Hotelier India speaks to some experts on what their perception of the right partner investor is
Real estate stole the limelight from individual owners a few years ago but it appears that individual owners are reclaiming their past glory. However, institutional owners are on their way to taking on some control too.
But who presents the best partner? Is there any such thing as the ‘best’ among the owner’s community or does the owner-management company relationship depend on how well the latter delivers?
Which category of owners will stand by a management company to weather a storm, should another one brew? Hotelier India talks to consultants and management companies to identify the cause, nature and future of the shift.
In good times…
Real estate found their way into the hospitality business during the boom years of 2006 and 2007. “Real estate hotel owners only emerged due to the fact that being developers, they owned the sites and with so many hotels coming in during those years, they entered the business,” Sarovar Hotels managing director Anil Madhok points out.
The problem is that for these real estate developers, hotels were simply an asset class within their development portfolio that also included commercial and residential projects.
“A real estate developer cannot be a serious hotelier – the long gestation, need for loans to develop the property and risks against commercial and residential is not their cup of tea,” comments Vijay Thacker, director, Horwath HTL.
The boom in real estate investments in hospitality is today seen as a thing of the past that is unlikely to be seen in hospitality again very soon – at least not in the mega sized avatar we saw a few years ago.
“It’s true that in 2007-08, there was a perception that real estate developers would do better but today most partnerships are being undertaken with individual owners,” says Manav Thadani, managing director, HVS-India.
Real estate companies tarnished their image by signing huge deals and then walking out on the agreements.
“When the recession came, land alone at exorbitant rates like `300-400 crores were seen as unsustainable investments on hotels as the returns would take too long to allow the real-estate developer to break even,” says Uttam Davé, head of development, Accor Hotels – India, Bangladesh, Nepal , Sri Lanka and president and CEO, InterGlobe Hotels (Accor JV).
For Accor of course, current and future development within India remains in partnership with InterGlobe Hotels.
That doesn’t mean to say that management companies are completely loathe to partnering with real estate developers.
“Marriott sees potential in partnerships with any real estate developer who wants to align his interest with ours as the operator,” says Marriott International senior vice president hotel development Navjit Ahluwalia acknowledging however, “The number of real estate players who had decided to go into hotels have slowed down but we have seen that is being replaced by a number of independent owners who want to do hotels who may not necessarily be in the real estate business but may have other businesses to expand into the hotel business.”
He places the figure of real estate contribution to Marriott’s existing inventory and development pipeline at approximately 35%. Madhok informs that today, out of 30 hotels under development, three or four would be partnerships with real estate developers.
“It’s simply that apartments sell faster and are therefore a better alternative for this segment of owners – the lead time on returns from hotel projects is not something that they are satisfied with,” he comments.
Davé anticipates that real estate will continue to invest in hospitality but it will be more the smaller players rather than the giants Emaar and DLF.
He also sees continued real estate investments in hospitality where the hospitality project is located in a mixed use complex. Thacker sees Raheja Builders as one real estate company that is serious about their hospitality vertical.
Also, real estate could benefit from the recognition generated by a hospitality project and may therefore continue some investments in hospitality when they want to move into new markets.
“Historically, in the US or India, real estate tends to dapple with hospitality. This is because in real estate when you start it’s not as easy to build brands.
There comes a point when they need to go beyond local brand recall and it is at this cutting point that they build a high profile hotel which gives them visibility. For instance, a builder may be well-known in his locality but he may not have the brand to grow beyond a point,” explains Gateway hotels’ chief operating officer P K Mohankumar.
For their Westin brand, Starwood has tied up with real estate developers for all five properties so far.
“There is no preference towards any category of owners as such but we have spent a lot of time identifying real estate developers who would be good partners in the long run,” explains Starwood’s regional general manager sales and marketing and director for national sales in India, Bangladesh and Maldives.
He explained that while an added positive of real estate developers is that they have land, Starwood has looked for owner-partners who respect the brand that they are looking to partner with.
Eye for investment
These investors are rapidly moving into this space. Especially now that development is back on track, real estate has withdrawn and hotels want sizeable inventories to meet rapidly multiplying demand in India and Asia, this segment of owners is making its presence felt.
“I think this is a more permanent shift that we’re seeing today. It’s also very organised,” says Davé. Madhok also sees this shift as coming to the forefront.
“Hotels looking at growth need funds. The obvious options are a public issue or by allowing investments venture capitalists but here too the lead time that one has to break even and start delivering is very short,” he says.
Master of one
The individual owner retains popularity simply because of his focus on his single property or handful of properties. “They don’t have their hands in too many pies. Individual owners can therefore focus on each partnership effectively,” says Thacker.
Thadani agrees that individual owners are back to enjoying their original popularity. “Phases come and go – owner paradigm shifts can hark back to when hotel operators owned the properties that they managed but they’ve gone asset light over the last 10-15 years,” he says.
He sees the next phase revolving around investments in the budget sector of accommodation.
Madhok says, “I think the individual owner is here to stay because it is simpler to develop a relationship with one owner of a property due to their dedicated focus on these assets.”
Who trumps whom?
The positive of real estate developers is that they already have the land. The down-side is that they walk at the slightest hint of trouble.
“Individual owners allow for ease in developing and maintaining relationships but it takes a good amount of time to prove yourself and gain that trust. Moreover to establish a wide enough footprint, you will be dealing with some fifty owners,” says Madhok.
Dedicated focus on properties could also turn into a disadvantage if the owner goes after the brand with hammer and tongs to deliver results quicker.
Institutional owners are a good idea because they come with the much needed vitamin-M. “The good thing is that the risk and debt in this case is not yours,” says Madhok. However funds will be pulled out after five years or seven years to be returned to their investors. Moreover they are seen to be turning into a “nuisance” if the hotel isn’t delivering quickly.
Be the change?
When identifying the best partner in our business, experts underline that it is imperative to remember that the very nature of this partnership throws up challenges.
“Hotel management companies have to accept that owners will be demanding – after all the property is their investment. A big focus area will obviously be commercial gains. It is for us to make them understand that there is much beyond immediate returns, to remind them that profits can go to their third generation,” says Mohankumar.
Arjun Thapar, director, Te New Delhi explains, “My father is in real estate and his land bank went a long way in helping us get our first property up and running. That said, I have had to explain to him extensively about guest areas and how they are required to ensure customer satisfaction. In real estate, every inch of space is supposed to earn you some revenue. Rentals run the business.”
Madhok agrees that management companies need to be sensitised and remember that no matter who your owner is, if you deliver results, he’ll be a great partner – performance, not who your owner is, determines the nature of the relationship according to Madhok.
Thacker says that management companies shouldn’t be choosy at least between real estate and individual owners. “Management companies should ideally be happy with either,”
he states.
