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India Grapples with Shortage of Branded Hotel Rooms; High Interest Rates and
 Surge in Construction Costs Delay Hundreds of Announced Hotel Projects

By Vishakha Talreja, The Economic Times, IndiaMcClatchy-Tribune Regional News

Aug. 9, 2008 - With a shortage of over 1.5 lakh (150,000) branded hotel rooms (one to five star rated) in the country, and big international tourist magnets like the Commonwealth Games, Formula 1, ICC World Cup Cricket and World Cup Hockey just two-three years away, all manner of players -- from Indian hotel biggies, global chains to property builders -- were falling over each other not too long ago to announce mega projects.

But with the financial markets in a spot of bother, financing these projects has become difficult. This, coupled with unrealistically high land prices and government red tape playing spoilsport, may mean that just over half of the planned 1 lakh (100,000)  new rooms will finally be built.

According to a KPMG report, only 60 percent of projects announced in key metros are operational as per schedule. Says Nandita Da Cunha, manager, KPMG, "Given the high interest rates, and surge in cost of construction, there has been a delay in new projects announced." For instance, in Hyderabad, the number of rooms announced in the premium category (five star and above) is close to 3,000. Of this only 1,800 rooms are expected to come up in the next 4 years.

As per government estimates, the number of hotel rooms required in the national capital region (NCR) for the Commonwealth Games 2010 is about 40,000. Currently the room supply by branded hotels in five star, mid -market and no frills categories in the region is just 7,000-8,000. Analysts believe that even if you add non-branded hotels in areas like Paharganj it takes up the total room count in NCR to no more than 15,000. And even if you add another 5,000-6,000 additional branded rooms that are expected to be built before the Games, that still leaves NCR with a shortfall of around 20,000 rooms!

"Despite the hotel rooms planned in advance, India could end up being in a very embarrassing situation," says a source. Amongst the 40 Delhi Development Authority (DDA) hotel plots auctioned by the government in the last year or two, hotel construction work is abysmally slow, thanks to exorbitant rates that hoteliers initially bid at. At the auctioned rates it might take these hoteliers over 20 years to break-even. "Even if one starts building these hotel rooms now the work wouldn't be complete by 2010, as average duration to build a hotel is at least three years," says a hotel consultant.

Most real estate developers are facing a cash crunch, and are not in a position to start work on hotel projects. Many projects are also awaiting government approvals. And with low floor space index (FSI -- ratio of land area to total build-up area) in the country being low, many hoteliers are delaying their projects in the hope that government may revise it upwards. Lower FSI means not only longer gestation periods for a new hotels, but also constraint on existing hotels adding rooms.

As per an HVS International report, the CBD (central business districts) of Manhattan allow an FSI of 15-18, Amsterdam has FSI up to 5, while in NCR it is as low as 1.75, though Kolkata offers a little more. Hoteliers have been lobbying for quite some time now to get a higher FSI. "One can use only 50 percent of the land as vertical expansion is not possible owing to lower FSI," cribs a hotelier.

Explaining the cash crunch situation that the hospitality industry is facing, Ernst & Young India partner Rajiv Sahni says, "Many developers are prioritising their cash flows towards residential & commercial property projects. Also private equity funds are not flowing into the sector. Foreign real estate investment trusts (which are allowed to invest in hospitality sector in India) too have not invested so far in any hotel project in the country.

Land cost now accounts for 50-60 percent of the hotel project making the break-even period of a hotel even longer. A hotel project makes sense for developers who had bought land when it was not very expensive. For instance, the Uppal Group bought 13-acre land in NCR for just Rs 1 crore few years back and is now building a hotel on it. Leela Hotels, on the other hand, purchased a 3 acre plot in prime location of Delhi for Rs 611 crore last year, and industry sources point that it may be very long for the company to show profits on this project at such high land acquisition costs.

Unattractiveness of hotel projects to investors like REITs apart, a slowing economy has also seen dipping occupancies across most star-rated hotels, making it a double whammy for any new hotel project. Cities such as Bangalore, Pune, Hyderabad and Chennai have seen a dip in occupancy this year as compared to last year, though the room rates and revenue-per-room (RevPAR) are still holding on.

Says Lemon Tree Hotels CMD, Petu Keswani, "About 85 percent of hotels in India are owned by developers or wealthy individuals and not professional companies. So while announcing a project, these stakeholders do not know what all it takes to build a hotel, leading to delay of projects."

Hotel developers on their part blame government redtape. "Not only the land cost is high in India pegged at 50 percent of the project cost as compared to just 20 percent in the US, one has to take as many as 40 to 80 approvals before starting a hotel," adds Lemon Tree's Keswani. The government, on its part, says it is easing its approval processes. Says Leena Nandan, joint secretary, ministry of tourism, the administrative ministry for the hospitality sector, "We have been in talks with state governments for a single window clearance. In fact Andhra Pradesh is the first one to do it and others will follow suit."

Global hotel chains like Marriott, already present in the country, feel that the delays have always been inevitable in the Indian market. Says Class R. Elze, senior VP, hotel development, Asia Pacific, Marriott International, "Delays have always been a part of hotel development in India as it takes longer to get approvals as compared to other countries.

Also construction delays are there." However, Deepak Mowar, VP-Hotels of Parsvnath Developers, has a different point of view, "Approvals take a lot of time, but while announcing a project a developer takes it into account, so a delay can not be blamed on the approvals (alone). Many developers had made forward looking announcements without even having adequate land bank."

The government agrees that the country is facing hotel room crunch. So it is looking at various alternate accommodation options to meet the shortage. About 300 units of bread & breakfast (B&B) accommodation, with a room inventory of more than 900 rooms, have been added, according to government sources. It has also introduced a camping-site policy. "These policies will give a fillip to tourism. There is greater interest in India now. The B&B policy is on track as the home ministry is giving tax incentives. Himachal Pradesh will also introduce the policy soon on a similar lines. Uttar Pradesh is also examining the concept closely and will soon launch it. In Kerala and Sikkim it is already a hit," adds Ministry of Tourism's Nandan.

(Additional reporting by Meenakshi Verma Ambwani)

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Copyright (c) 2008, The Economic Times, India

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