Infrastructure tag is of little help unless all classified hotels are covered by it
India?s hotel sector has been demanding the infrastructure status for long to speed up investment in the sector. Though the wish was granted in this fiscal’s Union budget, it came with riders. The infrastructure tag was granted only to three-star or higher category classified hotels that are located outside cities with a population of more than one million.
The Federation of Hotel and Restaurant Associations of India (FHRAI) argues that such hotels cover only 5% of hotel rooms in the country. Industry bodies such as the FHRAI and the Hotels Association of India (HAI) are now lobbying with the government for an extension of the status to all classified hotels. Hoteliers feel that the measure has been too late and too little, hardly helping the sector.
The hotel sector is capital-intensive, and it being included in the Reserve Bank’s infrastructure lending list would mean bank loan repayment period will be extended to 10-15 years and the interest rate would settle around 3-4%. This would translate into lower input costs for building hotel rooms. The current average lending rate that banks offer the sector is 12-13% for a five-seven year tenure.
Infrastructure status will also permit developers to have a higher debt-equity ratio of up to 4:1, a longer amortisation tenure and the ability to raise ECBs of up to $500 million. This would make hotel projects more feasible as they have long gestation periods.
That hotels have high gestation periods can be gauged from that fact that in most cases a newly opened hotel is unlikely to have a meaningful Ebidta level in the first year or two, let alone furnish a high annual debt service.
The annual debt service in India tends to be high when compared to other parts of the world and this is primarily due to two reasons–the high interest rates, which swells the total interest cost, and a short amortisation period, which translates into a high annual debt service that is difficult for most hotels to furnish.
Cheaper loans will boost hotels’ profitability, which in turn would incentivise hoteliers to plough back their profits into new projects.
Inclusion of all hotels in the list of infrastructure projects under Section 80 IA just like airports and ports would eventually help meet the shortage of hotel rooms in the country and make loans cheaper for the sector that is seeing funding drying up in a slowing economy.
According to a white paper by hospitality consultancy HVS India and World Travel & Tourism Council (WTTC), by 2021, the hospitality sector in India will need 1,80,000 additional rooms, $25.5 billion for constructing these rooms and about 2 ,11,000 people to operate them. Grant of infrastructure status means the additional room demand will be met by India.
Hotel infrastructure plays a pivotal role in boosting tourism, which contributes to both employment and GDP growth. WTTC predicts that by 2021, global travel would have reached 1,362 million travellers. India, according to WTTC, is expected to account for 0.8% of those travellers or 11.1 million international travellers. Both inbound and domestic tourism have seen a spurt in recent times. The demand for hotels has also increased from the burgeoning number of domestic tourists.
Many international tourists still perceive India as an expensive destination as compared to other Asia destinations such as Thailand, Malaysia and Singapore. As per the math done by industry bodies, infrastructure status would lower hotel room tariffs by 3%, as the cost of capital will be lower.