Fund-short hotels find it hard to come up

An edited version of this story first appeared in DNA Money edition on Thursday, April 12, 2012.

India’s largest realty firm DLF Ltd bought out its joint venture (JV) partner Hilton for Rs 120 crore in December 2011. Instituted in 2006-7, the DLF Hotels & Hospitality Ltd (JV firm), was to set up 75 hotels across the country. The transaction, according to DLF spokesperson, was done to take complete ownership of the JV and its underlying assets including incomplete hotel sites with a view to monetise them. “This is part of DLF's ongoing strategy to divest non-core assets," the spokesperson had said.

Similarly, in June 2007, another leading realtor Emaar MGF had announced 50:50 JV with Premier Inn, a subsidiary of UK’s largest hospitality company Whitbread PLC. The JV was targeting to develop and operate 80 limited services hotels across India under the brand Premier Inn over next 10 years with an investment of up to $600 million. However, with Emaar MGF running into its own set of financial troubles, Premier Inn bought out their stake in the JV and is now pursuing expansion on its own.

Taking just the two instances into account, approximately 150 hotels or 15,000 guest rooms (assuming each hotel had 100 keys) have gone out of the Indian hospitality development pipeline. Financial hurdle in pursuing the developments was that one common factor with both the fiascoes.

 

Commenting on the situation, Aly Shariff, managing director, Premier Inn India P Ltd, said, ”The JV partner (Emaar MGF) had a change in their overall business strategy, as a result we decided to buy them out thereby holding 100% of the company.” The UK’s largest hotel chain has significantly scaled down its plans and will now expand on its own. The hotel chain is now targeting an overall guestroom inventory of over 650 in the next 3 years including the 200 plus already operational hotel rooms across Delhi and Bangalore. Going forward, the company will adopt asset light strategy (management contracts) to expand in the Indian hospitality market.

A white paper released by global hospitality consulting and services firm HVS in collaboration with World Travel & Tourism Council (WTTC) recently, said India will need overall investment to the tune of $25.5 billion for constructing 180,000 additional hotel rooms in the next decade from now i.e. 2012.

However, HVS also feels that challenges related to sourcing capital for these hotels will impact the overall development pipeline.

Kaushik Vardharajan, managing director, HVS Hospitality Services India, said, “There will be a shortfall in the overall projected additional supply of 1.88 lakh hotel rooms in the next seven to 10 years and we are of the opinion that only 60% of these guest rooms will actually get constructed within the stipulated time frame.”

Leading hospitality firms and financial institutions operating in the Indian market, are in agreement with the fact that non-availability of capital and or lack of funding options are significantly impacting hotel developments in the country.

At a recently concluded hotel investment conference (HICSA 2012), at Grand Hyatt Hotel in Mumbai, erstwhile CEO of IDFC Private Equity Luis Miranda, said while there is significant demand for funds in the Indian hospitality sector there aren’t enough sources.

“If the project and the investment are priced properly I think money will come. However, hospitality assets tend to be so expensive in India that it just doesn’t make sense for investors to invest,” he said. Miranda is currently advisor to SilverNeedle Hospitality which is part of the Nadathur Group, an investment firm owned by Nadathur S Raghavan and family, co-founder of NASDAQ-listed Infosys Technologies.

Miranda’s concerns were echoed by other HICSA 2012 panel discussion participants including Navneet Bali, chief investment officer, Duet India Hotels, Peter Meyer, managing director, Pacifica Partners, Sandeep Kotak, executive vice president, Kotak Mahindra Bank and Vijay Jayaraman, senior vice president, Equity International.

Akshay Kulkarni, executive director - SA, Cushman and Wakefield Hospitality, feels while companies are looking to expand, their single most important concern is funding it. “A majority of the hotel companies operating in the country are in agreement of the fact that there isn’t enough capital to build all the hotel rooms being talked about,” said Kulkarni.

The severity of the problem is evident from the fact that, companies that raised money in the past and over-leveraged their balance sheets are now left with not much option but to sell some of their existing assets.

For instance, the home grown luxury hotel chain Leela Palaces Hotels & Resorts had sold its Kovalam hotel for Rs 500 crore while retaining management contract. The BSE-listed company is considering similar options for the company’s yet to open luxury hotel in Chennai. The money thus raised will be used to retire debt instead of building new hotels and the management now wants to focus on pursuing the asset light strategy (management contracts) going forward.

Following the footsteps is Bangalore-based BSE-listed hotel company Royal Orchid Hotels Ltd (ROHL) which is looking to divest a few of its existing hotels in the portfolio to retire debt and use the balance money to fund developments in key metros like Mumbai. 

In fact, ROHL has already inked a deal to sell its Royal Orchid Central Ahmedabad hotel. “The deal is in final stages of conclusion and the hotel has been bought by SAMHI Hotels Pvt Ltd,” said a source familiar with the development. However, it is not clear at this stage whether ROHL will retain management post the closure of this deal.

Concern over return on investment, industry experts feel, is another reason why investing in the hotel sector is not priority for financial institutions. Sarovar Hotels & Resorts had, in 2005, raised Rs 38 crore from two global private equity funds to part finance its new budget hotel brand, Hometel. Bessemer Venture Partners Trust (an affiliate of Bessemer Venture Partners) and New Vernon Private Equity Ltd had contributed equally in this round of funding.

“The investment, in its seventh year now, has already crossed holding period of 5-6 years and the PE funds will have to start exploring exit options. It will be really challenging (for the PE firms) to take the exit call considering the market conditions and the overall health of the hospitality sector in the country isn’t looking very favourable to register a respectable return on investment,” said a top industry official requesting not to be quoted.

All is not lost with investing in the Indian hospitality market. Of a few hotel companies spoken to, a handful of them are expected to pump in approximately $535 million over the next 8 eight years from now. Interestingly a majority of them are backed by equity participation from international chain while others are banking on their proven track records and execution capabilities for investing in building hotels.

 

Hotels-focused fund Duet India Hotels (DIH) which has a partnership with InterContinental Hotels Group (IHG) is looking at an investment of around $125 million in addition to the close to $200 million being earmarked already. The DIH management has set itself a target of 1,000 rooms for the next 8 years and is aggressively working towards getting the hotels up and running.

“We currently have enough money for deployment and are aggressively focussing on demonstrating execution capabilities. A new round of fund raise will happen in the future and it’s really heartening to see that international institutions are already showing interest on investing with our hotel development platform,” said Bali.

The UK’s Premier Inn will investment to the tune of $35 million. “We will be investing approximately Rs 175 crore (to be funded through internal accruals) for new properties coming up in cities like Pune (113 keys), Goa (131 keys) and Chennai (108 keys),” said Shariff.

Urbanedge Hotels, a joint venture company between Citigroup Property Investors and Auromatrix Hotels, has partnered with Starwood Hotels & Resorts Worldwide to develop ‘aloft’ hotels across India. Kumar Sitaraman, chairman and CEO, Auromatrix Hotels Pvt Ltd, said, “We will be investing to the tune of approximately $300 million in the said time frame. While a significant portion ($200 million) of the capital expenditure will come from internal accruals, we will explore other options including private equity for the balance $100 million.”

Adopting the selective investment approach, SilverNeedle Hospitality will invest a very conservative $75 million. The hotel company currently manages over 4,000 keys in the Asia-Pacific region, with an aim to have over 10,000 keys in its portfolio by 2016.

Among, prominent international hotel chains (with significant presence in India) that have already committed equity participation with their respective joint venture partners in India include Accor (with InterGlobe), Marriott International (with SAMHI Hotels), Carlson Rezidor (with Bestech), InterContinental Hotels Group (with Duet India Hotels) and Hyatt International (with Emaar MGF).

Starwood Hotels and Resorts Worldwide is currently the only international hotel company that is yet to invest in the Indian hospitality market. "It's not that we are averse to investing. We have done that in the international markets and will consider if the situation demands. However, I must also state here that our partners are very confident of the value that we bring to the table and that is the key reason they associate with us for their hotel developments," said, Simon M Turner, president - global development, Starwood Hotels and Resorts.