With advancement in the economic scenario of India, the hotel industry is on a robust trajectory. Every few weeks or months we see a new property being built or an existing being acquired, the competition is on an upswing. While the owners are under capital investment pressures the operators are in face with challenging times with a single drive of generating profitable revenues. Both are carriers of the same ship but the concerns are in face of each other. While owners need to understand the industry situations hotel operators too should mellow down on the demands considering the market value. We at TTJ spoke with few operators and owners to give a transparent view on the concerning issue. Here’s a look…
For a few years now we have been reading the researches and news on the ongoing debate between the owners and operators on revenue numbers. Both the parties involved need to do a self analysis before going in for an agreement, a detailed information scrutiny about each other is equally important. While an owner is required to go through a plethora of research studies on the destination and the brand he’s looking to associate with, the operators on other hand need to put up demands and numbers considering the market and competition sensitivity.
The ‘dash to brand’ possessions have been partially energised by the need to protected subsidy. This is especially true in light of the restrictions in the current lending environment. Veteran hotel owners and developers know that all this good news needs to be tempered with some cold realism about the process they are about to undertake. They know that finding a great operator and negotiating a hotel management agreement they can live with is critical to the success of their investment and the value of their hotel. Sharing her views on the very crucial debate Nirupa Shankar, Director, Brigade Hospitality states, “In order for hotels to generate healthy returns, many pieces of the puzzle need to come together, owners need to be smart about their capital investment by ensuring land doesn’t come at a very high cost and by ensuring that the cost per key is reasonable.
Operators on their part need to ensure that brand standards suit the market and unreasonable requests are not made for soft markets such as tier II and III cities. Operators need to give reasonable projections at the time of signing up the hotel to manage owner expectations and also be on top of their game once hotel doors are open. The product (hotel), place (location- should have sufficient demand generators) and the people (service provided at the hotel) if done right, will together will create a successful hotel that should in all probability give good returns to the owner.”
With so many properties coming in tier II and III, a lot of investment is being put into hotel building, and with such uptight competition the operators are facing negative numbers both in terms of ARR’s and occupancies, Saddam Zaroo, M D RK Sarovar Portico, Srinagar further shares, “It is true that there is massive investment taking place in tier II and III segments weather the hotel is existing or newly built. The quality of infrastructure in all segments has also improved because of the increase in demand for such infrastructure and easy knowledge being available online thus the guest satisfaction level has fairly increased leading to a better level of maintenance, services and facilities in tier II and III. All this along with the increase of the mid segment hotels especially in the smaller cities where the implementation of the master plan is weak has led to reduced levels of satisfaction for its owners. This has led to a huge gap in the supply and demand where the supply of rooms is much greater than the actual demand for the same.”
A decade ago it was believed that 40 per cent occupancy level throughout the year was enough to maintain a no profit no loss situation however it does not hold true now. A minimum of 60 per cent occupancy is required to meet the increased cost of energy, maintenance, marketing and human resource. Another important factor is that the ARRs of hotels has dropped, today tier I hotel rooms in most cities are available for the price of tier III whereas the building cost/ maintenance of hotels has steadily increased with inflation. This scenario along with the increased supply has made tier II and III a not so satisfactory venture since a hotel which meets all the present demands does not do a GOP of more than 25 per cent whereas a decade ago the same property would be touching GOP of 40-50 per cent, Nikhil Vahi, Senior Vice President, Hospitality operations and development DS Group Hospitality further shares, “We can see the development happening, a lot of properties are coming up to tier II and III cities.
Earlier they were devoid from five or four star properties, mid scale or upscale hotels. It was a disorganised sector and only private hotels were there. So rebranding is happening and new hotels are coming up with international standards, they can be mid scale or upscale. So one should look at markets demand and what is the potential of the market and what is the future supply, keeping that in mind we can do well in the market. So it’s important to know the supply side and the demand side tier II and III cites already have low supply sp one should be careful before getting into such market. Each four of our property is the no one of their cities.”
The decision to invest in a hotel property has to be the owner’s. The branding decision is taken after an independent third party feasibility report. Risk exposure to the hotel investment is singly to the owner. He needs to scientifically evaluate his ROI. Agreeing on the same Ajay Bakaya, Executive Director, Sarovar Hotels & Resorts excerpts, “A word or two of caution, Hotels are capital intensive. Projects take time. Debt funding should be manageable. Ideally below 50 per cent of the project cost. A hotel investment will yield long term results. Cash flows and valuations, an owner should not expect unrealistic early return. Investment in tier II and III cities must be in line with projected ARRs. We recommend large banquet areas, a modest room key inventory, functional but not expansive or opulent rooms, and a single restaurant.”
While some major players are unhappy with the edging competition others look content in margins of their work, Surbhi Vohra, Regional Director of Sales – India, StayWell adds on, “The hotels are doing well, we are able to generate good business currently we have three hotels in India. Many more are coming up in Hyderabad, Goa, Jodhpur, Udaipur, Ahmedabad and Kolkata. So by the end of this year, we will have five operational properties in India. Staywell is an Australian brand so we are trying to get maximum sales. We are participating in various events to increase our sales and to build connection.”