The boom in the Indian hospitality business is not only luring new entrants, but is also tempting them to alter the rules of the game. Traditionally, most of the hospitality majors in India have believed in owning and managing their properties. But, now most of them are going for management contracts.
Ownership and management, in other words, are increasingly getting divorced from each other in the business. This is particularly strong with the foreign hospitality chains making a beeline for India. Even the ones currently operational here such as the Marriott and Hyatt, for instance, do not own, but simply manage the properties under them. The reason is simple. Most of these players do not believe in owning properties. For them what matters is running a hotel.
As Rajesh Jain, executive director, KPMG, says, ?World over this is the trend. Most of these
hotel chains do not own properties at all.?
Given their business policy, then many of them are finding suitable partners in Indian real estate companies who are willing to build properties for them. It works well for the latter on account of the avenue of growth it presents to them.
Setting up hotels as such is quite a lucrative proposition for most real estate players, even if the gestation period of these projects is fairly long. Once a hotel is set up and a partner is in place to run it, the return on investment a real estate player can derive from the project is attractive. By some estimates, it is about 13-14%. No wonder most real estate companies today have aggressive plans to set up hotels in the country.
For instance, Emaar-MGF has plans to set up some 180-odd hotels (about 12,000 rooms) in the next five to seven years for two international groups Accor and Whitbread, which will operate under management contracts. The former will be in the one-two-star category and the latter in the three-star category respectively. The company also proposes to tap the four-star and five-star segments with multiple alliances in different cities, says Sanjiv Rai, CEO, hospitality, Emaar-MGF.
Other alliances too have been forged in the recent past such as the one between real estate major?DLF and Hilton Hotels, for instance, where the latter will invest about $175 million along with the former, which is putting in some $500 million for both hotels and service apartments across the country (about 25,000 rooms). ?The first property will rollout next year in Saket, Delhi,? says Rajeev Talwar, group executive director, DLF. ?We are getting into three segments?five-star luxury through Hilton, the business segment through Hilton Garden Inn and service apartments through Homeward Suites.?
Archrival Unitech has also reportedly tied up with Marriott for management of some of the properties by the latter.
This is not all. The list is endless with companies like Omaxe, Parsvnath, Purvankara, Ansal API and Prestige also wanting to cash in on the hospitality boom. ?There is greater flexibility and openness among foreign hospitality chains, which is why there is preference for them,? says Rai of Emaar-MGF.
Given the rush to set up properties, the number of hotel brands in the country is likely to move up to about 40 in the next few years from about 13-14 right now. What is driving this phenomenon as such is an acute shortage of rooms in India. According to HVS Hospitality Services, a New Delhi-based consultancy firm, the total number of rooms in the country is about two lakh at the moment. Of this, the supply of quality rooms (read branded) is just about 40,000, which is lesser than what most other countries in the world have.
Demand, in contrast, is clearly high, given the occupancy level of about 80-90% enjoyed by existing players in the business. It is due to the higher arrival of foreign tourists as well as the movement of domestic travellers. According to CRIS Infac, the research arm of rating agency Crisil, arrival by foreign tourists has been growing at a steady clip of about 11-15% year-on-year, touching 4.6 million in 2006-07 from 3.6 million in 2004-05. The impact of all this can be found in individual cities. The hotels in these cities are desperately trying to cope up with the influx.
Says Sanjoy Pasricha, vice-president, sales and marketing, Hotel Leelaventure, ?There is no denying that demand outstrips supply in most cities in the country.? The situation, in fact, is unlikely to ease even by 2009. The supply of rooms in Chennai, for instance, will be 5,000 against a demand of 7,500 in 2009. Hyderabad will have only 5,400 rooms against a requirement of 8,000 while Goa will have about 2,800 rooms against a requirement of 6,500 rooms in 2009.
What has actually compounded matters is the slow place with which some of the hospitality majors in the country have taken up expansion and growth over the last few decades. There are not very many major domestic hospitality chains and whatever some of them have done has not been adequate enough since they have opted to follow the own-and-operate model.
Anuj Puri, chairman & country head of real estate consultancy Jones Lang LaSalle Meghraj, says it has resulted in the huge gap between demand and supply. ?Adequate capacities have not been coming up to back demand,? he says. The key reason for lesser capacities in the marketplace is on account of the inability of players to acquire land easily.
Real estate players enjoy this advantage. ?They can get large parcels of land on account of the various projects they have,? says Puri. ?Many of them are in a position to utilise their existing land banks too,? he adds.
Aiding this innate ability that real estate developers have over pure hospitality chains is the five-year tax holiday proposed in the 2007 Union Budget for one, two, three and four-star hotels and convention centres catering to the 2010 Commonwealth Games in New Delhi, Gurgaon, Ghaziabad and Faridabad.
This is obviously driving interest of players in the business, say analysts. ?The impact of new developers and brands will be that there will be a few pockets where there could be a bit of over supply,? says Manav Thadani, managing director, HVS, New Delhi.
Despite this, there is no denying the fact that management contracts?a common way by which real estate developers and hotel chains are coming together?permit the stakeholders to focus on their individual strengths, increasing the overall speed of the project. Says Pasricha, ?Management contracts do allow you to grow faster. It is an option that Indian hotel companies will look at going forward.?
Adds K Sitaraman, vice-president (corporate) and company secretary, Magnum Ventures, which has a tie-up with the Carlson group to set up the four-star Country Inns & Suites outside Delhi, ?It’s a win-win situation for all.? Rightly so.
This need to scale up is driving conservative hotel chains to take up management contracts seriously. Hotel Leelaventure, for instance, has four owned and managed properties in Bangalore, Goa, Kovalam and Mumbai at the moment. It proposes to add another five luxury hotels to this list of owned and managed properties in the next few years (1,116 rooms will be added to the current 1,086).
But it is not leaving out growth via management contracts as well, with two projects ? a five-star hotel and service apartments in the NCR and Gurgaon regions (rooms total 409)?under the latter. Even more aggressive on the manage- ment contract front are players such Indian Hotels Company Ltd (IHCL). The latter with brands such as the Taj will add 1,855 rooms in the domestic market alone in the next few years on account of management contra-cts it has just got into.
In the international market, some 584 rooms will be added via the same route in countries such as Malaysia, Bhutan and the Middle East. The concept of management contracts is not lost on East India Hotels (EIH), which has the Oberoi brand, or the hotels division of ITC either.
By some estimates, the palace resorts under the Taj and Oberoi, for instance, operate under management contracts. ?These places have a heritage value to them and the owners have not parted with them because there are legal issues attached to their sale,? says an analyst based in Mumbai. Indeed, what has so far been in the orbit of exotic properties and locations is now trickling down to allied categories and segments too.
?For most companies,? says Pasricha, ?Ownership and management and management-only are two ways of doing business. As such, both can be used as a means to grow and expand.?
Says Prabhat Pani, chief executive officer, Roots Corporation, a 100% subsidiary of IHCL, which runs the Ginger brand of budget hotels in the country. ?Ownership and management and management-only are at the extreme ends of the spectrum. There are a number of business models in between, which will evolve over time.?