Institutional Investors Bet on an Optimistic Future for Indian Hospitality

India’s hospitality sector is on an upward trajectory, fueled by domestic travel, innovative accommodations, and government support. With an estimated market size of USD 24.61 billion, it is projected to reach USD 31.01 billion by 2029, growing at a CAGR of 4.73% during this period. India’s rich culture and diversity continue to attract global guests, positioning it as a sought-after destination. Domestic travel both for leisure and business has been on the rise post the pandemic. Apart from the country attracting foreign tourists, factors such as a growing middle class, increased disposable income, and a keen interest in exploring one’s own country have piqued the interest of domestic travelers too, thereby further contributing to the industry’s profitability.

How are the evaluations stacking up for the hotel industry?

In the wake of COVID-19, the hospitality sector has witnessed a remarkable resurgence in both revenue and performance. Previously, the considerable disparity between Replacement Cost and EBIDTA Multiple has narrowed as operational efficiency has improved. Notably, rates for upper upscale or higher category hotels, which previously ranged from $120 to $140, have surged to $180 to $200+, consequently augmenting hotel values via the earnings method.

This year has seen several prominent hotel companies going public, capitalizing on favorable market conditions, and enjoying robust valuations.

Furthermore, cost optimization initiatives have significantly bolstered performance, with energy-saving measures and reduced wages due to a decrease in the employee-to-room ratio playing pivotal roles. Some leading hotel companies have achieved annual EBIDTA exceeding 40%.

If you buy now, is it sustainable for hotels?

The hospitality industry operates in cycles and demands a long-term commitment, ideally spanning at least 20 years. Conceptually, a hotel resembles a perpetual bond; if strategically located and equipped with the right amenities, it has the potential to generate returns for decades to come.

India roughly has 200,000 hotel keys, comprising 75% of the inventory found in cities such as Las Vegas and Dubai, which boast over 150,000 keys each.

Currently, the hospitality sector is experiencing an upswing, projected to persist for the foreseeable future. Despite the signup of new properties, the operationalization of such ventures typically takes 4 to 5 years. Furthermore, the prevailing demand for hotels surpasses the rate of supply, suggesting that sustainability should not pose a significant challenge.

What’s the deal around business and leisure destinations?

In business-oriented locations, it is advisable to explore the acquisition of existing hotels experiencing operational challenges, preferably those already operational or nearing completion. This strategy is particularly prudent given the high cost of land in such areas. Additionally, Average Room Rates (ARR) in business locations tend to be range-bound, often limited by the rates charged by market leaders or luxury hotels.

Conversely, leisure destinations offer ample opportunities for hotel development due to the availability of land. Given the prevalence of large-scale MICE (Meetings, Incentives, Conferences, and Exhibitions) events, many hotel and resort developers are opting to construct banquet facilities to cater to weddings and other social gatherings. Furthermore, leisure destinations typically exhibit greater potential for ARR growth compared to business hotels, as choices are often more limited in these areas.

Are there deals happening specifically with hotels in mind to build?

The hotel industry in India has witnessed a marked surge in transactional activity. Previously, only a handful of deals surpassing 100 crore rupees would materialize, but now such substantial transactions have become more commonplace.

Existing hoteliers are displaying a keen interest in acquiring or constructing properties, marking a shift from the pre-COVID era when the majority of hotel development endeavors were undertaken by newcomers rather than established hoteliers. Notably, hotel companies have expanded their development teams to facilitate the signing of more properties, while (IPCs have also established hotel transaction divisions to capitalize on opportunities within the hospitality market.

Do you see these land rates sustaining themselves or coming down?

Land rates are anticipated to remain relatively high overall. However, with the rise in Average Room Rates (ARR), the economic landscape is becoming increasingly favorable for institutional investors to participate in the market. The exception to this trend may be observed in the city centers of metropolitan areas.

In contrast, leisure destinations and Tier 1 and 2 cities where land costs represent no more than 30% of hotel development expenses present an attractive proposition for land acquisition. Additionally, in metropolitan areas, long-term lease options, such as those offered by public-private partnership (PPP) entities like the Airport Authority, provide hotel owners with viable solutions for partnering and hotel development.

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