This story first appeared in DNA Money edition on Tuesday, December 06, 2011.
Delays and cost escalations are set to double the breakeven time for several upcoming upscale hotels in the country, including those of Leelaventure and French Group Accor, which are 2-3 years behind schedule and face a cost overrun of several hundreds of crores.
Several projects that were announced during the boom period in 2006-07, were affected by the economic slowdown of 2008-09 as funding dried and demand fell.
Experts said of every 100 guestrooms being built around 36 are behind schedule, which means only 48,000 guestrooms from the current total pipeline of 75,000 are at various stages of completion and the balance 27,000 are delayed.
Among the notable examples, Shangri-La hotel coming up at High Street Phoenix, Lower Parel, Mumbai and Sofitel at Bandra-Kurla Complex that were scheduled to open in 2009 have been delayed by almost three years and are only expected to receive guests next year. Work on both the hotels had started in 2006.
In case of Sofitel, the delay was because the French hotel group Accor decided to reposition it as a luxury hotel.
“The brand specs were redefined which led to change in the entire development plan. It not only delayed the development but also increased the cost per key from Rs80 lakh to Rs1.2 crore. The overall cost is now pegged at over Rs800 crore,” said an industry source. The total cost of the 302-key hotel was pegged at Rs473 crore. “Taking the cost escalation and the current stressed market scenario into account, the hotel’s breakeven will get extended by another 3-4 years at least,” said the source.
The asset owners could recover their investment in the hotel after 11 years from the time it gets operational as against 5-7 years earlier. Accor is also an investor in the hotel with Shree Naman Group, the asset owner. Michael Issenberg, chairman and chief operating officer, Accor Asia Pacific, recently told DNA that Accor continued to hold 40% stake in the development, which means it has to make further investment to maintain stake.
The over 400-room Shangri-La got delayed mainly because of issues with contractors. However, work resumed post hiring of new contractors late last year by the asset owner, Pallazzio Hotel and Leisure Ltd, a subsidiary of Phoenix Mills, and the property is now expected to be soft launched by April and a full-fledged opening by September.
The overall cost of the project as per 2010 timeline was estimated to be around Rs700 crore. A recent report by brokerage Edelweiss Securities has now pegged it at Rs835 crore. “The breakeven situation with Shangri-La is more or less similar to the Sofitel at BKC. I certainly don’t see it breaking even in the normal 5-7 years,” said top industry official.
Among the other hotels that have got delayed include the 250-room Ritz Carlton in Bangalore, being built by Nitesh Estates. The initial cost projection in 2007 was Rs450 crore, which has now risen to `700 crore. Industry experts feel the delay and cost escalation has been so severe that it may not be a viable project for the asset owner anymore.
Hotel Leelaventure’s hotel in Delhi also faced minor delays but it has its own challenges related to cost escalation. The Delhi market has seen a fairly good supply of hotels as a result the average room rate there is severely under pressure. The market scenario is expected to remain more or less the same for a while now and impact the breakeven of the hotel, a source said. The group’s Chennai hotel has been delayed by almost two years and is likely to open mid-next year.
Work on Emaar MGF’s JW Marriott hotel in Delhi, too, has been stalled for a while now with no updates on its resumption.
Experts say while a delay of few months is manageable, projects that deviate two years or more from their schedules affect profitability drastically and even make the project unviable.
Siddharth Thaker, managing partner, Prognosis Global Consulting, a hospitality advisory firm, said. “Breakeven is a function of how much leverage you have on the project. A delayed project inflates the interest component on the debt. The entire pressure is met through the operating cash flows of the hotel.”
The other factor is that the hotel misses the business cycle as the entire market dynamics changes, particularly the supply-demand situation, Thaker said.
Delays and cost escalations are set to double the breakeven time for several upcoming upscale hotels in the country, including those of Leelaventure and French Group Accor, which are 2-3 years behind schedule and face a cost overrun of several hundreds of crores.
Several projects that were announced during the boom period in 2006-07, were affected by the economic slowdown of 2008-09 as funding dried and demand fell.
Experts said of every 100 guestrooms being built around 36 are behind schedule, which means only 48,000 guestrooms from the current total pipeline of 75,000 are at various stages of completion and the balance 27,000 are delayed.
Among the notable examples, Shangri-La hotel coming up at High Street Phoenix, Lower Parel, Mumbai and Sofitel at Bandra-Kurla Complex that were scheduled to open in 2009 have been delayed by almost three years and are only expected to receive guests next year. Work on both the hotels had started in 2006.
In case of Sofitel, the delay was because the French hotel group Accor decided to reposition it as a luxury hotel.
“The brand specs were redefined which led to change in the entire development plan. It not only delayed the development but also increased the cost per key from Rs80 lakh to Rs1.2 crore. The overall cost is now pegged at over Rs800 crore,” said an industry source. The total cost of the 302-key hotel was pegged at Rs473 crore. “Taking the cost escalation and the current stressed market scenario into account, the hotel’s breakeven will get extended by another 3-4 years at least,” said the source.
The asset owners could recover their investment in the hotel after 11 years from the time it gets operational as against 5-7 years earlier. Accor is also an investor in the hotel with Shree Naman Group, the asset owner. Michael Issenberg, chairman and chief operating officer, Accor Asia Pacific, recently told DNA that Accor continued to hold 40% stake in the development, which means it has to make further investment to maintain stake.
The over 400-room Shangri-La got delayed mainly because of issues with contractors. However, work resumed post hiring of new contractors late last year by the asset owner, Pallazzio Hotel and Leisure Ltd, a subsidiary of Phoenix Mills, and the property is now expected to be soft launched by April and a full-fledged opening by September.
The overall cost of the project as per 2010 timeline was estimated to be around Rs700 crore. A recent report by brokerage Edelweiss Securities has now pegged it at Rs835 crore. “The breakeven situation with Shangri-La is more or less similar to the Sofitel at BKC. I certainly don’t see it breaking even in the normal 5-7 years,” said top industry official.
Among the other hotels that have got delayed include the 250-room Ritz Carlton in Bangalore, being built by Nitesh Estates. The initial cost projection in 2007 was Rs450 crore, which has now risen to `700 crore. Industry experts feel the delay and cost escalation has been so severe that it may not be a viable project for the asset owner anymore.
Hotel Leelaventure’s hotel in Delhi also faced minor delays but it has its own challenges related to cost escalation. The Delhi market has seen a fairly good supply of hotels as a result the average room rate there is severely under pressure. The market scenario is expected to remain more or less the same for a while now and impact the breakeven of the hotel, a source said. The group’s Chennai hotel has been delayed by almost two years and is likely to open mid-next year.
Work on Emaar MGF’s JW Marriott hotel in Delhi, too, has been stalled for a while now with no updates on its resumption.
Experts say while a delay of few months is manageable, projects that deviate two years or more from their schedules affect profitability drastically and even make the project unviable.
Siddharth Thaker, managing partner, Prognosis Global Consulting, a hospitality advisory firm, said. “Breakeven is a function of how much leverage you have on the project. A delayed project inflates the interest component on the debt. The entire pressure is met through the operating cash flows of the hotel.”
The other factor is that the hotel misses the business cycle as the entire market dynamics changes, particularly the supply-demand situation, Thaker said.
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