YOU WOULD be mistaken to think that Umesh Saraf has hoteliering in his blood. In fact, one of India’s most successful hotel owner took his own sweet time to warm to the business. Part of a large business family, Saraf grew up with business and commerce as part of his DNA. Saraf was born in 1963 in Kolkata before moving to Kathmandu where his family were staying. He was shifted to Hong Kong to complete his high school before arriving in California to finish his undergrad course.

Once he was ready to take the plunge into his family business, he was given a choice of either joining the hotel and trading business in Kathmandu, the trading business in Hong Kong or start something new in the US, by his father. A man who had a mind of his own, Saraf chose instead to work in India. It was the only place which he says he felt would treat him like  first class citizen. It was also a place which he bet on booming in business, along with China. Saraf arrived in New Delhi to set up office as  a family representative at the Hyatt Regency in New Delhi, where his company had a share. Saraf, who confesses to have been an aggressive go getter in those days did not sit around, but decided to explore on doing something different and on his own. A quest which took him across the country looking at various businesses, ranging from the steel industry to textile. In those days, hospitality was not Saraf’s first priority. In fact, he confesses that he didn’t want to be pigeon-holed in the sector. BW Hotelier spoke with Saraf to discover how he made the transition into hospitality and what he thinks is essential to be a successful hotel owner in India. Here are excerpt from the interview.

Umesh Saraf: For the first five or six years, I went all across India, looking at opportunities. Didn’t get frustrated. By 1991-92, I was very well versed with what was happening around India. I looked around for a business to inspire me. Somehow nothing did. The huge licensing raj sort of put me off. Then I decided to give hospitality a chance, I was still young around 26-27 by the time I finished a survey of 27 cities. I had my video camera and other gadgets, took pictures and videos of all the hotels in my target cities. As long as the property was a recognised hotel, I was there recording it’s ins and outs. I knew exactly what was happening in this country when it came to hospitality. I had no doubt in my mind where the opportunities lay. It was very clear even then, that this was a long term game, this is a lifetime business. 

US: This was my first baby. We bought this plot in a public auction in 1993 and was the highest bidder at Rs 32.2 crores which was US$ 11 million, but DDA refused to give it to me. We had to go to court, which took us a year-and-a-half, before finally we got the plot allotted to us. By the time we got all our approvals in place and built the place, it was 1999. But then, there was another stoppage, this time from an environmental case, which took another year in court to settle, followed by another year to get final DDA clearances. This, after we had invested Rs 340 crores in 1999, had a 500 strong staff and a leading management company twiddling their thumbs. For that one year, I was servicing the debt, paying the 500 people who didn’t have anything to do. But, when we did open it was amazing. People came to see the property from all over the country. It was a new generation, the quality, the size, everything about this place was unique and different.

US: Sometimes things work out and sometimes they don’t. At that time the situation was such that we had to part ways with the management company who used to run this hotel. Once we parted ways, it was all about doing things from a purely business perspective. Luckily the market turned in 2002-2003 and there was no looking back for us. Within six months of the hotel becoming the Grand, it was at the top of the market. In 2004-2005, it was top of the market, the hotel became the most profitable in the country. It remained in that position till the downturn happened. Costs were low, revenues were high. We lucked out with the boom. We also got in some great people with aggressive ideas, which really worked for us at that time, but the biggest job was done by the market itself. It’s really easy for me to take the credit, saying it was a great hotel and the guys did a great job (which was definitely a factor), but it was the booming market. 

US: They make a lot of mistakes. The first thing that they do is being unable to look at it as a business. The starting point is not looking at it as a commercial venture. The starting point is looking at the property as something that will give them a chip on their shoulder, something that will give them name and fame and an ego trip. This is really what’s in the back of a promoter’s mind. If decisions are based on commercials you look at it differently. You invest prudently where you’re going to make money. You have to be in the right market and you have to invest the right amount of money, as well as position the hotel correctly.  

US: 25 years ago or even 15 years ago, when you invested in this business, you looked at capital appreciation along with cash flows. But, when you look at something commercially you are looking at cash flows, your investments have to give you enough returns to take care of your debt and maybe service your equity a little bit. There was also a huge up-size of capital appreciation. The real estate values in India have gone so high in the last 25 years, that there is no more capital appreciation left in the business. The future is not going to be about capital appreciation but more about cash flows and annuity. There is a complete shift in how we think about hotel ownership now. When I now look at investing, I don’t really look at how much my property is going to appreciate. It’s more about how much money it’s going to make over a period of time and what kind of returns it’s going to give me. One has to really look at the business from an annuity perspective. Even when you go sell a hotel today, your valuations are based on the annuity system. Someone is going to buy your property based on the cash flows not on the capital value. Capital value has no meaning when it comes to this business, because it’s not going to appreciate. Margins are very low unless it’s a very badly run hotel or it’s in an unfortunate market where things are not doing well. Hotel rooms are going to get commoditised especially with REITs (Real Estate Investment Trusts) coming in now. Once the REIT business becomes successful in India, you will see REITs picking up leased assets for an annuity income. First commercial and residential and then to hotels. Valuation of hotels will depend on how a REIT will value the income stream. That’s the future. What has happened in the west in the last few decades has to happen here. Once that happens, the excitement in the business, which is all about appreciation, is not that much. 

US: In terms of business, one has to get more and more creative. You have to create value out of your assets. What’s going to work now is more mixed use developments, where one can add some other income streams apart from the hotel. Mixed use is one way to make it more interesting because you can actually sell as well. Hoteliering is going to be seen differently. Real Estate companies are already doing it, building hotels to create value for their real estate. Like in Bangalore, where a lot real estate developers have put up hotels near their developments.

US: In terms of our existing assets, there is a great opportunity here in this company and in this hotel. The government has changed the FAR (Floor Area Ratio) norms over the last five years. I have a huge amount of FAR now which I can build. The government has changed some norms on how much commercial property we can have. They have given hoteliers like me, more opportunity to increase our business. It looks like we will continue to keep the Grand as an independent hotel for the moment. We will only take a call after the development potential of this property has been fully reached. We are going to be doing a residential and commercial development and we will be adding more exhibition and convention space to the hotel complex. We have 10 acres of land here, with a lot of FAR available, all in this very prime area of New Delhi. The new development will be several times the existing hotel and its surroundings and I expect that work will begin within a year.