By: Rami Kaushal, Head–Consulting & Valuation CBRE South Asia
Track2Realty: India’s hospitality real estate space has probably come of age; and has reached a critical threshold in its learning as well as business development curves. Although the ongoing economic slowdown and uncertainty have caused hotel rates to decrease marginally in the last couple of years, India now stands at the cusp of a hotel building and rebranding boom, which should help keep rates competitive in 2013.
As far as building hotels in India go, the current year has seen an addition of approximately 9,000 branded rooms, taking the total stock to about 95,000 rooms—up by 11% over the previous year. The last six to seven quarters have also seen quite a few rebranding initiatives.
Consider the following developments in the hospitality sector: One of India’s luxury chains, Leela Hotels, and the Geneva-based Kempinski Hotels, a luxury hotel and marketing group, recently parted ways after nearly 25 years. The Hong Kong-based Shangri-La International Hotel Management also ended its relationship with Pallazzio Hotels and Leisure, a subsidiary of the BSE-listed Phoenix Mills.
The contract for the Shangri-La Hotel, Mumbai, was apparently inked for 20 years, before being canceled after only nine months of operation. Similarly, the Zurich-based hospitality chain, Swissotel Hotels & Resorts, broke off with Bangalore’s Convention, pulling out of its five-star resort at Goa’s Calangute within six months of the property launch.
ITC Hotel’s Sheraton Chola, Chennai, too has undergone a recent rebranding and will now come under the Fortune Hotels Group as a ‘My Fortune’ Hotel. In the economy/budget category, the Delhi-based Hotel Hans Pvt. Ltd., which owns and operates under the ‘Hans’ brand will soon rebrand as ‘Anya Hotels and Resorts’. Sarovar Hotels too expects to tap into the Bed and Breakfast segment, with a format cheaper than its existing budget brand Hometel.
As indicated by these recent developments, India’s home-grown hospitality brands are increasingly deciding to part ways with popular global brands and/or more upscale brands to chart their own growth. On the back of continued economic uncertainty, we may expect to see increased brand conversion and consolidation as less successful hotel businesses either stare at mergers and acquisitions or seek alternative business solutions.
With bottom lines continuing to turn unfavorable for certain hotel owners, most are taking a closer look at the commercial terms with their existing hotel operators, unlike the scenario a decade ago. And the desire to remain profitable has been the major reason behind this hotel rebranding trend.
However, continued profitability has not been the sole reason for brand conversions. The last couple of quarters have also been the period when many hospitality contract tenures have expired; and hotel owners have decided against continuing with old contracts as the market has currently been flooded with newer brands.
With competition intensifying as more international brands enter India’s hospitality sector, older hotel management firms in India are discovering that they need to update operating methods and fees to stay competitive.
Unlike the scenario, say a decade or two ago, when there were just a handful of global brands in the country, the market has come full circle wherein hotel owners have become more business savvy and today have greater bargaining power with the plethora of brands available. This has brought about a gradual change in the outlook of hotel operators and brands, and one finds them more open to negotiations and compromises on the business front, in comparison to earlier, lesser competitive times.
This trend in changing mindsets and business models is clearly indicative of a maturing industry, and the market noticeably belongs to the owners of hospitality properties over hotel managers and brands. With these changing dynamics in India’s hospitality real estate space, it is becoming increasingly critical for the hospitality business to avail professional help in negotiating contract terms with clients.
At this critical juncture, specialized professionals can help that much more in evaluating the current market scenario, exercising due diligence, and negotiating over contract fine prints that finally result in considerable resources in the long run.
Appropriate branding is a key driver of success in the hotel industry. In a bid to stay profitable and cost effective, hotel owners in India have been looking at rebranding, as well as renegotiating their commercial terms, to correctly reflect the changing times.
In the current climate of continued economic uncertainty, a clear road map to profitability is a key concern going forward—without which, lack of financing and/or funding sources may be expected by struggling and less successful hotel businesses in India.
