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Indian Hotel industry - The real estate opportunity

Several projects in the Indian Hospitality sector have been steadily coming up with respect to the viability of hotel business in India. Nevertheless, the real estate and hotel industry of India have also been aligning their roadmap in quite a rhythmic way.

As per the recent quarterly survey on project investment by ProjectsToday, investments to the tune of Rs 8,241 crore have been lined up for 160 hotel projects at different parts of the country.

Maharashtra tops the chart garnering projects worth Rs 2,281 crore, followed by Andhra Pradesh, which takes the share of Rs 931 crore with about 40 projects in its kitty.

With regard to the demand and supply equation between hospitality and real estate, commercial space between 30 and 35 million square feet will be required by Indian hospitality sector, in 2005-09, in top cities of India viz. Mumbai, Delhi, Chennai, Bangalore, Kolkata and Hyderabad

Indian Hotel Industry: Luxury room supply chart in Indian hotels

As per the Cushman and Wakefield report, the hotel sector will invest USD 8-9 billion in real estate to complete its new projects.

This is deemed as just the beginning. Opportunities in Tier-II and Tier-III cities too are looking great. Analysts estimate that there are about 16 cities like Jaipur, Agra, Goa, Pune, Ludhiana, Chandigarh, Ahmedabad and Cochin that have potential for a stalwart hotel industry.

Given the rapid economic development going on in the country, India is likely to become one of the top five destinations for business travelers in the years ahead, says London based World Travel and Tourism Council.

If we take a look at the availability of hotel rooms, there are 50,000 luxury rooms in the country at present. The tariffs for these rooms are generally in the range between Rs 4,000 and Rs 15,000 a day. It has been estimated that there will be shortage of about 33 per cent in availability of rooms in the next couple of years.

In all, Indian hotels need to add some 1-lakh rooms if they want to meet the market demands. The capital city of Delhi alone will be short of 20,000 rooms.

However, it is estimated that the current projects will only be able to meet 75 per cent of the total requirements. Such are the trends that indicate towards the dynamic opportunities of growth the hotel industry offers.

Interestingly, the property developers of India have been foraying into the hotel sector; as they have envisaged enormous opportunities as they bag mega contracts to construct hotels. Of late, India's real estate major Unitech joined hands with global hospitality giant Marriott International to construct 28 hotels at a whopping cost of USD 720 million, in the next 4-years.

Delhi based construction company Uppal group is already running a 5-star luxury hotel Ecotel business hotel spread in 10.5 acre in Delhi.

The Indian government has also laid ambitious plans to revive the state of its hotels with fresh investments of USD 55.5 million. Under the plan, Hotel Samrat, Hotel Ashok and Hotel Janpath will be given a facelift with provisions of most-modern facilities.

Boom in land prices

Of late, the growth prospect in Indian hotel industry is transcending the boom to the Indian real estate market.

The land prices have been touching new heights as hospitality giants hunt for land to establish their new hotels. The recent deal under which Hotel LeelaVentures paid as much as Rs 611 crore, for a plot; speak volumes about the latent investment opportunities in the Indian hospitality sector.

Similarly, Emaar-MGF bid a whopping Rs 388 crore for two pieces of land at a recent auction organized by Delhi Development Authority (DDA).

Investment avenues

It’s the right time to invest in Indian hotel industry. Returns are impressive and opportunities are infinite.

Take a look at the growth numbers. During 2005-06, the net profit of the hotel companies grew by skyrocketing 140.14 per cent to Rs 502.45 crore, over the preceding year.

Healthy trends are reported in Average Room Rates (ARRs) and occupancy rates are also going north.

Indian Hotel Industry: Average room rates in Indian hotels

In Mumbai, the ARR went up from Rs 1,822 of 2002-03 to Rs 4,307 in 2004-05. Similar was the trend in Delhi and Bangalore where the ARR increased from RS 2,918 and Rs 2,149 to Rs 5,498 and Rs 6,762, respectively in the same period. (See Chart)

With this, investing in Indian hotels is pretty profitable. The Internal Rate of Return (IRR) is close to 30 per cent. New hotel projects become profitable after 3-4 years and break even in a period of five to seven years.

The trends are not going unnoticed. A flurry of action is observed in the sector, from investment point of view. Corporates and venture capitalists from across the world are increasingly interested in buying hotels in India and paying hefty price to pick a stake in Indian hotels.

ICICI Venture Funds paid Rs 100 crore for picking stake in Hyderabad’s Viceroy Hotels. WestBridge Capital Partners acquired 10 per cent stake for Rs 25 crore in Royal Orchid Hotels.

Besides, several other deals have been inked in the sector. India’s largest private company Reliance has plans to saunter into hospitality sector. Textile behemoth Bombay Dyeing is in talks with Walt Disney, Ritz Carlton and Peninsula to form collaborations. 


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