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Brigade To Focus On Hotel Projects

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Bangalore head-quartered real estate major Brigade Enterprises which primarily operates in South Indian markets, plans to launch eight new hotels in the next five years with an investment of Rs 650-750 crore, excluding land costs. Inspite of a challenging real estate market, Brigade in 2013-14 had a reasonably good year with revenues of Rs 940 crore and net profit of Rs 88 crore. While this was primarily because the South Indian market was more resilient to slowdown blues impacting the sector, Nirupa Shankar, Director of Brigade Hospitality, a subsidiary of Brigade Enterprises, says it is also because of the ‘conservative way we run the group.’

Brigade Hospitality manages everything from serviced apartments, convention centres, lifestyle membership clubs an event management team to a baking company and earned revenues about Rs 130 crore last year. To ensure a healthy mix of short-term and long-term ‘annuity’ revenues, Brigade which already runs three hotels (two in Bangalore and one in Mysore) plans to launch 8 more, majority of them in the three start category. Nirupa who belongs to the promoter family which controls about 57.7 per cent of the listed company, is expected to eventually succeed her father the current Chairman and Managing Director M R Jaishankar.

In an interaction with Businessworld’s Venkatesha Babu, Shankar talked about why the focus on hotel business and how the sentiment is improving in the real estate sector. Edited Excerpts:

Has the real estate sector - witnessing a slowdown so far - turned the corner? The signals given by the new government indicate that they are keen on reviving growth in the construction and real estate industry.

I definitely think so. The new government has a decisive mandate and that is good to take decisions. Undobutedly the real estate industry went through some tough times but now the sentiment has changed. People have started buying and investing in the real estate sector again. This sector generates huge employment and it is good that the government is focussed on helping it revive to improve overall sentiment in the economy.

Brigade’s core strength has been building and selling apartments. Why the focus on the hotel sector now?
To run a company you need to have a healthy revenue mix. While we will contine our residential real estate focus, remember each time a project is identified and sold, there is very little recurring revenue from them. For instance the residential and market is highly cyclical.

So we need to have revenues which are annuity based. You don’t build a hotel with a 2-3 year view. You do that with more of a 30-40 year view. Annual returns are around 10-12 per cent. Also we have already have three hotels in our portfolio. Sheraton manages one of our property in Bangalore and another in Mysore. Another hotel in Bangalore also is a managed property. We expect the travel and tourism industry to pick up. While there might be a temporary supply glut in some cities for hotel rooms, we believe in the mid to long term, ARR (average room rents) will pick up and we will get good returns. Also Brigade is careful on the choice of location of hotels. All the eight hotels being planned are in Southern India. Our focus is on profitable growth. For the present we don’t have national ambitions. Hotel properties take anywhere between 5-7 years to payback and is some cases even upto 10-12 years. But after that one pretty much has a property for free which yields steady revenues.

Why the focus on the mid-end of the market?
Our existing properties are 5-star properties. The cost per key (for one room) would be about Rs 1-1.5 Crore for a 5 star property. Typically for a 300 room project it would mean an investment of Rs 300-400 crore. Whereas for a 3 star property it is about Rs 40-45 lakhs per key.

We are looking to focus on mid market range -- like internationally there are Holiday Inn Express -- because we think that is where a lot of demand is going to be.

The eight hotels coming up ...where are they in South India?
Apart from our existing hotels, we will add three more in Bangalore, two hotels in Mysore, two in Kochi and one in Chennai, all of them over the next 5-6 years.

These hotels will be managed by well known brands, right?
Typically how it works out is the developer, the property owner and the brand which will manage the hotel will arrive at a long-term arrangement, which could be anywhere between 30 and 60 years. Some organisations like Four Seasons even looks for a life-time partnership while others are comfortable with a 15 to 25 years partnership. As a part of our group long-term strategy, our goal is to get about 15-20 per cent of our revenues from this segement of the business.  

Given the funding needs for setting up of the hotels, are you looking to spin off the hospitality business into a separate venture?
No, not right now. We may look at creating a separate SPV for individual projects provided we get a right partner. Sevveral PE investors have spoken to us, but it has to make sense for us. Expectations need to be aligned. If somebody comes in with 15-18 per cent returns in the short term it is not going to happen and we dont want to do that. So right now all investments will be through internal funding. Once we have a certain number of rooms and certain critical mass, we may consider a spin off, but not right now.

The hospitality division does a lot of other things too. We manage serviced apartments, lifestyle membership clubs, convention centers and even event management.

So what about succession planning in the group? You clearly are being groomed to eventually lead the group?
It is too early to discuss that. My father is fully involved and hands on in the business. There is a capable senior management team which has been with the group for a long period of time. Maybe more clarity will emerge over the next few years. Right now we have a independent CEO for each of the three main verticals in the company. Residential, hospitality and commercial (which includes retail), who report to the chairman. The company has always been professionally managed and run.  The promoter family’s involvement has been more at a strategy level, at the board level in ensuring long term vision for the company so that it goes in the right direction and seizes the right growth opportunities. I am fully focussed right now on the hospitality division.