2017 could bring massive deals in India’s hotel sector, Mandeep Lamba JLL

Sheela Mamidenna

2017 has started off with a big bang as far as hotel real estate transactions in India are concerned. 2016 was quiet, but 2017 showered many deals and acquisitions. In an exclusive, Mandeep Lamba, MD, Hotels JLL India said, “this year saw the acquisition of a majority stake in India’s foremost hotel management company, Sarovar Hotels, by The Louvre Hotel Group (part of Jin Jiang International Holding). This transaction alone has paved the way for 2017 to set a new record in India’s fledgling hotel transactions’ market!”

As per ICRA Research Services, the hotel industry for over nine years (FY2008-FY2016) has been in a trough after enjoying a brief honeymoon in FY2008 wherein heightened optimism about ‘India growing and shining’ led to a spate of new announcements both domestically and internationally. 2010 was bad, FY2011 picked up and the market bottomed out again in FY2015-2016.

Detailing the significant years that were good and bad for the Indian hotel industry, Lamba said, ‘the last significant year for the hotel transaction market was 2015, in which the market witnessed over Rs. 24,233 million worth of trade in existing and brownfield hotel assets - a 44.8% increase over the second-highest year of 2012, which had witnessed nearly Rs. 6,730 million worth of trade. While 2016 lacked the big bang announcements of 2015, it witnessed five hotel-related asset transactions – some of which were undertaken to convert the underlying assets to alternate developments. The more significant contribution of 2016, however, has been the commencement of major transactions which are likely to fructify in 2017.”

Speaking about the deals that the JLL Hotels team is confident of bagging in 2017, he said, “In addition to the Sarovar deal, around 12 to 15 more hotel asset transactions – either in the form of portfolios or single assets – are currently in the works. JLL Hotels’ team is confident of closing about 10 to 12 such deals in 1H 2017.”

Though the hospitality sector hopes for a good turnaround in 2017, it is a given that hotel projects are capital intensive and many players have ended up with high leverage. Leverage is typically understood as a major component of company risk, while the financial effects come under the subtractive and amplifying heads. Increasing leverage increases the profit margin of a highly-leveraged company when compared to a less leveraged one. Thus, for newly launched hotels to achieve a breakeven gets stretched due to lower occupancy rates, resulting in an extension of loss periods.

But the seniors in the hospitality business believe that the ongoing trend in the hotel transactions market of Indian hospitality is fertile for strategic acquisitions. This trend will immensely help players keen on establishing a footprint in the Indian hospitality sector without taking the risks associated with development of new hotels in the country. And hotel transactions in the country are aiming to keep both the buyer and the seller happy by offering discounts for replacement costs thereby retaining the targeted price.

Hotel pundits opine that the economic cycle of hotels has started to show upward trends as key performance metrics of the hotel industry such as ADRs (Average daily rates) and occupancy figures have resumed strong growth in India. ICRA Research Services pegs the ADRs ranging between Rs. 4,200–7,900 and Occupancy ranging between 54-75%. In other words, hotel markets are clocking nearly 12% higher room revenue over 2015, which witnessed nearly 11% higher room revenue growth over 2014.

Among the cities in India, two unlikely ones, Pune and Hyderabad are witnessing double-digit growth in performance ranging between 12-18%. They were almost written off by many industry pundits after a dismal show. The leisure and tier-II and tier-III hotel markets are showing better results than the established ones in metropolitan cities.

With Indian hospitality figures boasting nearly 1.5 billion visitors in 2015, and with nearly 70 to 80 hotel assets up for transactions, market analysts opine that the acquisition of a good quality hotel asset in a well-established hotel market is the surest way to success in this under-serviced industry of India!

Finally indicating that the going will be better for those intending to invest in the hotel industry experts say “that given the new hotel supply in the country slowing to 3-4% (y-o-y) over the next 3-5 years – from a high of 6-8% over the past five years – and the return of growth of India’s macro-economic indicators, hotel markets will see strong performance growth in the short-to-medium term.”