Mid-sized hotels look to smaller cities

MUMBAI: Growth plans of mid-market hotel companies have gone haywire with a 30-40% jump in land prices and a 14-15% hike in borrowing costs in a year. Hotel companies are putting on hold plans to enter metros and instead tapping tier II and III markets. While some are converting hotels to commercial establishments (as the returns are higher and gestation lower) others are understood to be renting out acquired land. Some hoteliers and developers in tier II markets plan to sell fully-constructed hotels or land as it doesn’t seem viable.

“More than 80% of the projects announced in the recent past by global players will find it difficult to come up, thanks to steep land prices in metro markets,” said Lemon Tree Hotels CMD Patu Keswani. With RBI tightening ECB funding, mid-level hotel and realty developers have no access to cheaper ECBs for integrated townships. Besides, hotels insist the securitisation act provides for takeover of the land, in case of default in payments.

“Hotel companies and real estate developers who have standalone projects are finding it difficult to justify the viability. High land cost, price sensitivity and long gestation period have become a roadblock for most of the global hotel majors, says Leelaventure vice-chairman Vivek Nair.

What set the ball rolling among developers, corporates and hotel companies was the higher room rates and occupancy levels. Typically, hotel projects command an IRR of 30% pre-tax. But a hotel project gets profitable from the 3-4th year of operation, and breaks even in the 5-7th year making the viability unsustainable, said Akshay Kulkarni, national director, hospitality & leisure, Knight Frank. While there is an immediate requirement of approximately 100,000 new hotel rooms, most of the development is taking place in tier II and III markets. On account of the supply lag, average room rates and occupancy rates are rising.