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Indian hotels cash cows to the slaughter?

Indian hotels cash cows to the slaughter?
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First Published: Thu, May 01 2008. 12 09 AM IST

Acute shortage: Room rates in India are at a high premium to those in other developing countries in Asia.
Acute shortage: Room rates in India are at a high premium to those in other developing countries in Asia.
Updated: Thu, May 01 2008. 12 09 AM IST
Mumbai: Developers are rushing to build hotels in India to fill an estimated shortfall of 150,000 rooms, but rising financing, land and construction costs could dent profits for many of them.
With room rates rivalling and often surpassing those in Hong Kong and Tokyo, hotel owners and operators in India are keen to make a name in a market expected to draw millions more travellers as incomes rise and new airports and roads are built.
Acute shortage: Room rates in India are at a high premium to those in other developing countries in Asia.
But some industry executives say developers are taking on risky projects based on room-rate assumptions that could turn sour.
With about 50,000 rooms under construction, premium rates of $500-600 (Rs20,000- 24,000) per night are widely expected to drop, while land prices have quadrupled in many areas over the last three years.
Meanwhile, construction costs have risen by around a quarter in the last year, and salaries have jumped thanks to a staff exodus to new Dubai hotels and cruise ships.
“I wouldn’t be surprised if there’s a bit of a bloodbath,” said Uttam Dave, chief executive of Interglobe Hotels, during a conference held at a JW Marriott hotel in Mumbai, which charges $450 per night.
“Construction quality is getting better but it’s expensive. To get quality challenges the entire economies of a project.”
Because all of India has only 86,000 hotel rooms, not many more than New York City’s 73,300, room rates are at a high premium to those in other developing countries in Asia.
A Crowne Plaza hotel that opened recently in the New Delhi suburb of Gurgaon boasts average revenue per room of $330 per night, compared with about $260 for the more up market InterContinental Hotel in Hong Kong and $150 for top-notch hotels in Bangkok.
“Developers assume these rates will carry on but they’re unsustainable,” said Paul Logan, head of Southern Asia development for InterContinental Hotels Group Plc., which owns the Crowne Plaza brand. “There’ll be corrections of up to 50%.”
“We don’t think room rates can go any higher and the cost of operations is rising, so the pace of growth will slow,” said Manav Thadani, managing director at HVS Hospitality Services. “But existing players will still continue to do very well for the next couple of years. Gross operating profit margins in India are still at about 43%, compared with 30% in mature markets in Europe and the US,” he said.
Indicating strong demand, average occupancy rates in India’s branded hotels stood at around 72% in 2007-08, up from 65% four years ago, consulting firm HVS said.
The number of visitors to India doubled in five years to five million in 2007, according to government figures.
Leading the charge is the country’s biggest developer DLF Ltd, which has teamed up with operator Hilton Hotels Corp. to build in 75 locations over the next seven years.
Ritz-Carlton, the luxury arm of Marriott International Inc., will operate a hotel in Bangalore being built by developer Nitesh Estates and a fund run by Citigroup Inc., and is looking for similar partnerships in New Delhi and Mumbai.
US firm Hampshire Hotels and Resorts Llc. plans to build and operate 25 hotels over the next five years, with 2,500 rooms built at 11 locations before 2011, according to Ram Gupta, a managing director at the firm.
Land accounted for 40-60% of the cost of a hotel in India, compared with around a quarter in most countries, he said.
But developers doing hotel deals could get some respite from softening land prices in some areas even though demand remains high in prime locations.
Gupta said he believed room rates would not fall by more than 10% because huge spending in infrastructure would fuel demand. The Indian government expects some $500 billion to be spent on airports, roads, ports and power in the next five years.
“If you’re hungry, you eat,” Gupta said. “India has very poor infrastructure but we’re still getting five million tourists a year. With improvements there’ll be more arrivals.”
However, hotel developers are also finding equity capital for their projects more expensive as the Reserve Bank of India tightens monetary policy.
This month, Indian Hotels Co., the country’s top hotel operator, extended the close of a rights issue of shares and pushed the exercise of warrants to next year because of volatile markets.
A stock market slump has halved the valuations of many developers since the beginning of the year and initial public offerings are nearly impossible at the moment — a fact not lost on private equity firms as they invest in projects.
With the cost of equity rising, if developers err in their projections for construction costs and room rates, profits could dwindle quickly, said Gaurav Kumar, vice-president for real estate finance at Credit Suisse Group. “It takes one year to source land, and three years to get a single penny out,” Kumar said. “And a 25% variation in costs can make the difference between 15 and 25% returns.”
Rina Chandran contributed to this story.
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First Published: Thu, May 01 2008. 12 09 AM IST