Property developers and private equity (PE) funds are slowly returning to the hospitality sector, years after they left it to concentrate on their core business.
However, unlike the 2006-07 boom, when they built hotels across the country, they are cautious this time around, choosing locations such as information technology (IT) parks and mixed-used development projects with captive demand for hotel rooms from business and domestic travellers.
Last month, Bengaluru-based Brigade Enterprises Ltd announced plans to hive off its hospitality business into a wholly-owned unit. Brigade Hospitality, which has 500 rooms across the three hotels it built in Bengaluru, plans to have about 4,000 rooms by 2018-19.
In an earlier interview, chief financial officer Suresh Kris said the firm plans to transfer the assets into a separate entity before it gets bigger, and to make it more investor-friendly.
“Brigade is planning to bring in new PE investors into the hotel business, who may not be keen if it continues to be a part of the holding company,” said an analyst, who didn’t want to be identified.
Embassy Group is planning to build business hotels at its existing and upcoming office parks spread across Bengaluru, along with investor partner Blackstone Group Lp. It will build two hotels in Manyata Embassy Business Park in Bengaluru, which has around 12 million sq. ft of existing office space, and is close to signing up for two hotels under the Hilton brand.
At Embassy Tech Village, another upcoming office park, two more business hotels will be built at around Rs.600 crore, though the company has not zeroed in on a brand yet. “The overall performance measure which is the revenue per available room (RevPAR) and gross operating profit both started showing improvement across India, given the improvement in business sentiment. PE interest is beginning to start as they believe this is the right time to get good distressed deals while hotel operators are a lot busy currently than before signing management contracts,” said Ramesh Nair, chief operating officer, JLL India, a global property consultant.
Earlier this year, the PE arm of Goldman Sachs also announced its plan to invest Rs.440 crore for a minority stake in Samhi Hotels, which operates around 16 hotels across the country. The Gurgaon-based hospitality investment firm is looking for acquisitions as it plans to add two more hotels by the end of this year.
“PE investors are more interested today than they were a few years back, following a belief that the Indian economy is at the cusp of a turnaround. We expect that the operating metrics in the hotel industry will improve towards the end of the year and stronger from next year... However, given the degree of distress over the past several years, many investors would like to see real change and may sit on the fence before they commit capital,” said Ashish Jakhanwala, managing director and chief executive officer, Samhi Hotels.
Mumbai-based developer K Raheja Corp.’s hospitality arm, Chalet Hotel Pvt. Ltd, which has around 2,700 rooms across Mumbai, Bengaluru and Hyderabad, is also planning acquisitions to double its portfolio in four years. Chalet is scouting for hotel properties with 200-400 rooms, and plans to enter markets such as Delhi, Pune and Goa, apart from expanding its existing capacities.
“In the past, we have not looked at acquiring ready hotels as a growth model. Now we are looking at that as an option because we want to be quick in the market. We are probably on the cusp of an upturn. We would like to have ready hotels when the next cycle comes as against building during the upcycle and acquisition opportunities are far better now if we compare to two-three years ago,” said Sanjay Sethi, managing director and chief executive, Chalet Hotels.
Godrej Properties Ltd, for the first time, is setting up a hotel as part of its new mixed-use development project at Vikhroli in Mumbai, while Oberoi Realty is in the process of building its second hotel, Ritz Carlton, at Worli.
“It is the first time we could be integrating a hotel in our development. We have been fairly inundated with a lot of interest. Yes, the interest is natural as there aren’t that many hotels around Vikhroli (a suburb in Mumbai) and also most people do realize that we have a fairly large land bank,” said Anubhav Gupta, executive vice-president, design strategy, Godrej Properties.
According to real estate advisers, setting up a hotel in a mixed-used development helps developers draw a premium for its residential properties, improves location dynamics and creates a better feel to the location. However, JLL’s Nair warned that developers should tread with caution as setting up hotels and building commercial or residential properties involve different business dynamics.
In 2009, many debt-laden real estate firms, including large developers such as DLF Ltd and Unitech Ltd, exited the hotel business.
“Today, developers are increasing their involvement and carefully studying the feasibility of setting up a hotel at a particular location,” said Neeraj Govil, market vice-president, Marriott South Asia, a global hospitality firm which runs 33 hotels under seven brands in India.
Developers are looking to build hotels in markets where there is insufficient demand and where the moment they bring the hotel they can start straightaway successfully. Five-six years ago, people were building in futuristic locations where demand would be induced at some point by external factors,” he added.
