Dec 06, 2017 04:22 PM IST | Source:

PE interest in hospitality revives, but cautious over investments

PEs are cautious and now looking at operational hotels, to avoid project delays and cost overruns

Swaraj Baggonkar @swarajsb

Private equity interest in the hospitality sector has seen a revival in the past 12-18 months but focus is majorly on those projects which are completed rather than under-construction projects.

As per a report made by rating and research agency ICRA PE activity has picked up in the market over the past 12-18 months; however, unlike the interest during 2005-2008, PEs are cautious and now looking at operational hotels, to avoid project delays and cost overruns. With the industry having turned the tide, PEs now prefer ready hotels, as against going through the 3-5 year construction cycle.

Further, PE interest in the midscale segment has been driving investments in small companies like Mint Stay in 2017. Typically, PE investments have been attracted to chains with multiple properties and a scalable model, which are also conducive to eventual listing through the IPO route. Example of such investments includes home-grown brands like Lemon Tree or asset-owning companies like SAMHI.

Hotel PE/VC deals as a percentage of the total PE/VC unviverse in India had ai its peak accounted for a minuscule 3 percent of total value of deals. The largest PE deals in the hotel industry include SAMHI Hotels, Lemon Tree and the hospitality division of Panchshil Realty. According to reports 12 private equity deals worth around USD 91.69 million were closed till September 2017 in the year.

While PE had shown interest banks pulled out from the segment. Banks have been averse to lending for hotel projects since the down-cycle of 2009 which triggered several delays and defaults. Traditional lenders of debt treat hotels as project finance investments with the hotel as tradable real estate asset. While debt structuring has improved in the recent past, with debt tenure extending to 15 years, hotels require longer loan amortization.

Another area which has attracted high PE interest is the budget hotel aggregator space, with players like OYO rooms, Zo Rooms, Stayzilla, Rooms On Call, and Treebo, among others. Hotel aggregator platforms act as a connect between guests and hotel listings, in return for which they charge a commission per booking. Competition in this space has been intense leading to heavy discounting (borne by the aggregator) and cash burn. Some players like Stayzilla, Roomstonight have, as a result, burnt out.

“Compared to the situation in 2010-15, when several real estate developers like DLF exited the hotel business, few real estate developers like the Embassy Group and the Brigade Group have evinced strong interest in growing their hotel portfolio”, said the report.

Bengaluru-based Brigade Enterprises has hived off its hospitality business into a separate division and plans to grow it over the next couple of years. Embassy Group is planning to build business hotels at its existing and upcoming office parks, along with investor partner Blackstone Group LP. Canadian global PE Brookfield Asset management and GIC, Singapore are in discussions for acquiring Four Seasons, Mumbai.
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