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‘We foresee sustainable interest from both Foreign & Domestic investors for the multifaceted hospitality real estate sector’

Friday, June 15, 2018, 16:17 Hrs  [IST]

Founded in 2009, Noesis Capital Advisors - a leading solutions provider for hotel real estate sector has extended its services and solutions to many hotels, resorts, MICE destinations, convention centres, etc. from distinct international and national brands. Nandivardhan Jain, Founder& CEO, Noesis Capital Advisors in conversation with Hospitality Biz gives a detailed overview on the various aspects and their contribution to the current position of the hotel real-estate industry in India.

Q. What is your assessment of the investment climate in hotel sector in India today? What kind of direction is it expecting to take in coming years?
In last nine years Indian Hospitality industry has gone through the lower curve of the cycle. Now we are seeing the signs of the recovery with the rise in rooms Occupancy in the last two quarters. We are anticipating in next 12 months ARR’s will also improve further. At present quite a few hotel assets at brownfield stage are available at realistic price points. We foresee sustainable interest from foreign investors in the operational hotels and from domestic investors in brownfield projects.

Q. With nation-wide occupancies, and other performance parameters like Average Room Rates showing upward growth pointing to improving business climate, what kind of impact would it have on valuation of hotel assets, deals market, transactions, etc. in the hotel market?
Hotel industry in India is at a positive footing today and its reflection is visible at stock exchange with the performance of hotel stock in last one quarter. Rise in ARR and occupancy are encouraging and hotels get valued on its EBIT. Quite a few seasoned hotel investors have given us mandate to assist them in acquisition. Mid-market & budget hotel operators are also acquiring assets on lease and revenue share. Rooms demand is going to increase at faster pace than rooms inventory supply due to the development challenges involved in our country like debt structure, approvals, permissions, technology, etc. Quite a few players will bid for the same limited inventory which will eventually lead to rise in asset value ask.

Q. Despite having a lot of de-stressed assets in the sector, what do you think is limiting transactions in the hospitality sector in India?
Hotels have a longer gestation period and its yield is lower than other commercial assets classes like retail and commercial office space development. Hotel asset above 150 rooms do justice financially. There are very limited curated assets available in the market, which are above 150 rooms and under distress and not got transacted. Left over transactions have an issue of scale, which do not justify return of investment for an institutional player who is looking for an IRR of 10-11%.

Q. With greenfield developments being quite minimal, and too many brands chasing too few assets, what kind of changes do you expect in brand–owner relationships as compared to the past?
China and India are two important growth markets for all the hotel companies. Considering Indian market challenges of finance cost, delay in approval & permissions from land acquisition stage to hotel opening, on an average it takes five years to build a hotel and couple of years further to stabilise the hotel revenues. Due to these challenges involved, a very limited inventory will come into market and all brands will pitch for this limited supply. The owner has multiple options available for operator selection across the hotel formats. Today they are more demanding in their task, starting from legal agreement negotiation to assurance on financial performance. In some of the key markets few international operators are willing to put their skin in the game as follows:

a. Key Money – which is a non-recoverable funds infused by the operator at the time of completion of the hotel in terms like operating supplies, pre-opening expenses and working capital.

b. Soft Loan/Deposit – used as a last-mile funding for the completion of the hotel, quantum can be up to 10% of project construction cost. In some cases it is chargeable at an interest rate of 4-6% p.a. and they secure it by creating charge on the hotel. Soft loan can be recovered from the hotel monthly cash flow surplus after servicing the debt. In an ideal scenario operator recovers the soft loan is over a period of five years.

c. Performance Guarantee – Under this, the operator writes up to 75-80% of projected GOP to the hotel owner on year-on-year basis. In the case of non-performance operator has to compulsorily top up the deficit amount at the end of financial year. This performance guarantee clause gets effective from the second year of hotel commencement. In a way it is a quasi lease for the owner.

Q. As an advisory firm where do you see Indian owners still making mistakes? Do you see any major change in their attitude when it comes to investing in hotel assets, dealing with brand managers, financing, etc.?
Some of the first-time hotel owners make mistake by not understanding the importance of professional hotel investment advisory. Common mistakes at a planning & project execution stage are Feasibility Study – where in some cases owners avoid professional feasibility study, which cost not even a fraction of project cost. Due to lack of statistics available with them they decide on product on the basis of their own assumptions, which leads to project failures. Then comes the Brand Selection – Brand is to be appointed at the planning stage only, which helps in building the product as per brands specs. If owner initiate dialogue with brand when they have already completed the structure and at that stage nothing much can be done to change your facility designing and planning.

After the above two aspects, appointments come into play where owners need to realise the importance of hotel expert architect, Interior designer, and other consultants. Their role is quite crucial at planning and construction stage. Lastly comes the Bad debt structuring – Hotel investments are quite capital intensive and have a longer gestation period. Hotel occupancy and ARR’s take couple of years to get stabilised. Debt tenure, interest rate, moratorium, and repayment schedule with ballooning these are few vital points which need to be addressed well at the time of raising debt. Some of the finest executed hotel projects, which are doing well operationally, are into financial difficulties due to non-efficient debt structure.

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