Author of www.HotelLawBlog.com
26 December 2006
Hospitality Lawyer India. In a number of articles on www.HotelLawBlog.com, I have talked about the exploding international hotel markets, including Mexico, Costa Rica, the Caribbean, Spain, Italy, London Saudi Arabia, Dubai and China — but particularly INDIA. Why are we building hotels in India? Why are all of the brands and operators trying to stake out territory in India?
It’s not hard to figure out. On December 23, 2006, the Los Angeles Times ran an article by Henry Chu that summed it up pretty well. The headline read: “India, a boom that’s bursting at the seams.” The explosive growth in India is what has everyone scrambling to feed this hungry market.
Interest in international hotel development is hitting new highs.
International hotel development is surging. As I noted in my posting from the Phoenix Lodging Conference, “I was struck by how it seemed that talk of hotel development in China, India, Mexico and Europe dominated so many conversations and conference presentations. Is this the beginning of new era of hotel development outside the U.S.?” And I talked about what a number of specific hotel companies were doing in foreign markets.
Then, in mid November, 2006, I discussed the half billion dollar bet by Barry Sternlicht and Starwood Capital in India hotel investments with Crillon, ‘1’ Hotels and Residences and budget hotel chain, Campanile.
Earlier this month I posted an article about What is fanning the condo hotel wild fire in Latin America, the Caribbean, Europe, China, India and the Middle East? And www.HotelLawBlog.com experienced an all time record number of visitors and page views!
So what’s it all mean?
Explosive economic growth ignites unquenchable demand for hotel rooms.
- India’s booming economy is projected to grow at 7.5% to 8.0% over 2006-2007. It grew 9.2% last quarter compared with a year earlier. Multinational companies are flocking to India for a piece of the action.
- According to a 2005 Merrill Lynch & Co. report, commercial and residential construction in India is expected to surge more than four fold from $12 billion in 2005 to more than $50 billion by 2010.
- India is on track to capture 1% of the global trade in the near future. Merchandise export growth of 24% per annum, on average, in the past four years points to the growing competitiveness of Indian manufacturing.
- According to some experts, while the US share in world GDP is expected to fall (from 21% to 18%), India’s s expected to rise (from 6% to 11% in 2025), and India may emerge as “the third pole” in the global economy after the US and China.
- According to the World Wealth Report, compiled by Merrill Lynch and Capgemini, the number of individuals with net financial assets of more than $1 million grew by 6.5% to 8.7 million in 2005. The biggest increases in numbers of high net worth individuals is no longer just in the United States but countries such as South Korea (up by 21.3% last year), India (19.3%) and Russia (17.4%).
- With a growing number of wealthy Indians as well as an expanding middle class, the number of Indians traveling within the country has nearly doubled in the past decade to about 350 million, according to the Indian Association of Tour Operators.
- Foreign visitor numbers have nearly doubled over the past decade to just under 4 million. But domestic travel accounts for most of the growth.
- On December 4, 2006, the AP report by Ashok Sharma summed it all up in a headline: “Foreigners and newly affluent Indians are flocking to India’s big cities, but are finding a shortage of places to stay.” The subtitle was “Need a hotel room in India? Better book early and bring big bucks.”
- According to the October 2006 report by Stephen Rushmore, CEO and Founder of HVS International, “In addition, many Asian countries, especially China and India, are making huge investments in infrastructure such as highways, airports and convention centers, which will further encourage tourism, business and convention travel.” In other words, it may be huge now, but it is going to get much bigger.
The demand for hotel rooms is matching the skyrocketing economic growth.
Although there is a very intuitive connection between exploding economic growth in India and the need for hotel rooms — as commercial traffic builds to serve the burgeoning market, and wealthy individuals expand their travels, there are many more objective indications of the dramatic need for more hotel rooms.
- India “immediately needs another 100,000 rooms” — more than double the current amount — according to Lalit Suri, the chairman and managing director of India’s Bharat Hotels. He estimated that would require investment of up to $17.4 billion.”
- At the current pace, India will fall far short of that projected need. A total of 300 hotel projects have been approved by the government and are in varying stages of development, said Amitabh Kant, a Tourism Ministry official. Most are likely to be completed in the next three years and should increase capacity by about 75,000 rooms, he said.
- Nearly half of the new projects are luxury hotels, and account for about $1.58 billion in investment, said Subhash Goyal, chairman of the Indian Association of Tour Operators. He was not able to provide figures for total investment in the hotel sector.
- That means the current situation of high prices and low availability is expected to continue for the foreseeable future, and worsen at around key events, such as the Commonwealth Games in 2010 and the cricket World Cup in 2011.
Until a few years ago, hotel rooms were readily available in India’s big cities and a night in the top establishments tended to run in the $50 to $60 range. But India’s hotel industry has simply failed to keep up with the country’s hectic economic growth, averaging about 8 percent a year. Over the past decade, the total number of hotel rooms in all categories — a figure that includes everything from filthy hostels to opulent resorts — has only grown 10 percent to about 92,000. That’s lifted the price of a night in a five-star hotel, which international business travelers tend to use, to an average $325, according to the tour operators association.
Will the rush to build hotels over-saturate the market anytime soon? It seems like we have barely scratched the surface of the demand and need in India and China. Some international markets may approach saturation on 5-star product, but that seems some time off in India. And, in any event, the development opportunity for mid-market product has plenty of room to go.
Who’s doing what in India?
In an effort to encourage foreign investment, the Indian government changed its restrictive laws in February 2005, to allow 100% foreign direct investment to develop new housing, commercial properties, hotels and hospitals. Foreign investors aren’t allowed to buy buildings already standing or undeveloped land. India also allows foreign funds to own stakes of as much as 24% in the nation’s publicly traded real estate companies.
Indian hospitality space is pretty attractive with a major shortage of rooms in commercial centers like Delhi, Mumbai, Bangalore and Hyderabad. The hospitality industry has grown at 23.7% in 2005-06. The all-India occupancy mark too touched the 70.8% mark for the first time, while there is a severe demand-supply imbalance in cities like Hyderabad, Jaipur and Bangalore. The room tariffs have also been on a rise.
Foreign hotel operators are eager to invest in India, helped by changes in Indian law in recent years that allow full foreign ownership of hotels. So who are some of the players focusing on India now? Here’s just a sampling of current interest by the hotel industry:
Barry Sternlicht and Starwood Capital
Barry Sternlicht’s Starwood Capital Group announced on November 14, 2006, that it would invest up to $500 million in India over the next 3 years to promote its Crillon, “1” Hotels and Residences, and Campanile brands. Starwood was reportedly in talks to buy its first property for $50 million with the purchase to be completed by the end of March 2007. Sternlicht says that there is so much demand that he is targeting an average annual return of 20% on investments in India. “Overwhelming demand allows you to differentiate your product and probably sell it through any cycle” of the economy.
Rising incomes, easy financing and population growth are driving housing demand as the economy expands 8 percent a year, the fastest after China. That’s why Starwood announced a couple of days ago that it had opened an office in Mumbai, India’s financial capital, and aims to increase the number of employees to 20 from four by the end of next year. Starwood will consider investments in any Indian city with two million to three million people, Sternlicht said. “Delhi and Mumbai are the frothiest at the moment.” The company will initially focus on developing residential projects, followed by hotels and office space, Sternlicht said. “Residential has the greatest demand,” he said.
“The timing is excellent,” said Scott Woroch, a senior vice president of Canada’s Four Seasons Hotels and Resorts, which plans to open its first hotel next year in Mumbai in a partnership with the India’s Magnus Hotel group. “There is a growing demand with respect to international visits to key urban and resort destinations,” he said.
Four Seasons is also “looking at a number of opportunities in New Delhi and Bangalore” and are studying possibilities in Goa to the south, and Rajasthan in the northwest, he said.
The Sheraton Group is collaborating with the Indian Tobacco Company in running 10 luxury hotels across the country for more than a decade and is also looking to expand.
“We believe that India has very strong growth potential, across all our brands,” said Hwee Peng Yeo, a spokesman for Starwood Asia Pacific Hotels & Resorts Pvt. Ltd, part of the Sheraton Group.
One firm, the London-based India Hospitality Corp., has raised $100 million to build or acquire mid-level hotels in India, said the company’s chief executive, Jason Ader. Ader says his company views India’s hotel industry as high-growth but fragmented, offering profit potential among the most attractive in the world.
The non-luxury market has been overlooked by major Indian players like Taj Hotels, Resorts and Palaces and Oberoi Group, Ader said. He declined to name the Indian companies his group was negotiating with for collaboration, but said he expects to firm up plans by early 2007.
Local hotel chains have not been aggressive about growing, Ader said. IHC will be able to use its expertise in management and finance to make its plans work, and the $100 million it raised shows shareholders are confident that its strategy will deliver, he said.
Gupta Group and Hillwood
On December 15, 2006, it was announced that The Gupta Group, which runs five-star hotels in such Indian cities as Delhi, Mumbai and Kolkata under the Hyatt brand, has formed a new joint venture company with U.S.-based real estate company Hillwood that will develop three hotels.
In the joint venture firm Hillwood would have an equity share of 24.9%, while Gupta Group, which is the developer of Choice Hotels, Asian Hotels and Edenpark Hotels, would hold the remaining share. Innova would initially develop three 150-room Clarion hotels in Bangalore, Pune and NCR. Land for development of these properties has already been identified or purchased. The Gupta Group is also looking for more sites in Chennai, Mumbai and Jaipur, India.
Accor Asia Pacific Chairman, David Baffsky, recently said that the company had plans to open more than 5,000 rooms in India over the next five years. Less than a month ago, Accor announced several partnerships to develop a spectrum of hotel product in emerging markets, particularly in India. A partnership with Dubai-based EMAAR plans to invest more than US$300 million to develop 100 budget Formule 1 Hotels in India
In addition, Accor and its joint-venture partner InterGlobe are also developing a network of Ibis hotels around the country. By the end of 2007, Accor and InterGlobe expect to have up to 15 Ibis hotels (2,700 rooms) under development, for a total investment of US$ 180 million.
Accor also plans to expand its Novotel brand in India with one Novotel presently under construction in Gurgaon, a business precinct of New Delhi. Accor is in discussion with leading Indian business groups for a variety of developments, including the launch of the Mercure brand in India.
And at the upper-upscale end of the spectrum, Accor has announced two Sofitel developments — one a U.S.$106 million Sofitel Mumbai with approximately 300 rooms being developed by a joint venture comprising Accor and prominent local developer, Naman Developers Limited. A second Sofitel – and Accor’s first resort property in India – is being built in Goa. Accor will manage the Sofitel Cabo de Rama, which is being developed by Uniworth Resorts, a member of the JB Group of Hong Kong. The resort is located on the oceanfront adjacent to the historic Cabo de Rama fort and will feature 260 rooms and a spa and is scheduled to open in 2009.
Announcing Accor’s ambitious expansion plans in India, Accor Chief Executive Officer, Gilles Pelisson said: “India is one of the world’s most dynamic economies, with rapidly growing inbound, outbound and domestic travel sectors that we hope Accor’s development strategy will cater for. Accor sees the investment play as attractive for both the inbound and outbound traffic to the rest of its worldwide system.
On December 5, 2006, while in Dubai, Donald Trump, Jr. in a keynote address to delegates at the world’s largest international property investment and development event, Cityscape Dubai 2006. was joined at Cityscape by his sister Ivanka and brother Eric. The three have been charged by their real estate legend father Donald Trump with taking the American brand overseas. As well as the Middle East, they are currently eyeing India, the focus of a special session at the Cityscape Dubai Conference, and Russia.
How do we make successful foreign hotel investments to take advantage of these exciting opportunities for international hotel development?
Not surprisingly, great opportunities are usually accompanied by great challenges. That is certainly true for international hotel investment, whether in India, or any of the other hot markets we have been discussing.
Skyrocketing land and construction prices are just the tip of the iceberg. US investors will find many of the bureaucratic rules, infrastructure limitations, arcane business practices, corruption, and the difficulty of doing business to be frustrating–even with a local partner. And local partners will find the hesitations and concerns of foreign investors equally challenging to deal with. But the rewards can be so great, that there will be many attempts to harvest the riches promised by these exciting markets. Some will succeed and other will not.
What will separate the successful from the failures, aside from luck? I will talk about how we make successful foreign hotel investments in an upcoming posting in the near future.
Our Perspective. We represent developers, owners and lenders. We have helped our clients as business and legal advisors on more than $50 billion of hotel transactions, involving more than 1,000 properties all over the world. For more information, please contact Jim Butler at email@example.com or 310.201.3526.
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Jim Butler is a Founding Partner of Jeffer, Mangels, Butler & Marmaro LLP and he is Chairman of the firm’s Global Hospitality Group®. If you would like to discuss any hospitality or condo hotel matters, Jim would like to hear from you. Contact him at firstname.lastname@example.org or 310.201.3526. For his views on current industry issues, visit www.HotelLawBlog.com.