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Sunday, September 8, 2013

Shangri-La, Phoenix Mills scrap management agreement for Mumbai hotel

An edited version of this story first appeared in DNA Money edition on Tuesday, Aug 27, 2013.

Nine months after operating the luxury hotel atop the Palladium Mall at Lower Parel in Mumbai, Hong Kong-based Shangri-La Hotels and Resorts is now calling it quits. Industry sources familiar with the development told dna that the hotel operator has decided to part ways with the Pallazzio Hotel and Leisure Ltd, which is the asset owning company and a subsidiary of BSE-listed Phoenix Mills Ltd (PML).

Shishir Shrivastava, Group CEO and joint managing director, PML, confirmed the separation though he denied that Shangri-La was walking out of the management agreement. “It is with mutual discussion that we have decided to terminate the contract. A new operator has been finalised already details of which will be made public shortly,” said Shrivastava. Being a mutual decision there will be no penalties levied for terminating the management contract with Shangri-La Hotels & Resorts which was for a period of 20 years.

Most of the hotel projects being developed by PML sit under a separate special purpose vehicles (SPVs). The Shangri-La Hotel, Mumbai is under Pallazzio Hotel and Leisure Ltd (a subsidiary of Phoenix Mills Ltd). The company has invested Rs 294.6 crore with a debt of Rs 652.6 crore. The overall project cost however is pegged at Rs 1,050 crore.

On what led the parting of ways between the two entities, industry sources said that a misalignment in their vision for the luxury hotel development was the key reason. This clearly is a case wherein the owner-operator did not get along a bit. The source said there was major disconnect between them for various reasons including significant delays and the hotel being partially developed in terms of total guestrooms and food and beverage facilities.

“The operator wasn’t very happy with the overall development. In fact, being a flagship hotel in Mumbai, Shangri-La also offered to buy out the asset owners and develop it as per their international standards but in vain. Finally, when nothing appeared to be working they decided to walk-out of the management agreement,” said the source.

The office of Farhat Jamal, area general manager (India, Sri Lanka and Maldives), Shangri-La Hotels and Resorts, also confirmed the development saying Shangri-La will withdraw from the management of the hotel on September 6.

Shrivastava said the hotel will continue to operate as an uber luxury hotel with several enhancements, new banquet facilities and further the signature restaurant Mekong and Libai Bar will launch as planned by mid September.

The new brand will have to be announced in the shoulder month itself as the Indian hospitality sector will enter the peak business season starting October.

After significant delays of approximately three years, the Shangri-La Hotel, Mumbai began receiving guests in sometime in the third week of December last year (2012). The delay led to its overall development cost of Rs 1,050 crore overshoot the planned expenditure by Rs 400 crore. Of the total 390 guestrooms and suites approximately 221 guestrooms were operational as on June 30, 2013. By August end this inventory was to increase to 300 rooms and another 90 rooms were to be added in a phased manner depending on the market demand.

With an average occupancy of 40% for the April-June quarter, the hotel enjoyed an average room rate (ARR) of Rs 8,473 which could have been better given the luxury positioning of the hotel. Room revenues for the first quarter of fiscal 2014 was Rs 5.9 crore versus Rs 5.8 crore for FY13.

Of the planned 11 restaurants, only three are operational while the balance were projected to be operational by September this year. Revenue from Banqueting and F&B in Q1FY14 stood at Rs 9.1 crore as compared to Rs 9.4 crore in four-odd months of FY13.

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