Hotel cos make room at slower pace

NEW DELHI: Inbound traffic may be booming and average room rates sky high. But all that jazz conceals the predicament of many a hotel developer as they reel under a choked supply pipeline with uppity interest rates.

ITC has about three properties in the pipeline, which will commence operations by 2010, as do 12 more pending offerings from East India Hotels, besides new sites from a swathe of hospitality majors.

In the same vein, Roots Corp, a subsidiary of Indian Hotels, is targeting 17 properties over the next decade, of which only 10 may see the light of the day in the near future (near term estimates vary from two to three years), or so says its official web site.

Consider the rest of the frat. Parsvnath Developers planned 17 hotels, TDI is working on eight while API Ansal was developing five. None of these projects, besides a host of other projects in different parts of the country, are anywhere near completion. “With interest rates hardening, the ratio will dip further.

The hotel projects don’t seem to be viable when you look at the scenario post 2010, when supply will outstrip demand and hotels will not be in a position to charge high room rates,” gripes Ajay Bakaya, executive director, Delhi-based Sarovar Hotels.

Blame it all on the active development ratio, or actualisation rate, or simply put, the rate at which hotel projects actually materialise. It stands at a measly 67%, nearly 5% lower than what it was last year. All thanks to the stiffening and stifling interest rates over the last two to three years.

“The development of quality hotels is getting slower. If a developer conceived a project last year at 9% interest, he has to cough up 13% for the same now,” says Siddharth Thaker, associate director, HVS Hospitality Services. Even top hotel execs echo Thaker’s apprehensions. “As interest levels touch all-time highs, costs per project soar. At this moment, real estate is on short shrift and prices unwieldy,” says S S Mukherjee, deputy MD, EIH.

Besides, with rack rates upward of $200-300 a night, the hotel industry is outpricing itself. “Alternatives, such as stand-alone hotels with 20-30 rooms, are cropping up which are much cheaper than their full-service counterparts,” mentions Thaker.

On an average, it takes 18 months to build such hotels as against three to four years to construct five-star hotels, he adds. Moreover, corporate guesthouses too are fast dotting the landscape, giving big hotel projects a slipshod treatment.

As the cost of land goes north, developers are on a hold mode. “Increasingly, developers are sitting on land for speculative purposes, instead of building hotels. Owing to this, the active development ratio is falling,” says a tourism ministry official. For one, the RBI has slapped the wrist of banks to dish out loans to developers.

Moreover, “a lot of sanctions are required to set up hotels — as many as eight to nine levels. Besides, there are environmental issues, which need a no-objection certificate and can get painstakingly long,” points out Sumit Sachar, COO, UP, Parsvnath Developers.

Although Parsvnath has a low-cost land bank advantage, it prefers to adopt the wait and watch attitude for the time being. Ditto for TDI Builders. “The drop is being felt because last year the market was high and banks had no hitches giving out loans. But now, post a slew of regulations, builders can do precious little to raise capital,” says Sanyam Dudeja, V-P, marketing, TDI Builders.