Although some cities are now saturated, fundamentally the Indian growth story is strong, and potential investors should closely monitor the upcoming supply, says Chander Baljee.
The hotel industry is a cyclical one. After a terrific run from 2003-2008, we are now in the midst of a recession, and I suspect this is going to be a longer haul than most people are expecting.
The sensex has surely rebounded from its lows, but the hotel industry has a fair amount of bunched-up supply coming into stream from this year onwards, for the next two years. Therefore, despite the growth in the economy, the hotel industry may see one or two tough years yet.
The growth in Indian hospitality between 2003 and 2008 attracted nearly every developer and foreign hotel brand to India. Today, there are over 1,00,000 hotel rooms under construction across the country, and we expect the construction pace to accelerate in the coming years.
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Investments in the last few years have been impacted due to the global recession, especially since the USA (which is a large investor in Indian hospitality) has been under some stress. The news of Dubai’s troubles will also hurt investments into Indian hospitality.
However, fundamentally, since the Indian growth story is strong, people will continue to bet on Indian hospitality. Royal Orchid Hotels has grown immensely in the last few years despite the recession, and we hope to emerge shortly as one of the larger hotel chains in the country.
We currently have 13-operating hotels, with 1100-keys in eight cities. We have approximately one million square feet of hospitality under various stages of construction and have an ambition to reach 4000-keys by 2015.
Since the country has come out unscathed in the recession, some Indian hoteliers are now harbouring hopes of expanding abroad. Several chains have done this, but usually via the management contract route.
We have also invested in a beach-front property in Tanzania recently, and there are a few other hoteliers – Taj and the Lalit Group come to mind – who have invested abroad. With global prices at an all-time low, it might be a good time for local hoteliers to expand their footprint abroad as there are great deals to be had, and marquee properties which can be bought at a song.
The flipside of this is that India now competes with developed countries (where hotels can be typically bought below replacement cost in the current scenario). This will hurt the flow of short-term capital into Indian hospitality for the foreseeable future.
For the truly long-term player, business opportunities abound in most Indian cities, however, potential investors should closely monitor the upcoming supply. For instance, Gurgaon is a terrific business destination but there are over 4000-keys coming up in the next few years – not to mention over 3000-keys in the Delhi Airport complex alone.
The business impact of the Commonwealth Games is likely to be spread only over one month. Despite the tax benefits, many investors will find it difficult to recoup their investments once the going gets tough post the Games.
The second investment opportunity is Goa – India’s only true beach holiday destination. As the economic environment improves, Goa will benefit. However, development is notoriously difficult here.
I would currently avoid some of the Tier III cities unless the upcoming supply has been washed out entirely. Bear in mind that if a second or third tier city has 500-keys currently, and over 2500-keys under development, it is ripe for disaster, especially since most of the reasons for the keys under development (new IT parks, larger airports, and so on) have typically been negated given the economic slowdown.
A lot of players have started to build hotels in smaller state capitals, which is a great idea. However, one needs to closely monitor the number of hotels coming up, and whether the planned development is suitable for the market.
I do know of certain five-star deluxe hotels that are under construction in very small state capitals, which might be very unviable in the current scenario.
Certain markets like Bengaluru, Hyderabad, Pune and Gurgaon, have been saturated over the last few years, and will be tough markets for some time to come. This is primarily because of the supply coming in, which is bunched-up. Due to this, a lot of developers have also stalled their hotel projects, as the demand has not materialised.
Even the RBI’s move of removing hospitality from the commercial real estate segment (thereby leading to lower provisioning norms for loans to hospitality developments), will not help these projects too much.
As a result, investments in hospitality will certainly take a beating over the next few years – including investments from abroad. Certain foreign markets like the USA are actually cheaper to invest in than India at present, with higher medium-term returns.
Therefore, only truly long-term capital will chase Indian assets. Eventually, this will slow down the development in India, leading us onto the next supply shortage. And so, the cycle continues…
Cyclic growth stories
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Although some cities are now saturated, fundamentally the Indian growth story is strong, and potential investors should closely monitor the upcoming supply, says Chander Baljee.
The hotel industry is a cyclical one. After a terrific run from 2003-2008, we are now in the midst of a recession, and I suspect this is going to be a longer haul than most people are expecting.
The sensex has surely rebounded from its lows, but the hotel industry has a fair amount of bunched-up supply coming into stream from this year onwards, for the next two years. Therefore, despite the growth in the economy, the hotel industry may see one or two tough years yet.
The growth in Indian hospitality between 2003 and 2008 attracted nearly every developer and foreign hotel brand to India. Today, there are over 1,00,000 hotel rooms under construction across the country, and we expect the construction pace to accelerate in the coming years.
Â
Investments in the last few years have been impacted due to the global recession, especially since the USA (which is a large investor in Indian hospitality) has been under some stress. The news of Dubai’s troubles will also hurt investments into Indian hospitality.
However, fundamentally, since the Indian growth story is strong, people will continue to bet on Indian hospitality. Royal Orchid Hotels has grown immensely in the last few years despite the recession, and we hope to emerge shortly as one of the larger hotel chains in the country.
We currently have 13-operating hotels, with 1100-keys in eight cities. We have approximately one million square feet of hospitality under various stages of construction and have an ambition to reach 4000-keys by 2015.
Since the country has come out unscathed in the recession, some Indian hoteliers are now harbouring hopes of expanding abroad. Several chains have done this, but usually via the management contract route.
We have also invested in a beach-front property in Tanzania recently, and there are a few other hoteliers – Taj and the Lalit Group come to mind – who have invested abroad. With global prices at an all-time low, it might be a good time for local hoteliers to expand their footprint abroad as there are great deals to be had, and marquee properties which can be bought at a song.
The flipside of this is that India now competes with developed countries (where hotels can be typically bought below replacement cost in the current scenario). This will hurt the flow of short-term capital into Indian hospitality for the foreseeable future.
For the truly long-term player, business opportunities abound in most Indian cities, however, potential investors should closely monitor the upcoming supply. For instance, Gurgaon is a terrific business destination but there are over 4000-keys coming up in the next few years – not to mention over 3000-keys in the Delhi Airport complex alone.
The business impact of the Commonwealth Games is likely to be spread only over one month. Despite the tax benefits, many investors will find it difficult to recoup their investments once the going gets tough post the Games.
The second investment opportunity is Goa – India’s only true beach holiday destination. As the economic environment improves, Goa will benefit. However, development is notoriously difficult here.
I would currently avoid some of the Tier III cities unless the upcoming supply has been washed out entirely. Bear in mind that if a second or third tier city has 500-keys currently, and over 2500-keys under development, it is ripe for disaster, especially since most of the reasons for the keys under development (new IT parks, larger airports, and so on) have typically been negated given the economic slowdown.
A lot of players have started to build hotels in smaller state capitals, which is a great idea. However, one needs to closely monitor the number of hotels coming up, and whether the planned development is suitable for the market.
I do know of certain five-star deluxe hotels that are under construction in very small state capitals, which might be very unviable in the current scenario.
Certain markets like Bengaluru, Hyderabad, Pune and Gurgaon, have been saturated over the last few years, and will be tough markets for some time to come. This is primarily because of the supply coming in, which is bunched-up. Due to this, a lot of developers have also stalled their hotel projects, as the demand has not materialised.
Even the RBI’s move of removing hospitality from the commercial real estate segment (thereby leading to lower provisioning norms for loans to hospitality developments), will not help these projects too much.
As a result, investments in hospitality will certainly take a beating over the next few years – including investments from abroad. Certain foreign markets like the USA are actually cheaper to invest in than India at present, with higher medium-term returns.
Therefore, only truly long-term capital will chase Indian assets. Eventually, this will slow down the development in India, leading us onto the next supply shortage. And so, the cycle continues…
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