News: Global hotel chains check in to India

(RTR 08/12/2006) Mumbai - A buoyant economy and a woefully inadequate supply of hotel rooms are drawing global chains to India, where pricey real estate is forcing them to partner with local developers to get off the ground quickly.

There are an estimated 105,000 hotel rooms in India -- compared with 135,000 in Shanghai alone -- and only a quarter of these are in the branded segment. Another 100,000 to 125,000 rooms would be needed over the next five years to meet demand.

Room rates -- at $150-$ 300 in premium hotels, and going up to as much as $550-$ 650 in the peak tourist season from November to March -- are already among the highest in Asia-Pacific.

Rates are expected to climb a further 20-25 per cent over the next two to three years, according to industry estimates.

But the pitfalls are many in Asia's fourth-biggest economy.

"India is a tough country to do business in because real estate is not transparent, so it's better to join hands with someone who knows the market and has a land bank," said Manav Thadani at hospitality consultancy HVS International.

"Plus, when you're looking for economies of scale to maximise returns, you need to start with 15-20 hotels at one go, and that's only possible with a developer that has land."

Hotels can free up precious capital, while a franchise deal or management contract also minimises operational risk, he said.

But hotel chains are not alone in the chase for land.

Land prices in India's top cities have doubled in the last two years as hoteliers, retailers, commercial and residential property developers and multiplex operators fight for space.

"You might like to buy, but there's not a lot of property to buy," said Chender Baljee, managing director of Royal Orchid Hotels Ltd, which has a franchise deal with Wyndham Worldwide Corp to manage its Ramada brand in India.

Growth markets

A recent report from PriceWaterhouseCoopers said slower growth at home and booming markets in emerging economies such as India and China were drawing global hotels to these markets.

French hotel group Accor SA , owner of the upmarket Sofitel and budget Ibis brands, plans to open 200,000 new rooms by 2010, with two-thirds of them in emerging markets.

In addition to an earlier joint venture for 25 Ibis economy hotels in India, Accor recently signed deals with Hindustan Construction Co. , GMR Infrastructure Ltd. developer Nirmal Lifestyles Ltd. and Naman Developers Ltd.

Accor also has a joint venture with Dubai's Emaar Properties for 100 budget hotels in India at an investment of $ 300 million. Emaar MGF owns more than 5,000 acres across India.

Hilton Hotels will invest $143 million in a venture with developer DLF Ltd. for 75 hotels and serviced apartments.

For developers, hotels are more commercially viable than retail, as the floor space index is double that of malls.

"But the gestation period for a hotel is much longer, so you need deep pockets, besides a lot of patience," said Anuj Puri, head of property consultant Trammell Crow Meghraj.

"You can't just build it and expect returns from day one."

Still, the attraction of a showpiece hotel is hard to resist.

"It's big for the developer's ego to partner with the Hiltons and Shangri-Las of the world here in India," Puri said.