|By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com
26 December 2006 - 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
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.
So what's it all mean?
Explosive economic growth ignites unquenchable demand for hotel rooms.
The demand for hotel rooms is matching the skyrocketing economic growth.
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.
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
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.
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
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
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
How do we make successful foreign hotel investments to take advantage
of these exciting opportunities for international hotel development?
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,
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.
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 bureacratic 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 conerns of foreign investors equally challenging to
deal with. But the rewards can be so great, that there will be many attemps
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.
Jim Butler is one of the top hotel lawyers in the world.
GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and
you will see why. Jim devotes 100% of his practice to hospitality, representing
hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality
Group® – a team of 50 seasoned professionals with more than $40 billion
of hotel transactional experience, involving more than 1,000 properties
located around the globe. Jim and his team are more than “just” great
hotel lawyers. They are also hospitality consultants and business advisors.
They are deal makers. They can help find the right operator or capital
provider. They know who to call and how to reach them. They are a major
gateway of hotel finance, facilitating the flow of capital with their legal
skill, hospitality industry knowledge and ability to find the right “fit”
for all parts of the capital stack. Because they are part of the very fabric
of the hotel industry, they are able to help clients identify key business
goals, assemble the right team, strategize the approach to optimize value
and then get the deal done. Jim is frequently quoted as an expert on hotel
issues by national and industry publications such as The New York Times,
The Wall Street Journal, Los Angeles Times, Forbes, BusinessWeek, and Hotel
Business. A frequent author and speaker, Jim's books, articles and many
expert panel presentations cover topics reflecting his practice, including
hotel and hotel-mixed use investment and development, negotiating, re-negotiating
or terminating hotel management agreements, acquisition and sale of hospitality
properties, hotel finance, complex joint venture and entity structure matters,
workouts, as well as many operating and strategic issues.