Invest now, reap benefits later
BW HOTELIER gets views of owners who are not just pillars of the sector but the bridge that make the hospitality business viable and workable and a huge creator of wealth, employment and generator of all important forex
After over a decade of steady growth, the unprecedented global health situation dramatically impacted consumer travel demand, leaving many owners and operators in the hospitality industry stunned and reeling. With lengthy lockdowns ending and travel restrictions easing, the Indian hospitality industry has witnessed improvement in the occupancy levels. However, the Government’s investor-friendly initiatives, focus on infrastructure and connectivity developments and innovative programmes like Gati Shakti are likely to help the investment atmosphere. BW HOTELIER gets views of owners who are not just pillars of the sector but the bridge that make the hospitality business viable and workable and a huge creator of wealth, employment and generator of all important forex.
Our choice of brand partners is driven by market opportunity
Ashish Jakhanwala, MD & CEO, SAMHI
The relationship between an owner and an operator is objectively defined by contracts that are standard but with high degree of mutual trust and respect. We have learnt that simple tips can help maintain not just cordial but symbiotic relationship helping both the partners. Our endeavour is to set and communicate our expectations (from the asset) in an objective manner and based on available data/ facts. We maintain utmost respect for the professionals who operate business on ground. They are often made scapegoats for disagreements and we find it unacceptable. The operator has great experience in managing the hotel and in its distribution. However, a professional owner can further aide in this by providing more granular information on macro demand generators, government policies and by making the right interventions in product.
We ensure that we allow the operator to focus on long-term business plan and not just an annual budget. This is more important in new hotels/ rebranding and in situations like recovery from an adverse environment.
Starting point for making an investment decision is the strength of location. This can be defined by its economic potential, growth, government policies for future growth, current and future demand and supply situation etc. We then evaluate the entry price. It is easy to overpay/ overspend in our business. SAMHI has built its portfolio at significant discount to replacement cost. While this alone doesn’t guarantee success, it does allow us headroom for dealing with market fluctuations better. An important factor for eventual success of an investment in our sector is the how one combines the opportunity with the right product and brand/ operating partner. India has a very diverse demand base and hence presents with an exciting opportunity to create products at different price points. In markets such as Bengaluru and Pune, SAMHI has invested in assets across price points and working with different operators/ brands.
MACRO TRENDS POST-COVID19
Covid19 has been a watershed event for the tourism sector. It has caused tremendous stress and losses. However, it has compelled long-term structural changes to the sector which will serve it well. Two key trends that may drive growth of the sector are: Discovering potential of domestic demand which will be key to sustainable growth of tourism sector in India. Globally, tourism flourishes on back of demand from short haul destinations. While India does not have large short haul markets but its internal demand itself is both very large and also fast improving in its spending capacity. And changes to operating model to allow lower fixed costs. Hospitality industry in India operates with very high fixed costs (relative to its global peers). This becomes onerous in situations when one witnesses sudden loss of business. It is almost certain that businesses will remodel to operate with lower fixed expenses.
We have built our portfolio by acquiring hotels which were underperforming to their true potential. We then make the right interventions to improve the product, brand and its long-term performance. Renovation is driven by assessment of its impact to draw the right brand, customer and positioning. This is done in partnership with the hotel operator. Several of our successful hotels such as Sheraton Hyderabad, a large part of the Fairfield by Marriott portfolio and the entire Holiday Inn Express portfolio has been developed by acquiring existing hotels and then undertaking material product changes and rebranding. Even in operating hotels, we consistently invest capital to ensure product remains relevant and competitive. Our renovation and re-launch of Zeta Restaurant at Hyatt Regency Pune was one such example.
We have been one of the most active hotel investors in India in the past decade. Our confidence in long-term prospects of the sector, imminent and strong recovery and our core strategy of acquisitions and turnaround encourages us to continue to invest. However, we are currently focussing on ensuring full recovery of our portfolio and to strengthen our balance sheet. In addition, we have on-going programs to renovate few hotels and add inventory to our existing hotels. India offers plethora of investment opportunities in tourism sector. It has a fast expanding middle class and a very aspirational young generation which will drive future demand. In our opinion the sector has high degree of investor interest but because it tends to be operationally intensive, investors often don’t find the right platform to deploy capital. Institutional capital, which was largely focused on business locations, may also make its way to strong leisure markets and products. Many people believe that Covid19 will lead to “special opportunities” to acquire hotels. However, our belief is that this is a bit of herd mentality. Buying just because of a discount without having a strong plan for future income or operational competitiveness will disappoint.
SPECIFIC PLANS FOR INVESTMENTS
We would like to strengthen our existing brand portfolio which augurs well for business hotels in key markets. While leisure hotels have done well in past year, we still prefer more stable, predictable business hotels which also tend be more disciplined in terms of product and capital. However, we are firm believers in the future of domestic leisure travel and may build a strategy around it just as we have done for business hotels. We aren’t well-versed with regulation around gaming in India and so we stay away from that segment.
We think the discussion on domestic vs international brands is a bit dated. Hotel companies/ brands such as Taj, Oberoi, ITC and Leela are formidable participants in the market. We don’t differentiate between domestic and international. Our choice of brand partners is driven by market opportunity, product that we acquire and strength of the operator to distribute the inventory well.
We continue to expand, explore opportunities with multiple operators
Ranjit Batra, President, Panchshil Hospitality
Aligning goals is the key as it is a marriage of valuable linkage where each has a set of distinctive skills that add value to the business and access to insights about the markets, capital or industry relationships. The talent linkage is often ignored but can be the most powerful for the brand’s vision. Business and profitability are typically entangled with operating actions and market risks, so Panchshil Hospitality ideally looks at the power of portfolio moves while controlling it for other variables. The first reality is that there is a specific and identifiable relationship between the bottom-line performance and value. Improvements in business operations raise values. Owners and operators work hand-in-hand to ensure robust cash flow; the P&L and the balance sheet sits with the owner. Therefore, the impact is a lot stronger for ownerships. Owners and operators need to work hand-in-hand to preserve the bottom-line. The decision-making process needs to be nimble. You need to have decision-makers at the local level who can immediately change and adapt to suit the owner’s needs. If operators have a clear plan in reaction to the market, a transparent discussion with a result -oriented focus helps forge a stronger relationship. On both sides, there has to be more visibility on the actual investment and expectations.
As hotel owners, we increasingly employ contract hotel management companies to operate our properties. Extensive research goes through for examined management agreements to determine the balance of power between owners and management companies. We carry most of the financial risks and are permitted a substantial role in influencing the hotel’s management, even – or especially – when engaging a management company’s services. We, as investors, understand all primary and complex concepts on how hotels are organised and the responsibilities of being an owner, comprehensive research goes into hotel investment structures and concepts laid down by the operators. We look at all spheres of investments ie transactions and capitalisation rates, risks, location, property characteristics, scale, franchising, owner, operator lender, hotel investment cycle, hotel impact, and construction trends that are critical to analyse. The decisions in the various stages of the investment have a profound impact on the overall profitability of the investment. Many of the concepts presented, like the hotel industry in general, change over time. As a result, we consider current and relevant advice from industry professionals and researchers. In valuing hotels, there are three approaches through which we select hotels: income capitalisation, sales comparison, and cost approach.
When it comes to the deciding factors while investing in hotel projects, it includes financial reasons for hotel investment, economic gains over a period of time, risk vs high returns, tax efficiency, leveraging cost control, asset diversification, capital protection, investment control, community footprint and going with the brand. The risks involved include not aligning with right people, inflexible management, hiring process and internal transfers within the brand without owners being involved, owners often having limited control over spending in their hotel management agreements and operators typically reserve wide discretion to spend in times of crisis, transparency gets compromised by operator, cash flow volatility and operating efficiencies by the operator.
MACRO TRENDS POST-COVID19
Domestic travel was surging up until now but international travel was still depressed, given pandemic-related border restrictions and concerns about health and safety. As a whole, hotel occupancy and the number of travellers on domestic flights were increasing, especially over festive weekends. Because of confidence in the overall health and safety measures, domestic travel is almost back to the level seen prior to the pandemic, and high-end domestic travel is actually ahead of it. Regional and domestic business travel will likely rebound first; some companies and sectors will want to resume in-person sales and customer meetings as soon as they safely can. Peer pressure may also play a part: once one company gets back to face-to-face meetings, their competitors may not want to hold back. In short, leisure travel is driven by the very human desire to explore and to enjoy, and that has not changed. Indeed, one of the first things people do as they grow more prosperous is to travel — first close to home and then further afield.
From a practical standpoint, property improvements address physical aspects like mechanical systems, plumbing, and electrical; corridors, guest rooms, and spaces such as meeting rooms or fitness centres; communication and security systems; landscaping, lighting, and parking. More extensive programs might include lobby space, modifying the arrival experience, and adding or reconfiguring restaurants, all of which can be costly. From a strategic standpoint, property improvements are meant to improve guest satisfaction and enhance competitiveness. These improvements are intended to increase market share and drive both occupancy and rates, while reducing fixed expenses. The ultimate goals are to enhance operating profit and asset value.
Panchshil has always led the market with a well-earned reputation and association with luxury brands. Each of our projects drives truly qualitative offerings. We continue to expand and explore opportunities with multiple operators. Our key focus is to look at each destination in isolation and understand the market with our expert teams. As far as our investments are concerned, we continue to remain market leaders in hospitality segment with strategic partnerships for our collection of hotels. We believe these collaborations will add operational strength and build on the foundations of our successful portfolio; Panchshil Hospitality’s vision is to build a hand-picked selection of leading hotels in key destinations around the region and grow our footprint in vibrant and exciting markets.
Part of our five-year plan before Covid19 centred on technology. We knew technology is a catalyst, a springboard we can take advantage of. We revamp our website content periodically to increase bookings on our own booking engine; that is, we manage to drive more traffic through our brands as opposed to online travel agents. But with a guest experience, from a brand perspective, we have to be careful, because we cannot compromise our brand values and our guest experience. Here we need to make sure that the human touch is still there. Because at the end of the day, people go on vacations. People go on breaks to talk to human beings. They don’t want to talk to robots. We are nearly opening one hotel every year and our pipeline has the Amari Project in Maldives which will be a collaboration with Onyx Hospitality Company.
Focus on long-term endeavour to grow network
JB Singh, President & CEO, InterGlobe Hotels Pvt Ltd
Our relationship with Accor thrives on mutual trust and a shared vision to transform the hospitality sector through an efficient development model backed by a sound financial structure. This has enabled us to be market leaders as a hotel owning and development company in India. Together, we have achieved a domestic edge over all our competitors in the mid-market segment.
Our investment criteria is always such that we only look at leads where we are confident of stabilising under four years while the payback period is achieved in another three-four years. So the total project payback cycle remains at around eight years after opening. We remain committed to increasing our footprint by targetting new investments every year by densifying in key Tier I cities and making strategic investments in growing Tier II markets. From an investment point of view, we spend a significant time reviewing the location of the proposed property. Our teams spend time assessing the demand potential, target clientele, current and proposed demand supply and connectivity to the demand generators. While the design of the hotel undergoes a continuous evolution, the location of the property remains consistent so we spend time reviewing the Master Plan, infrastructure assessment and even neighbourhood development to understand how best our property would fit in.
MACRO TRENDS POST-COVID19
There has been a significant revival, post-second Covid19 wave. Every month has posted a noticeable improvement in ARRs as well as occupancy percentage. In November, post-Diwali, occupancies at our hotels surpassed pre-Covid19 levels and the ARRs are improving on a month-on-month basis. The robust vaccination programme, sharp decline in cases and simplified Covid19 travel guidelines between states coinciding with the festive season and peak travel period has had a significant effect on improved mobility. Business is looking promising at properties which have a strong leisure segment pull like in Goa, Jaipur, Nashik, Kochi, Kolkata, Pune and Delhi Aerocity. Even business hotels are witnessing an improved demand as most business sectors like manufacturing, pharmaceuticals, IT/ITeS and SMEs have started business travel. The banquets and social segment have been encouraging too.
Like recently launched ibis Kolkata Rajarhat and Ibis Mumbai Vikhroli, we wanted to create a new look and feel for some of our earlier hotels. Therefore, a recent refurbishment was carried out at ibis Jaipur with the use of vibrant colours to get a younger and trendier look and feel for public areas which also have elements of local culture in interiors. We redeveloped the property which was not just for business and families but for millennials and young couples too. We have ensured every design decision that we have taken is to enhance consumer experience, offer modern facilities and yet give value for money so that the brands values are preserved. We are reviewing our properties in Mumbai and Pune and will look at properties across the portfolio which we may need a facelift.
After the pandemic, the revival of the hospitality industry was achieved with the performance of the strong and promising domestic market and the absence of inbound tourists. Hotel development is now most likely to get fast-tracked in regions where the segmentation is driven by higher domestic travellers with the investor preference being towards offbeat locations with exploring new business models like homestays and boutique properties. Hotel companies are focussing on leisure destinations as the key development route with hill destinations to witness most openings.
Hoteliers are optimistic about revenge tourism trend being sustainable in the long-term and we have witnessed a tectonic shift in segmentation to domestic markets, destination weddings and preference for unexplored destinations being a key investment factor. In fact, 11 per cent of total upcoming supply will be focussed on luxury segment which suggests that the domestic segment will be on everyone’s radar. With a consistent revival and a cautious approach, 2022 will be more promising as the sentiments will be high but the process of finalising the deal remains to be driven by the impending revival we all are hopeful of.
Our business model is different from other owner-operator models. InterGlobe Hotels as an entity is not a typical owner-operator model, but our operator, Accor, is a significant investment partner. We have a strong pipeline and together we will be among the biggest hotel developers in India. Come 2024 and we will have a total inventory of over 4,000+ keys. Post two Covid19 waves and subsequent lockdowns, InterGlobe and Accor have worked closely to manage the situation and our relationship has reached new heights after the developments over the last 18 months. Our new-gen product is powerful and meets the aspirations of the discerning Indian traveller and has seen a very strong uptake. We are continuing to build on our product design and quality raising the bar for the industry.
We are committed to continue developing and raising the benchmark of the smart economy segment with high quality buildings having state-of-the-art designs and efficient operations. Our hotels are positioned in AAA locations and are a preferred one for corporate accounts. What we offer as a hotel in terms of amenities, quality of rooms, dining options and the vibrancy of the public areas is something our designers and teams from both Accor and IGH sit, discuss and plan. After years of working together, we have a great level of understanding of our strengths and the scale we can achieve.
InterGlobe Hotels, a JV between InterGlobe Enterprises and Accor, has invested around Rs 2,700 crore in India since 2004 and has 18 operational properties. Our current inventory is 3,308 keys and we are further investing another Rs 500 crore to develop five more hotels with around 800+ keys are in an active stage of development. We have presence in 13 cities, and a solid pipeline ahead as we open our new-gen hotels over the next three years in Bengaluru Hebbal, Thane, Bengaluru City Centre, Goa Vagator, and our fifth ibis in Mumbai in Kalina. The last of our upcoming hotels in the active pipeline is Ibis Kalina on CST Road in Mumbai.
Optimistic about long-term prospects of hospitality
Harshavardhan Neotia, Chairman, Ambuja Neotia Group
Between a hospitality operator and an owner, it has to be a relationship-based trust and mutual appreciation of each other’s competencies. The good operators have invested several years in developing their expertise. They have developed brand recognition, customer loyalty and have strong HR processes. These take time to create and tremendous effort to build a sustainable management model. Builders of hotels on the other hand have competencies in dealing with land and related regulation, bringing in the necessary capital to invest and also some builders have a good sense of design and aesthetics. When we are able to respect each other’s mutual contribution, we can have a win-win partnership.
Hospitality requires patient capital. It takes time for hotels to stabilise and create a niche in the market. Besides, it is vulnerable to various vagaries like we have seen recently in the face of the pandemic. We, therefore, need to be moderately and not highly leveraged. We need to understand that a part of the gains have to come from capital appreciation and not from profits alone. If these attitudes are kept in mind and if it motivates the investor to do so, then only he should invest in hotel projects.
MACRO TRENDS POST-COVID19
Human beings are essentially social animals. Also, they have a general tendency to connect with Nature. There is also the lurking adventurer in us and a sense of wanderlust. All these create a compelling proposition for tourism and hospitality, particularly leisure tourism. Business travel, on the other hand, is driven by the imperatives of the need for people to meet other people to conduct business, to build relationships and to forge partnerships. We have seen that some amount of this has been possible to do over the virtual mode, but it is never as effective. I’m sure that once people find it safe to travel, a lot of the travel that was not possible earlier will come back. Also, conferences etc are an opportunity to network and to know each other. This is hardly possible in the virtual space in the same manner. Already the zoom fatigue is setting in and I have no measure of doubt that conferences and seminars will also see a sharp comeback from 2022 onwards.
Ultimately, hotels require some renovation every 10-12 years and major renovation every 20-25 years. This is on two counts. One, of course, is that there are technological changes and there are other changes. For instance, the security challenge. Now the Covid19 created the health challenge and sanitation challenge. Some of these things come from time to time and there are requirements to redesign some things. Then there is the general wear and tear.
Finally, there is a need to keep up to the competition. In some markets, hotels have not had to make any major change for a long period of time because inherently they have had a monopolistic situation or the supply has been much less than the demand. Whereas in other places where the supply has been extremely robust, even established hotels have had to upgrade themselves.
I feel optimistic about the prospects of investment in hospitality. We will be doing our bit. I also see that investors are looking at India seriously and there is far more interest now than I have seen in the last few years. From my conversations with some people, I get a sense that this optimism is here to stay.
I think Indian and international brands, both have an important role to play in our country. At this moment, our tie-up for most of our projects is with the Taj Group and we value that relationship and partnership. In the past, we have had a very fruitful relationship with Swissotel and with the Radisson Hotel Group.
We are optimistic about the long-term prospects of hospitality and are committed to several projects in the eastern part of India. They are projects in cities like Kolkata and Patna as well as in leisure destinations like Darjeeling, Sikkim, Sunderbans etc. We certainly hope to keep to our plans. Maybe they are pushed back slightly due to the pandemic, but we do hope that we will pick up pace soon.
No single recipe for a successful partnership
Vineet Verma, Director, Brigade Hospitality
Any successful partnership begins with two entities coming together based on mutual trust and confidence that they will be compatible for the given opportunity. An owner has the confidence that the operator has the right product and expertise to make it work. The operator, on the other hand, needs to feel reassured that the owner understands the business and will give enough freedom and support, especially when needed. From thereon, it is simply a matter of owners maintaining a ‘hands off’ approach in letting the operator manage the property yet keeping a close watch on the asset and its performance. After all, one has hired the operator for their expertise and it is best left to them to deliver as per agreed targets and processes. Step in when necessary to suggest a course correction and do have periodic performance reviews with the team. The owners should have healthy discussions with the operators, questioning status quo and encouraging them to think out of the box.
All in all, there is no single recipe for a successful partnership. It evolves over time yet needs to be nurtured with both sides occasionally donning each other’s hats when it comes to running an efficient and profitable venture.
There are multiple reasons for the owners to invest the kind of money as required in hotels. We are all aware of the relatively long gestation periods before you see ROI, yet the hotel business does make sense in the long term. At least it did, before the pandemic that has turned the entire hospitality sector upside down. Typically, the quantum of investment in a hotel is made with a target of achieving ROI anywhere between five and seven years for business class hotels and longer for resorts.
Covid19 has dealt its deadliest blow to the hospitality sector. Occupancies and rates dropped to abysmally low levels during the first phase. Fortunately, with the waning of the second wave across the country, occupancies in business class hotels have started picking up but ARRs are at barely 50-55 per cent of pre- Covid19 levels. As a result, GOPs continue to suffer and on an average, these are at around 35 per cent of pre- Covid19 GOPs. In such a scenario, the owners are certainly bound to revisit their plans to launch new hotels and probably wait until the situation improves and business touches at least the pre- Covid19 levels.
MACRO TRENDS POST-COVID19
There has been a huge tilt towards leisure tourism, especially after the second wave. In fact, some leisure properties have seen both their occupancies and rates touching historical highs. Neighbourhood resorts within reasonable driving distances have also benefitted. People have opened up to the idea of taking short staycations and this augurs well for domestic tourism.
Renovating a hotel just because a few years have passed or is required as per brand standards is no longer an acceptable norm. One should look at renovating a hotel or a part thereof, strictly based on the principles of safety, security and hygiene or for augmenting hotel revenues through improved guest experiences
India’s potential as world’s leading tourism destination remains grossly under-exploited. A lot more is desired and this can be achieved only though collaborative efforts of the industry and the Government. There is nothing that India lacks when it comes to its ability to offer high quality experiences. If we are able to just focus on improving infrastructure and last mile connectivity besides offering a set of incentives, investors will come flocking from not only overseas but from within the country.
While the concept of franchising in hotels has been prevalent across the globe and more particularly in USA where it has attained some levels of maturity, it is at its nascent state here in India. It comes with its own set of advantages and disadvantages. As of now, all our hotels are under management contracts and it is still early days for us to decide if at all we will opt for taking the franchisee route.
We have not believed in placing all our eggs in one basket and have multiple operators as our partners who have all been with us for well over a decade now. In essence, we are brand agnostic and will generally chose an operator and the brand based strictly on what works best for the location and keeping in mind the already available supply in the immediate catchment.
We believe in the business of hotels and feel that given some time for this pandemic to pass, it will come back with a vengeance. While we may have temporarily slowed down on construction of our upcoming hotels, we do plan to resume work at the soonest available opportunity. These hotels already have an operator on board.
This article was published in BW hotelier issue dated '' with cover story titled 'INVESTMENT SPECIAL ISSUE VOL 7, ISSUE 6'
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