Boom checks in
By Tejeesh N.S. Behl August 31, 2007
Everyone from global hospitality chains to private equity funds has lined up to invest in hotels in India.
More than 37,000 hotel rooms, at a cost of $3 billion, are expected to be added over the next three years. That's more than the 'branded' rooms India currently has.
Best Western to establish 100 hotels and 10,000 rooms under its umbrella in India
These are just some of the headlines that have hit the newspapers in the recent past. There are dozens of other investors, existing and new, who have announced plans of plunging into India's booming hospitality industry. In fact, there's so much money coming in-at least on paper-that investors would be mad to think that there's room enough for all. "Probably not (mad)," says Prithvi Raj Singh Oberoi, the 78-year old Chairman and CEO, EIH (read: the Oberoi Group). "But then, announcements come for free in this country," chuckles the septuagenarian, as an afterthought.
Oberoi isn't being a cynic. "The economy's growth rate, at 9.4 per cent, eventually had to have a cascading effect on investments in the hospitality sector," he points out when asked whether hotels have become the new playing field for both domestic and global investors. "India has approximately 110,000 rooms and of this only 35,000 are branded. That is fewer rooms than most major global cities," points out Manav Thadani, Managing Director, HVS International. And it's not just the foreign players but also the Indian hospitality companies who are getting into high gear. "We have invested Rs 1,500 crore for our three upcoming properties in Bangalore, Chennai and Ahmedabad, which will be operational in the next few years," says Nakul Anand, Divisional Chief Executive, ITC Hotels. Apparently, the opportunities seem big enough to excite even blue-chip barons such as RIL's Mukesh Ambani and Bombay Dyeing's Nusli Wadia.
Room for more
Investment: $550 million (Rs 2,255 crore) by DLF and $143 million (Rs 586.3 crore) by Hilton (in phase one)
Marriott, Carlson, Ritz Carlton and Country Inn in association with Unitech
Formule 1, JV between Emaar-MGF and Accor
Dusit Thani Hotels in association with Bird Hospitality Services
easyHotels in association with Istithmar Hotels of Dubai
Keys Hotels from Berggruen Holdings
The demand-supply mismatch of hotel rooms is so acute that even the stand-alone, mom-n-pop hotels are quoting room tariffs that are 40 to 50 per cent of five star rates. That probably explains the announcements of $10 billion in investments over the next five to 10 years, with $3 billion expected to materialise over the next four years. The capacity addition: 70,000 rooms across all categories. That's an incredible number compared to the scenario even two years ago. Back in 2005, the foreign direct investment (FDI) in hospitality was 1 per cent of the $10.3 billion that flowed in. However, the hardening of interest rates since the time most of these announcements were made may prompt a rethink on the size of investment.
Not so Budget Anymore
The segments that most of the investors seem to be interested in are budget and mid-market. The reason is pretty straightforward. The five stars in India are overpriced, with an ordinary room costing $400 a night or upwards, excluding taxes. Compare that with a destination like Singapore, where you can get a five-star room for $200 a night. That leaves a huge chasm in the economy segment, which may or may not be shoestring but is certainly not lavish. And it's a chasm that players like Lemon Tree, Roots Corporation, Sarovar Hotels, Royal Orchid Hotels, Uniglobe and others hope to fill.
Hope is the operative word here. "In India, the embedded cost of a hotel project is 60 per cent, which is the cost of the land. Compare that with the US, where only 15 per cent is the land cost and 85 per cent is the construction cost of a hotel project," explains Patu Keswani, Chairman and Managing Director, The Lemon Tree Hotel Company. That, Keswani says, makes it extremely tough for a budget or economy segment hotel to sustain its low prices for long. Case in point: Roots Corporation's Ginger Hotels, which created a flutter with its sub-Rs 1,000 room rates, but ultimately had to revise them upwards. Besides, given that the hotel industry sustains itself on domestic tourists, who are largely price conscious, the budget and economy segment is a natural driver for growth.
Warburg Pincus: 26.11 per cent stake each in Lemon Tree Hotel Company and Red Fox Hotels for Rs 210 crore and Rs 70 crore, respectively
Kotak Mahindra Realty Fund: 3.5 per cent stake in Lemon Tree Hotel Company for Rs 32 crore
Bessemer Venture Partners and New Vernon Private Equity: 28 per cent shares of Sarovar Hotels for Rs 38 crore to part fund its Hometel brand
WestBridge Capital Partners (now Sequoia Capital India): 10 per cent stake in Royal Orchid Hotels for Rs 25 crore
ICICI Venture Funds: 26 per cent stake in Viceroy Hotels for Rs 140 crore
Berggruen Holdings: Wholly-owned subsidiary Berggruen Hotels is setting up Keys Hotels in India, investing $100 million
Dawnay Day: Setting up Dawnay Day Hotels in India with an investment of $1.2 billion
The scary hotel economics raises an interesting question: given that economy segment hotels in India have had to scale up, bringing their room tariffs close to those of top-end hotels, is the market mature enough to accept scaled-down accommodation? Experience shows, perhaps not. For instance, Indian Hotels (read: Taj Hotels) tried that with Gateway properties but it didn't prove to be a roaring success. In fact, even the current crop of economy segment players have had to introduce a second-rung brand as the mother-brand moved up the value chain. Lemon Tree has a Red Fox, Royal Orchid launched Peppermint and Sarovar, Hometel and Portico.
Sanjay Chandra, MD, Unitech, which is developing Marriott's Courtyard brand and also setting up a property in Kolkata under the Ritz Carlton brand, has an explanation. "Culturally, Indians are not accustomed to a budget hotel," he says. Accustomed to being served even at a roadside eatery (dhaba), Indians, Chandra says, definitely expect a bellboy to fetch their luggage even if it's a no-frills two-star property. Lemon Tree's Keswani will likely agree. His first property in Gurgaon was positioned as a bottom-end three-star but eventually scaled up to a four-star.
Admitting the role of predatory pricing, Keswani says that ultimately market economics force an upgrade, in the absence of which the brand's IQ (investment quotient) suffers adversely. "You must understand that the concept of economy hotels is still evolving in India. When we started out in 1994, we discovered that travellers demanded add-on facilities such as room service, luggage delivery and wider culinary choices, and they were willing to pay more," points out Ajay K. Bakaya, Executive Director, Sarovar Hotels and Resorts. So with the additional costs passed on to the customer, Bakaya was only too happy to scale up his properties.
Blame the Realty Boom
However, scaling up is not just a matter of choice for many, but is a function of asset economics. With real estate prices going through the roof, many hoteliers succumb to valuation pressures, trading their original plans of a budget hotel for a more upmarket facility-something that Leela Hotels was forced to do after it realised that market economics will not support an economy hotel on the three-acre plot it recently acquired in Delhi for a staggering Rs 611 crore.
Mixed use land development is also the way for Unitech's Sanjay Chandra, who says that as developers, their incremental effort is not large, since certain expertise is already available in-house-architectural services, interior design and centralised procurement, which can bring down costs by 15 per cent. "We not only have access to land but also know its developmental history," says Chandra. In fact, he feels that given the high cost of land acquisition, hotel companies will increasingly go in for tie-ups with developers having ready access to land banks. At the end of the day, says Singh, hotels too are a real estate project.
With 43,000 hectares of land lying vacant-out of a total inventory of 4.23 lakh hectares-the Indian Railways has finally got a hold over its latent fiscal potential. The Rail Land Development Authority (RLDA) set up last year to commercially exploit surplus land through private-public partnerships, has already awarded licences for 20 budget hotels, with another 80 planned across the country. Key sites include Chennai, Madurai, Thiruvanthapuram and Rameshwaram in the south; Chandigarh, Shimla, Amritsar, Srinagar and Katra in the north; Mumbai, Thane and Nagpur in the west; Gwalior in central India, and Sealdah in the east. Most of these properties are under various stages of renovation by private players, including IHCL's Roots Corporation, which is converting the Rail Yatri Niwas in Delhi into a Ginger Hotel. The RLDA has allotted land on a long-term lease basis and the hotels coming up will all be in the budget segment.
The open auction of land assets by the city development authorities has got hoteliers crying for 'creative land-banking', which means allotments as against auctions. "At Rs 40 crore an acre, the reserve price in an area like Rohini or Dwarka in Delhi's suburbs-which are not 'happening' as far as hotels are concerned-the cost per room makes the project financially unviable," points out Ambar Maheshwari, Director Investment Advisory, DTZ India, referring to the recent auctions of land parcels by DDA that came a cropper.
No doubt, that is why developers such as DLF, Unitech, Nirmal Lifestyle, Eros, and Nitesh Estates are capitalising on their land banks and getting into hotel construction (see Realty Play). Even an established player like EIH-which has steadfastly refused to join the economy bandwagon for fear of diluting its brand equity-is now open to the idea of not having complete ownership of its land assets.
The boom, however, has raised fears of oversupply four years down the road when the projects actually become operational. "Hospitality is a cyclical business-so, yes, there will be some correction after 2010 (after the Commonwealth Games in Delhi), which could last for 1-2 years," feels Mandeep S. Lamba, MD, Dawnay Day Hotels India. His views are corroborated by Thadani, who says cities such as Pune, NCR and Bangalore will take a modest hit in room tariffs. "Then again, that could be offset by the volumes in domestic tourism, which is actually what sustains the industry as against the perception that it thrives on international tourists," counters Thadani.
The chicken, they say, is flapping its wings. But will it lay an egg? Wait a while.