Hotel Industry outlook and Investment Sales climate in 2021
Taking notes from the current situation of the hospitality sector, Jaideep Dang, Managing Director -South Asia, JLL Hotels and Hospitality Group predicts how fear of missing good deals may drive the investment activity in the coming days.
Economic recovery and the revival of the hospitality sector
Since the unlocking of the country in June, the economy showed signs of recovery and with it the hospitality sector also witnessed a revival in demand since August. After the record decline of 23.9 per cent y-o-y in GDP during Q1 FY 2020-21, the second quarter of this fiscal year witnessed a softening of GDP contraction to 7.5 per cent as against earlier estimated range between 9 per cent and 11 per cent. RBI has also stated that the third and fourth quarter of FY 2020-21 may witness marginal positive growth in GDP over last fiscal year. Furthermore, there has been an upward revision of the GDP forecasts for FY2020-21 and FY 2021-22 from earlier estimates. We have also witnessed a record growth in GST collections in the latter half of 2020, with the month of December recording the highest monthly GST collections since its inception three years ago.Similar signs of positivity have emerged in the hospitality space too. Leisure demand led the growth, with holiday destinations in close proximity to major cities witnessing a surge in weekend getaway demand. Goa, India’s leading leisure destination witnessed a significant growth in room night demand in the last few months of 2020, with market-wide occupancy levels almost touching 55 per cent in November.
We also witnessed a recovery in F&B demand in recent months as people have started dining out. As per data on restaurant bookings made through leading Restaurant online booking platforms, there has been a nine-fold increase in table bookings from June to November 2020 across India, which can give the sector some brightness in 2021.
We have also witnessed a month on month growth in domestic air passenger traffic since June. We expect this trend to continue in 2021 as business travel picks up around March-April, once offices reopen and travel advisories are softened by companies.
Hotel Development Landscape
Hotel development remained muted during the initial months of the lockdown. We witnessed some revival in Q2 FY 2020-21. The trend continued into Q3 FY 2020-21 as per preliminary data collected by JLL Hotels and Hospitality Group.The pandemic has also forced hotel operators to re-think the lease agreements they offer to owners. Indian operators that offer lease agreements are now focusing on revenue share agreements rather than making minimum guarantee and fixed lease commitments. Going forward operators are trying to safeguard themselves in the event of future pandemic situations by strengthening their force majeure clause in hotel lease agreements.
Office market recovery – Ray of hope for the hospitality sector
Similar to all real estate asset classes, the Indian office market was also severely impacted in Q1 FY 2020-21 with only 3.3 mn sqft of net absorption of office stock and 5.7 mn sqft of new completions, as per data published by JLL REIS. However, the sector has witnessed a quarter on quarter increase in leasing activity resulting in a 52 per cent increase in net absorption in Q3 FY 2020-21. New completions in Q3 FY 2020-21 reached 12.78 mn sqft across India, registering a 39% growth over the previous quarter. This brings some confidence to the hospitality sector, particularly in business markets such as Mumbai, Bangalore, Delhi-NCR, Hyderabad, Pune and Chennai - as historically the performance of both sectors is highly correlated.
Hotel investment environment
Investment activity has been on pause since March 2020 and is yet to re-start. But there are emerging signs of re-valuations taking place keeping in mind a slow demand revival, improvised cost structures and reduced profit levels in the next 2 years. Serious investors, who are looking closely at deals, are giving prominence to debt service ratios, operating costs and supressed demand from corporate travel, conventions, conferences and exhibition business. Investors are mostly inclined to evaluate operational assets in key markets rather than Greenfield developments. This trend is witnessed across India.
Private equity firms, institutional investors and high net worth individuals (HNIs) have begun evaluating good quality operational assets in major markets, with a focus on resort assets in prominent leisure destinations. A couple of developers with strong balance sheets are also actively pursuing hotel deals.
There has been a rationalization of prices from pre-COVID to COVID levels, albeit not too much due to the support provided by the government to the major borrowers in the sector. The support came in the form of loan moratoriums and the Emergency Credit Line Guarantee Scheme (ECLGS). Once the support from the government run its course, we may witness a few assets entering the tradable market.
Outlook for 2021
In 2021, we expect domestic business travel to pick-up pace in the second quarter, as employees return to their workplaces and companies soften their travel advisories. In the interim, domestic leisure, weddings and F&B demand is expected to drive the sectors recovery. We may witness the conversion of brownfield hotel assets to alternative usages such as co-living, senior living and student housing, subject to the demand in specific markets. Investors will likely firm up investment decisions as performance cycle picks up. Fear of missing good deals may drive the investment activity.
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