A previously buoyant real estate market prompted several realty firms to venture into the hospitality sector. However, the recent slowdown in the real estate market and subsequent cash flow challenges have compelled several small realty firms to put at least half a dozen hotel projects on the block.
A developer has listed a 200-room hotel project in Ahmedabad. This project, which has a management tie-up with a reputed international hotel brand, is approximately 60% complete. Similarly, two mid-size hotel projects in Bangalore that are in their early construction phases, along with one each in Pune, Chandigarh, and NCR, have been put up for sale. Almost all these projects are of a mid-size scale. Some developers aim to fully exit the hotel projects, while others are considering stake sales.
Akshay Kulkarni, Director of Hospitality at Cushman And Wakefield, noted, "The developers are looking for equity dilution and are now willing to settle for lower valuation in their hotel projects."
Until about six months ago, when the market was thriving, numerous realty developers who possessed strategic land parcels were eager to enter the glamorous hotel business. With hotel room shortages driving room revenues to new highs, the hospitality sector appeared extremely attractive. Additionally, foreign hotel chains' aggressive expansion plans in India facilitated these small developers to secure management contracts easily.
"The initial excitement is over. The hotel room rates are sliding. Moreover, the hotel projects are capital-intensive and the payback period is very long, compared to other assets such as housing or commercial," says Pranay Vakeel, Chairman of Knight Frank India. Most of the properties up for sale belong to small developers who lack the holding power and are now approaching larger developers for a buyout.
In several instances where actual construction has not yet begun, developers have deferred the projects. Rajeev Menon, Area Vice-President of Marriott, commented, "Developers are now looking at a longer timeframe for their new projects." Marriott currently operates six properties in India and plans to add 15 more by the end of 2009. The company only engages in management tie-ups with local hotel owners and developers.