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The quantum of investment in hotel projects is very high

The hotel industry is impacted by both the overall economic health of the country, and global occurrences, hence, it is important to take on the right kind of debt, says Akshay Kulkarni.

The thought of owning a five-star hotel does bring a smile to most large size investors in the real estate space.

The glamour factor that comes with a hotel asset and the social elevation that it brings, are unmatched by any other asset class, and these were the motivations for the traditional investor.

Today, times have changed, and the average investor is far more focussed on the returns, capital appreciation, and the speed at which cash flows start. This is not to say that these factors weren’t important in the past, but the other reasons were more important drivers in hospitality projects and property acquisitions.

Upon a little study of the holding patterns of the past, it would be obvious that not many individuals held any kind of portfolio of hotels; those that did, actually listed and brought in capital to grow, while others sold out to larger companies.

Hence, for the longest time, hotel portfolios in the country were held either by families or corporate groups. This was followed by a stage when portfolios were held by consortiums of investors who started to see merit in the hotel investment model, and finally came the surge where real estate investor-backed-developers, wanted to own hotels.

This was more or less, the last stage of evolving buyers, and, post the real estate developer boom stage, the sector witnessed the mature, institutional investors in the form of funds or other financial institutions. With the changing nature of the investors, the motivation and focus also changed.

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For a long time, the average investor was convinced by what looked fabulous on paper – a doubling of value in an instant.

With no background in the hotel business, this class of investor often made the mistake of classifying the hotel product in the same group as any real estate product, and hence their development strategy too followed a similar course - take a parcel of land, get multiple FSI on it and, almost instantly, the value has increased in proportion; build on it and the per square foot return seems great in theory.

What most of them didn’t seem to account for is the gestation period, cash flows, and returns.

Investments in the sector tend to be capital intensive and brand driven but the ability to sustain the long gestation period is a must for the investor, that is, the total time taken to (a) develop a hotel, (b) get it operational, (c) get it to stabilise, and finally, derive any value out of it.

Consider an apartment complex - positive cash flow can start as soon as the plans are launched, or, in case of a commercial build-ing - where the maximum risk is whether the return will meet expectations - it is possible to start some cash flow in about 12-months from the beginning of construction in order to get/start debt service.