Pe Funds not Keen on Hotel Projects Here

By: Propertiesmls

NEW DELHI: High property prices and spiralling interest rates are holding back many developers and hospitality funds from writing big cheques for hotel projects in India. Instead, private equity (PE) funds are focusing on other developing markets like Vietnam, Malaysia and Thailand.

PE players who were recently planning to invest in the Delhi-based Asian Hotels (before the split), had changed their minds. Some developers are having a rethink on their hotel projects, preferring to develop commercial office space, where upfront cash investment is less and returns are quicker. PE players were willing to bring in close to $1 billion, but few deals have been cut in the hospitality sector.

'PE funds expect a 30-35% return in 3-5 years and that's not possible when the real estate valuations are high,' said Hotel Leelaventures vice-chairman & MD Vivek Nair. Agrees Akshay Kulkarni, Knight Frank's head of hospitality: 'Large transactions in the domestic hotel market are getting fewer as the returns in India are low as compared to other developing markets.'

Globally, hotel deals are getting delinked from properties. They strip off properties into separate companies or real estate investment trusts while PE investors invest only in the company that manages the hotel business. Until this happens in India, hotel deals will continue to be expensive, said an official from a Mumbai-based PE fund.

For instance, in Gurgaon, around 20 hotel projects - involving over 3,000 rooms - were announced over the past 18 months, but only half-a-dozen have taken off. The private operators of the Delhi International Airport, which has drawn up plans for developing 10-12 hotel projects in and around the airport, have quoted land rates to the tune of around Rs 50 crore per acre. High real estate price skews the market towards luxury hotel projects while the biggest demand in the market is for mid-market and budget hotels.

PE fund managers say the land price of several prime hospitality projects in NCR have shot up over the past one year and this makes hotel projects unattractive as a short-to-medium-term investment. 'Hotel projects require more upfront fund infusion and returns start only after completion of the project. This makes developing commercial, retail and residential space more attractive as a large part of the development is self-financed,' said Dawnay, Day Hotels-India MD Mandeep Lamba. The UK-based fund plans to invest around Rs 1,500 crore over the next three years to set up 10 three and four star properties across the country.

All these investors are betting on the scarcity of hotel rooms. There is an immediate requirement of approximately 100,000 new hotel rooms across cities; only 75% of this demand is being met by projects underway. Due to the supply lag, average room rates and occupancy rates have been on the rise. They're expected to rise 20-25% over two years and stabilise thereafter.

'In the next 3-4 years when the new supply comes in, valuations will come to realistic levels. Currently, valuations are asset-driven and not business-driven,' said Lemon Tree CMD Pattu Keswani. In 2006, occupancy rate across 10 major cities in the country touched 74.5% and ARR was about Rs 7,800. Hoteliers hope once the supply comes in, valuations will touch realistic levels.

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