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The situation will worsen post August when RBI’s moratorium on repayments ends. (Reuters)
The situation will worsen post August when RBI’s moratorium on repayments ends. (Reuters)

Distressed deals in hospitality biz on the rise

  • Industry officials say the situation will likely worsen post 31 August when the RBI’s six-month loan moratorium on interest and principal repayment ends
  • Consultants believe loan defaults in the sector post August could rise as high as 50% of the total outstanding loans extended to the sector

Owners of hotels and resorts are dialling real estate consultants in desperate efforts to sell their properties amid the demand destruction in the tourism and hospitality industry from the coronavirus pandemic.

These properties, which have gone on sale in the past two months, are valued between 50 crore and 500 crore each, and include some of the top domestic and international hospitality brands, according to industry officials. High overheads such as accruing interest on loans and fixed establishment costs have made it untenable for these owners to continue running these properties, they said.

“Prospective sale transactions are available across the country and we are seeing good interest from a mix of high net worth individuals, family offices and financial institutions in these properties," said Nandi Vardhan Jain, founder and CEO, Noesis Capital, a hospitality-focused investment advisory firm.

He said investors are taking a cautious approach and, in most cases, seeking steep discounts on the asking price as revenue visibility remains grim.

“In some cases, owners are willing to sell assets just on the basis of replacement cost," said a consultant working at a well-known hospitality firm. “This is a marked departure from typical hospitality deals, where hotels are valued on the basis of discounted cash flow method and direct-comparison approach with competitors," he added.

Industry officials say the situation will likely worsen post 31 August when the Reserve Bank of India’s six-month loan moratorium on interest and principal repayment ends. Consultants believe loan defaults in the sector post August could rise as high as 50% of the total outstanding loans extended to the sector.

Consulting firm Hotelivate said about 50,000 crore worth of outstanding loans are attached to hotel real estate. According to estimates, occupancies across hotels have crashed over 40% in many cases.

“Even if travel bans are lifted, the fear of getting infected is likely to deter tourists from planning travel for sometime. Occupancy rates however, should start picking up from Q3FY21 and end the year at around 35% with a full-year average of around 25%," said Care Ratings in a report dated July 8.

Hotel owners are hoping the suspension of Insolvency and Bankruptcy Code (IBC) provisions for six months till 25 September will be extended till March 2021 to keep lenders at bay from initiating bankruptcy proceedings.

“Hospitality is a long-term play. So, investors will have to discount hotel performance for the next two years because room night demand may not peak too easily. Thus, the biggest challenge is how do you value assets in the absence of business growth in the short term," said Jaideep Dang, managing director, hotels and hospitality group at JLL, a real estate services firm.

According to a recent survey by JLL, only 20% of the operators believe that their hotels could bounce back to 2019 revenue per available room or RevPAR levels within 6-12 months.

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