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Saturday, December 24, 2011

Hotel buyers sniff a chance to rake it in

This story first appeared in DNA Money edition on Tuesday, December 20, 2011.

The fairly quick rebound following the economic downturn in 2008-09 had upset all calculations for hospitality asset buyers, who now have a reason to rejoice. A looming double-dip recession means 2012-13 is likely to open another window of opportunity for them to make a killing.

Real estate consultants - both domestic and international - and individual brokers these days are working overtime on mandates involving buying and selling of hotel projects. While the phenomenon, experts said, is quite evident in key metros, the level of activity is quite similar in non-metros as well. And as the sector has already witnessed a handful of deals being concluded in the recent past, there is a feeling that the momentum will pick up in the coming year.

“There is some degree of stress in the market for sure, especially with land parcels and incomplete structures. As for sale of operational hotels is concerned, it is largely in the case of companies with heavily leveraged balance sheets,” said an industry expert.

Companies with high debt on books and those struggling to access capital to start or complete work on their respective projects are taking to divestment seriously. Besides, the not-so-exciting economic environment, which is likely to impact hospitality, travel and tourism sectors in the coming year, has only added to the urgency in sales.

Among hotel assets already in the market for sale are those from leading realty firms like DLF Hotel Holdings, a subsidiary of DLF Ltd, and DB Hospitality, a part of DB Realty. According to sources, there are assets also from companies like Bangalore-based Royal Orchid Hotels (ROHL) and Indore-based mixed-used developer Entertainment World Developers Pvt (EWDPL) which are understood to be seeking buyers for some of their projects.

Similarly, another BSE-listed hotel company Kamat Hotels India (KHIL) is in the process of divesting four of its hotel land parcels - ranging from 2 acres to 40 acres -in cities like Coimbatore, Amravati, Raipur and Nagpur. The assets were earlier in the development pipeline.

Leading international property consultants (IPCs) like Cushman & Wakefield (CW), Ernst & Young (E&Y) and Jones Lang LaSalle Hotels (JLLH), among others, too confirmed the rising flow of mandates for buying and selling of hotel assets across the country. But putting a figure to the number of hotel assets on the block is difficult because each one works on a slew of exclusive mandates and there are non-disclosure agreements in place to protect the identity of the buyer or the seller.

Akshay Kulkarni, executive director - residential services, Cushman & Wakefield, said: “The current activity level is certainly high and I’m confident that the sector will see a good number of transactions getting concluded in 2012-13. In fact, we are working on a few hotel transaction mandates and are likely to close some deals by the first quarter of the next fiscal.”

Deals currently being pursued by the IPCs are a mixed bag of operational hotels, incomplete structures and land parcels earmarked for hotel projects. While cities like Mumbai, Delhi, Bangalore and Chennai are certainly on the radar, others like Pune, Hyderabad, Kerala and Goa are joining the brigade, too. Interestingly, ‘sell’ mandates seem to be on the higher side vis-a-vis ‘buy’, thus making it very challenging for the broking community to find potential buyers.

Talking about the profile of prospective buyers, Chintan Patel, director, real estate and hospitality services, E&Y India, said strategic and financial investors are best suited for land parcels and incomplete structures. “The current market scenario, however, is more opportunistic for high net worth individuals (HNIs) in the case of already operational hotels. In fact, the timing is much better also because of a depreciating rupee,” Patel said. Reasons to sell hotel assets vary for different companies. While DLF is keen to shift focus from non-core assets, for DB Hospitality, the priority is to raise funds to mitigate debt pressure on the books. And as for ROHL and KHIL, ramping up hospitality presence in key metros to access capital is a big driver.

But are valuations realistic for faster closure of deals? A senior consultant with one of the domestic hospitality consultant companies said, “Deals generally take longer to conclude mainly because of valuation issues between the buyer and the seller.”

So, is distress one of the reasons for companies to sell hotel assets? The IPCs feel otherwise. “There is some stress in the market for sure but it certainly has not reached the distress situation. While buyers are not giving high premium, sellers have also become realistic with their expectations. This is why the market has seen a few deals getting concluded in the recent past.

This momentum will only increase next year,” said Patel. Some of the deals that are expected to get concluded include projects from BSE-listed Viceroy Hotels, which is expected to complete the sale transaction of its Chennai hotel and residential projects with Mahal Hotel Pvt and Esteem Housing Developers Pvt, respectively. The deal size reportedly is in the region of Rs500 crore.

Similarly, DLF Hotel Holdings — which recently acquired Hilton’s 26% stake in the JV for Rs120 crore — is rumoured to have sold its four land parcels to Kolkata-based Square Four Housing & Infrastructure Pvt for Rs550 crore.

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