Fearing a supply glut in the housing and commercial property markets, real estate companies are pinning hopes on the booming hospitality sector.
They are seeking to fill the demand-supply gap for hotel rooms
BANGALORE: Fearing a supply glut in the housing and commercial property markets, real estate companies are pinning hopes on the booming hospitality sector.
It’s not that the trend has just set in. It has, however, certainly gained momentum of late, with practically every developer announcing hospitality projects.
All major players in the real estate sector - DLF, Parsvnath Developers Ltd, Purvankara Projects and others - are looking to grab a piece of the action in the hotel industry. Builders undertaking sprawling township are also including hotels in their project.
“Of all segments in the property market, hospitality seems to be the best bet, with average room rates (of hotels) still shooting up and supply remaining subdued. It also offers permanent income as against one-off earning in other realty projects,” points out Ashok Narayan of L Lachmandas & Co, a property consultancy firm.
Narayan’s views are based on estimates given out by tourism ministry. According to the ministry, around 80,000 rooms would be added by 2010 to the existing capacity of one lakh rooms. This addition, however, will fall way short of the demand, which would have moved up by 1.5 lakh rooms by then.
It is this gap between demand and supply that builders are trying to fill.
“We are expecting a spurt in demand for hotel rooms. Today, the number of business class hotels in India is less than what New York City alone has. The requirement (in India) for business hotels is huge while supply is limited,” says Purvankara Projects Ltd director - finance - Ravi Ramu.
Rakindo Developers has raised Rs 4,000 crore ($1 billion) from Lotus Investment fund to develop hotel properties across India under the brand name Millennium and Copthorne Hotels. It has begun construction in Hyderabad and Bangalore, and plans to set up hotels in Vizag, Kochi and other south Indian cities.
Delhi’s DLF and Parsvnath have also planned 75 and 100 hotels, respectively. DLF is collaborating with Hilton Hotels and Parsvanth with Royal Orchid Hotel.
Pune-based property developer Sahil Group has tied up Carlson Hotels Worldwide-Asia Pacific for a project under the Radisson Resort and Spa brand at Alibaug.
But even as builders set aside huge funds for hospitality projects, they are aware of the risks that come long with them.
“With residential and commercial projects, once you have sold the properties, you wash your hands off them. In case of a hotel project, there is a long gestation (breakeven) period. The hospitality industry is also cyclical,” warns a senior executive with realty firm.
Lachmandas & Co’s Narayan says developers floating hotels should watch out three things to be profitable. “First, they should launch more than one hotel. Second, they should have tie-up with an international or an established hotel, and third, they should have sufficient funds as the breakeven period for a hospitality project is long (9-10 years).”
He cites the example of Mumbai’s Taj Lands End (formerly Regent Hotel), which was developed by the Lokhandwala group. Lokhandwala erred on all three premises and had to eventually sell off its 500-room Regent Hotel to the Tata group and ICICI Trustee Services for Rs 415 crore in 2002.
Also, the shortage of hotel rooms could disappear in 3-4 years, Narayan warns. “Once the demand-supply chasm closes, those with limited scale, liquidity and no tie-up will be trouble,” he forebodes.
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