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Hospitality: Blessing In Disguise

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Baljee, who may close two deals soon, is one among many three and four Star hotel chains — including Tata-owned Ginger, Lemon Tree, Sarovar Hotels and Resorts, Kamat Group, Empee group — that are being sounded out by builders to buy their properties. “Builders are approaching us with properties at 30-40 per cent lower than the market price,” says S.P. Jain, managing director of Pride Hotels and president of the Hotels and Restaurant Association of Western India. “Deals, however, are getting delayed due to the suitability and customisation factors.”
Proposals from cash-strapped builders range from sale, lease or management contract of 60 projects of 50-100 rooms each, 20-25 villas and resorts and even a couple of luxury hotels in cities such as Mumbai, Delhi, Hyderabad, Bangalore, Pune, Jaipur, Gurgaon and states such as Himachal Pradesh and Kerala at rates 45-60 per cent lower than their peak. At the peak of the realty boom during 2006-08, enthusiastic builders had kicked off more than 400 hotel projects across India. Of these, about 70 per cent were three and four star hotels. Following the downturn, these have become attractive propositions for hotel chains focused on three and four star properties since operators such as the Carlson group and Accor don’t find them suitable for their chains. Bigger chains such as Indian Hotels want hotels built to their specifications.
The rate for service apartments in some of the tier-2 cities is even lower given the flood of offers. “Developers are seeking either operators who can also pick up a substantial equity or an investor who can bring in the cash,” says Sudeep Jain, executive vice-president of Jones Lang LaSalle. Many deals in the range of Rs 100 crore-120 crore may be closed in a month or so, depending on the desperation of the seller even as hotel chains play the waiting game.
Realty giants DLF and Unitech had set the ball rolling recently by selling their under-construction hotels while lining up several service apartments for sale. Market sources say second-rung companies such as Sobha Developers and Purvankara in Bangalore, Mantri Developers of Mumbai and Gayatri Projects in Hyderabad are looking for investors, too.
The two-four star hotel category with fewer branded players is likely to grow between 10 and 12 per cent till 2012 as against 4 and 6 per cent growth in the higher segment. The average construction cost here per room is Rs 45-75 lakh (Rs 1-1.5 crore for luxury rooms). Even though builders are willing to forego a majority of the construction cost, they want a higher cut for the premium location. Groups such as Sarovar Hotels and Pride Hotels have already prepared their war chests while market sources expect companies such as the US based Tristar Hotel Management Co., which has announced a Rs 400 crore investment in India — to consider some of these opportunities.
For developers, hotel projects were more of ‘prestige value’ than anything else (DLF-Hilton wanted 150 hotels) as they bid at major auctions in Delhi and Mumbai throughout 2006-08 at rates that made these projects unviable from the word go. Soon the slowdown hit the average tariff in Mumbai by as much as 41 per cent while the national average was 12 per cent. The strategic blunder, says Vinay Phadnis, hotel operator and chairman of the Sahil Group, was to seek quick returns in a capital-heavy industry.
(Businessworld Issue Dated 2-8 June 2009)