REITs may help address hoteliers' fund-shortage woes

NEW DELHI: The hotel industry has got something to cheer about. The expected introduction of Real Estate Investment Trusts (REITs) by the Securities and Exchange Board of India (SEBI) may now help the industry overcome room shortages.

According to hospitality heads, REITs will not only allow retail investors to participate in the hospitality boom but will also correct the demand-supply mismatch in the hotel sector. In the long run, it will also correct room rates and will have an impact on land prices.

According to hospitality consultancy firm HVS International, with the introduction of REITs, retail investors can participate in the booming hospitality industry registering a 20% YoY growth.

“REITs will provide an alternate source of funding to hotels. Earlier hotels could only look at banks and financial institutions for investments. Then private equity funds came in and now REITs will fund expansion of hotels,” says HVS International associate director Siddharth Thaker.

As per advisory firm Grant Thornton, around $259 million was invested in the hospitality sector in six private equity deals last year. This is 2% of the total PE money invested across various sectors in the country.

REITs would invest directly in real estate projects after raising money through stock markets. “With REITs, liquid funds will be available to fuel hospitality players’ expansion plans. With greater supply of hotel rooms, it will correct average room rates (ARRs) in the long run,” says Sarovar Hotels executive director Ajay Bakaya.

The group is already in discussions with two prospective REIT funds for its expansion. Another fallout that industry analysts foresee is greater financial transparency in the sector. “It will make industry more transparent,” says Mr Thaker.

Choice Hotels India CEO Vilas Pawar says: “It will make relations between operators and owners more professional.” Choice Hotels, a US-based hotel brand, with over 30 properties in India has global exposure to REITs. For instance in Canada, InnVest REIT holds interest in Choice Hotels Canada, a wholly-owned subsidiary of Choice Hotels US.

“In India, we are open to promoters who will have REIT funding,” adds Mr Pawar. Globally, REIT is a popular investment vehicle for hotels. With greater supply coming in, the ARRs may soften, but the already high land prices may witness an upward trend.

“In India, land price is 50% of the total hotel cost whereas in China, it is only 10-15% and in US, it is 20-25%. REITs will increase expansion, pushing the land costs up,” says Lemon Tree Hotels VP-operations Rahul Pandit. For now, the hotel industry is gung-ho about the introduction of REIT and it eagerly awaits SEBI guidelines on the same.