Chopra, Managing Director, Residency Hotels, a consultant to the Raheja Group's hotel properties in Mumbai under the Marriott brand, believes the Rahejas have made their mark in the hospitality sector owing to "a marriage of all the right factors, including their expertise in land procurement, sound construction knowledge and having operators in Marriott and Starwood".

While this marriage worked, it remains to be seen how the new partnerships and tie-ups will weather the crests and troughs of the ever-burgeoning hospitality industry. At the moment though, the rush to add more size - and, therefore, oomph - to India's hotel infrastructure is on.

HOSPITALITY ACTORS

  • The hotel sector has witnessed investments from varied set-ups like: PE players like Warburg Pincus (Lemon Tree), Xander (individual assets),
  • Equity International (SAMHI), GTI Capital group (SAMHI), Kotak Realty (Lemon Tree) Pension funds like APG (Lemon Tree)
  • Corporates like Accor (also operating and managing company), Capitaland (Ascott)
  • Domestic firms like Sahara, Nadathur, Aromatrix, Muthoot, Peerless
  • Developers like Brigade, RMZ, Nitesh, Oberoi Constructions, Parsvnath, Vatika
  • HNIs like Ravindran Pillai (Travancore Enterprises)

Source: DTZ