By Vivek Narain
THE GLOBAL travel and tourism industry provides employment to over 277mn people (1 in 11 jobs on the planet) and contributes almost 10 percent to world GDP. Travel and tourism in India accounts for almost 7 percent of GDP and there is no wonder that the industry is getting such a big policy impetus from the current establishment. In fact, out of the ten-point agenda for India’s economic revitalization laid out by the Modi led government, three of them have a direct impact on the Indian tourism industry. While the government seems sincere in its objectives, the impact of any policy will only be felt in the medium term at best.
The Indian Hotel Industry is currently plagued by unprecedented financial woes, which have been compounded in the context of an unpredictable regulatory regime and the general challenges of project execution across India. Whether it’s the 100 odd permits needed to open a hotel or the very unique problem, recently experienced in Delhi’s Aerocity Hospitality Complex, of not being allowed to become operational because rooms overlook the runway (which incidentally was always part of the plan), getting a project off the ground and successfully completed in India is a monumental achievement. On the operations side, the issues are real and well known ’ poor last mile infrastructure impacting the potential of business, anaemic growth of international travellers partly due to archaic visa laws (which are now being addressed, albeit not without confusion in its implementation), rising input costs especially those related to payroll, weak demand in the face of significant room inventory additions, the list unfortunately keeps going on.
This does not bode well for the financial health of hotels in the near term, especially those with severe capital structure dislocation. Ill-advised, poorly conceived, and under-capitalized from day one, a number of hotel assets today are under stress and unable to generate sufficient internal accruals to service debt. Several properties have been classified as non-performing assets, leading to chronic under-investment in operational hotels, and also resulting in a number of under development projects having either been cancelled or stalled. With the banks under increasing pressure from the RBI to clean up their balance sheets, and several assets already sold to Asset Reconstruction Companies (ARCs), the need for significant recapitalization has never been greater.
Unlike other income generating real estate assets, hotels are unique as they exhibit characteristics of both a traditional real estate asset and an operating business, making them more susceptible to the business cycle.
There are however, several global examples where companies have witnessed a reversal of their fortunes by adapting swiftly to changing market conditions. One of the most high-profile examples is Blackstone’s 2007 acquisition of Hilton. The PE powerhouse financed the purchase of the hotel group for about $5.6-billion in equity plus around $20.5-billion of debt from a group of 26 banks, hedge funds, and real estate debt investors. Due to the financial crisis that followed, revenues for the Group were running down 20 percent by the end of 2009, and the company foresaw an imminent cash flow crunch. Within a year, Blackstone corralled the lenders into a new agreement, invested $819-million of new equity into Hilton, which the company used to buy back $1.8-billion of its secured debt at a discount of 54-percent from the original borrowed amount. This decisive action bought Hilton sufficient liquidity to tide over and restructure its business, and resulted in one of the most profitable exits for a PE investment ever. On IPO day in 2013, Hilton was valued at an equity value of around $20-billion and Blackstone was sitting on a gain of almost $9-billion.
This kind of turnaround is an important lesson for the Indian Hotel Industry which is at a watershed moment. Global appetite for investing ’equity’ in Indian hotel assets will re-emerge, despite the sub-optimal returns of the previous investment cycle on account of many factors including inappropriate underwriting and the collapse of the rupee in 2013. One such source of capital may come in the form of the under consideration REIT framework. There has been a lot of talk about how it might serve to be the silver bullet that saves the industry. REITs in India will take time to evolve before they can attract meaningful institutional capital ’ owing to challenges of taxation structure, price discovery, transparency and lack of scale.
With the yield on the 10 year government bond close to 8%, one can assume that equity investors would expect a reasonable risk premium. Given current trading performance, this would imply that existing hotels would need to transact at a significant discount to replacement cost for an equity transaction to make economic sense. The price expectation of the seller - the Indian promoter (a unique form of business owner and investment syndicator), will hence need to recalibrate to the risk adjusted yield expectation of potential investors.
Historically, borrowers have been bailed out by inflation in asset prices. If one were to assume that property prices in India cannot continue to defy gravity, the failure to recapitalize these troubled assets will lead to significant write downs. In order to avoid this, decisive action is required and there needs to be a coordinated effort on the part of bank creditors, promoters and financial investors to allow these assets to successfully realign their capital structures making existing hotels financially viable and resuscitate stalled projects. This much needed shot in the arm will benefit the entire Indian tourism ecosystem.
There is light at the end of the tunnel. Revival of GDP growth, business expansion, continuing growth in the middle-income demographics and an increase in international visitors, will lead to the stabilization in the hotel sector with revival in demand coming from both the business and leisure segments. One can be assured, that the next few years promises to be an interesting phase for the Indian hotel industry.
The author is an entrepreneurial executive with experience in real estate, hospitality, investment advisory and corporate banking. He is the Co-Founder and Director of Apex India Club, a new vernacular of by-invitation members-only business/city clubs and also a Director of DoiT Hotels & Resorts, an India focused hotel investment platform.
THE GLOBAL travel and tourism industry provides employment to over 277mn people (1 in 11 jobs on the planet) and contributes almost 10 percent to world GDP. Travel and tourism in India accounts for almost 7 percent of GDP and there is no wonder that the industry is getting such a big policy impetus from the current establishment. In fact, out of the ten-point agenda for India’s economic revitalization laid out by the Modi led government, three of them have a direct impact on the Indian tourism industry. While the government seems sincere in its objectives, the impact of any policy will only be felt in the medium term at best.
The Indian Hotel Industry is currently plagued by unprecedented financial woes, which have been compounded in the context of an unpredictable regulatory regime and the general challenges of project execution across India. Whether it’s the 100 odd permits needed to open a hotel or the very unique problem, recently experienced in Delhi’s Aerocity Hospitality Complex, of not being allowed to become operational because rooms overlook the runway (which incidentally was always part of the plan), getting a project off the ground and successfully completed in India is a monumental achievement. On the operations side, the issues are real and well known ’ poor last mile infrastructure impacting the potential of business, anaemic growth of international travellers partly due to archaic visa laws (which are now being addressed, albeit not without confusion in its implementation), rising input costs especially those related to payroll, weak demand in the face of significant room inventory additions, the list unfortunately keeps going on.
This does not bode well for the financial health of hotels in the near term, especially those with severe capital structure dislocation. Ill-advised, poorly conceived, and under-capitalized from day one, a number of hotel assets today are under stress and unable to generate sufficient internal accruals to service debt. Several properties have been classified as non-performing assets, leading to chronic under-investment in operational hotels, and also resulting in a number of under development projects having either been cancelled or stalled. With the banks under increasing pressure from the RBI to clean up their balance sheets, and several assets already sold to Asset Reconstruction Companies (ARCs), the need for significant recapitalization has never been greater.
Unlike other income generating real estate assets, hotels are unique as they exhibit characteristics of both a traditional real estate asset and an operating business, making them more susceptible to the business cycle.
There are however, several global examples where companies have witnessed a reversal of their fortunes by adapting swiftly to changing market conditions. One of the most high-profile examples is Blackstone’s 2007 acquisition of Hilton. The PE powerhouse financed the purchase of the hotel group for about $5.6-billion in equity plus around $20.5-billion of debt from a group of 26 banks, hedge funds, and real estate debt investors. Due to the financial crisis that followed, revenues for the Group were running down 20 percent by the end of 2009, and the company foresaw an imminent cash flow crunch. Within a year, Blackstone corralled the lenders into a new agreement, invested $819-million of new equity into Hilton, which the company used to buy back $1.8-billion of its secured debt at a discount of 54-percent from the original borrowed amount. This decisive action bought Hilton sufficient liquidity to tide over and restructure its business, and resulted in one of the most profitable exits for a PE investment ever. On IPO day in 2013, Hilton was valued at an equity value of around $20-billion and Blackstone was sitting on a gain of almost $9-billion.
This kind of turnaround is an important lesson for the Indian Hotel Industry which is at a watershed moment. Global appetite for investing ’equity’ in Indian hotel assets will re-emerge, despite the sub-optimal returns of the previous investment cycle on account of many factors including inappropriate underwriting and the collapse of the rupee in 2013. One such source of capital may come in the form of the under consideration REIT framework. There has been a lot of talk about how it might serve to be the silver bullet that saves the industry. REITs in India will take time to evolve before they can attract meaningful institutional capital ’ owing to challenges of taxation structure, price discovery, transparency and lack of scale.
With the yield on the 10 year government bond close to 8%, one can assume that equity investors would expect a reasonable risk premium. Given current trading performance, this would imply that existing hotels would need to transact at a significant discount to replacement cost for an equity transaction to make economic sense. The price expectation of the seller - the Indian promoter (a unique form of business owner and investment syndicator), will hence need to recalibrate to the risk adjusted yield expectation of potential investors.
Historically, borrowers have been bailed out by inflation in asset prices. If one were to assume that property prices in India cannot continue to defy gravity, the failure to recapitalize these troubled assets will lead to significant write downs. In order to avoid this, decisive action is required and there needs to be a coordinated effort on the part of bank creditors, promoters and financial investors to allow these assets to successfully realign their capital structures making existing hotels financially viable and resuscitate stalled projects. This much needed shot in the arm will benefit the entire Indian tourism ecosystem.
There is light at the end of the tunnel. Revival of GDP growth, business expansion, continuing growth in the middle-income demographics and an increase in international visitors, will lead to the stabilization in the hotel sector with revival in demand coming from both the business and leisure segments. One can be assured, that the next few years promises to be an interesting phase for the Indian hotel industry.
The author is an entrepreneurial executive with experience in real estate, hospitality, investment advisory and corporate banking. He is the Co-Founder and Director of Apex India Club, a new vernacular of by-invitation members-only business/city clubs and also a Director of DoiT Hotels & Resorts, an India focused hotel investment platform.
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