"True Value” as perceived by the owner is increasingly getting sophisticated in the Indian hospitality context. Maximising value is becoming more of a challenge in the traditional branded hotel development space. In the developed Western markets, the concept of ‘creative hospitality’ (real estate) solutions is opening up possibilities of application of better design and planning, better product development that is conducive, adaptive and responsive to Changing Consumer Demands (CCD). The democratisation of information and ease of access through the internet is transforming the owner /operator relationship to a new paradigm across the world.
The brands are increasingly facing the challenge of ‘Relevance’ in the present and most definitely in the emerging IOT (Internet of things) digitalised environment. The hotel developers and owners are discovering the possibilities and opportunities to venture on their own as operators with active support from a new genre of professional managers. These new genre of professional managers come with vast experience and knowledge having worked with established brands for decades. They are now venturing out to upcoming asset owner companies as VPs, COOs, and CEOs to manage / operate the assets as well. The growth of independent third party delivery channels have opened up a whole new horizon to overcome the perceived pain points; that of marketing and reservations, in a sense a classic technology innovation, a game changer that enables the owner to embrace business of operating the hotel as well.
The phenomena of acquiring properties at the right price, reshaping to fit the market, engaging experienced veterans with adequate incentives and effectively service the demand to a target segment and profile is now receiving a lot of attention and interest among potential new investors in the hospitality sector in India. The conventional hotel development approach hitherto the norm, to fit in to a series of outdated or irrelevant ‘Brand Standards’ that do nothing other than serve the brand and hardly enhance the value for the developer is now becoming passé !!
Owner partnerships, families are constantly identifying and building expertise and talents within the group (a perceived gap in resource) which is then leveraged with the latest technology to fulfill all the functions a brand brings to the table in terms
of conceptualisation, design theme and the dynamics of feasibility, cost, business potential, sustainability and, of course, the talent resource in order to gain control over the entire business of owning and operating properties. The trend appears to be attracting attention in today’s India with its large geography and a captive burgeoning domestic market with air and ground travel at record levels, working up enough appetite to consume new capacities across metros, cities, towns and leisure locations. Seasoned as well nouveau investors are actively identifying and bidding properties (which are NPAs or half-finished mainly due to cost overrun or under performance) to resuscitate and infuse with smart concepts to skillfully turnaround the acquired property into a business success. The market today is abuzz with many such turnaround cases that are bucking the development cost, timelines to quickly hit the role for the expected upturn in the industry.
"Most critical high risk phase of vulnerability in terms of owner–operator relationship
is at the early phase of execution"
The challenges of a hotel management agreement are many fold while it defines the relationship between the owner and the operator of the hotel. Broadly speaking, a typical management agreement is categorised into hotel operation agreement, strategic oversight agreement, technical service & trademark agreement, etc. However, the most contentious of all the agreements is performance test clause which may or may not find its way in the agreement. Essentially, this provision safeguards the owners interest if and when discussions on performance of the operator arises (which is happening), in most recent cases of luxury and premium properties with unplanned cost escalations and time lines leading to excessive burden in servicing the debt putting pressure on the owner to intervene and question. The provisions are eventually incorporated at the insistence of the owner post an intensive session of discussions. The main areas of assessment and review by the owners would be the cash flow position, actual v/s budget, REVPAR Test, revenue and GOP growth, customer feedback and special concessions in case of the owners and their captive business and personal friends circle.
In my view, the most critical high risk phase of vulnerability in terms of owner – operator relationship is in fact at the early phase of execution. The crucial components of cost, time, and flexibility in specs of product and procurement process, handling unexpected site work constraints force compromises in a green field project. However, in an acquisition and makeover scenario, which is likely to trigger unexpected cost escalations and time delays, the onus is on the brand to sensitise the owners concerns vis-a-vis the budget constraints and timelines. While, the owner has an equal role not to overstretch the brand in terms of compromises on minimum basic brand standards and specs. In most cases the international brands with their offices usually located in Dubai or Singapore have a challenge in terms of logistics while it becomes a clear advantage for major domestic brands in case of India with their entire leadership located in Delhi and Mumbai.
The views expressed within this column are the opinion of the author, and may not necessarily be endorsed by the publication.