As non-serious players exit and asset prices correct, hotel companies are acquiring premium assets at attractive prices.
The consolidation taking place in India’s downturn-hit hospitality sector has also brought in a host of positives for hotel investment and development companies. As non-serious players exit this space and asset prices correct, these companies are acquiring premium assets at attractive prices, Farah Bookwala reports.
Hotel investment and development companies are out on a shopping spree. Compared to just one transaction that took place in the hospitality sector between 2007-11, there have been at least 3 big ticket deals since last year.
In 2012, Gurgaon-based Samhi Hotels, acquired royal orchid Ahmedabad and is currently finalizing one more acquisition. Mahindra Holidays made two purchases -- Divine Heritage Hotels and Infinity Hospitalities. This week, Delhi-based Lemon Tree Hotels bought boutique hotel chain Clarion Century from Asian Hotels.
Given that the hospitality sector has been beaten blue by the economic slowdown, why are companies making acquisitions? One reason is that with non-serious players exiting, sub-optimal assets on the block have increased significantly.
“Four years ago we had a lot of PE players and real estate players investing in hotels, and we now see that that class of capital is withdrawing from the sector for various reasons. Now that throws a great opportunity because on one hand you have greater throughput of transactions and on the other hand you have very limited competition,” Ashish Jakhanwala, CMD, Samhi Hotels said.
Rahul Pandit, President, Lemon Tree Hotels, says, “Because conditions are tough especially for people where the leverage is high, so it will ensure only senior guys stay embedded, who have a long-term cyclical returns perspective. And this will present opportunities becos there will be assets, where people find it difficult to meet their obligation or those on which people don't want to focus long term on.”
Asset valuations are now very attractive. According to figures by Samhi Hotels, in 2009, an upper mid-scale hotel would quote Rs 1.25- Rs 1.3 crore per room during negotiations. This has fallen 20-25% to Rs 1 crore or less today.
With most hotel investment companies being backed by foreign institutions, the sliding rupee makes investments even more lucrative. Above all, investing during the downturn will ensure companies are well-positioned in key demand markets when the sector swings back in 2015-16, as predicted by analysts.
“It is giving us entry into key-micro markets, and it's taking the development risk away,” Rahul Pandit, President, Lemon Tree Hotels said.
While the cost of financing debt is still high players say falling lending base rates by banks and financial institutions certainly helps.