Experts predict about 30% hotel assets will turn distressed, rich pickings for groups and investors looking to consolidate and invest

More than 25 to 30% of assets are likely to become distressed as the industry struggles with a collective outstanding debt of Rs 50,000 crore and no debt restructuring measures in sight. How will the industry cope?

Hotel assets, Distressed properties, Hotel investors, Consolidation, Investment opportunities, Hotel news

Across the world, distressed hotels are creating new opportunities for keen-eyed investors.

The signs are visible globally. In Thailand, Destination Capital, a Bangkok-based private equity real estate investment and asset management company, is set to join forces with its capital partners to acquire hotel assets in the Asia Pacific region.

They are drawing up a game plan of acquiring strategic hotel assets and adding value through renovation, asset management and rebranding with a global hotel brand to boost financial returns.

In the US, it is being estimated that 20 % of hotels have debt held in commercial mortgage-backed securities (CMBS). Blackstone, one of the world’s largest real estate investors, is said to be scouting for struggling hotel properties for investments, globally. After raising $20 billion during the second quarter, Blackstone now has a record $156 billion in “dry powder” capital to deploy for investments.

Internationally, Accor has confirmed it was closing in on a deal to take over the contracts of about 100 Travelodge hotels after an ongoing dispute over rent payments at the budget group. “The deal would involve Accor taking a 10% stake in a new special purpose vehicle that would be majority-owned by the Travelodge landlords. The vehicle, to be named Ago, would issue new 25-year leases to the hotel owners, who would pay franchise fees to Accor for use of its Ibis brand,” reported the Financial Times.

India’s distressed hotel landscape

The continuing coronavirus pandemic saga has left several hotels floundering, making them rich pickings for investors and PE funds. As the bank moratorium period comes to an end in August, India will most likely mirror the unfortunate global trend, as debt-ridden owners begin to offload their properties, not being in a position to service those expensive loans.

Vijay Thacker, Director, Horwath HTL India expects 25-30% of rooms supply to not open. “An equal number could reflect distressed assets, even if the hotels open. The large inventory expansion since 2014, all of them with outstanding loans, coupled with the complete shutdown of operations (or minimal operations in some cases) will make survival a very tough game for hotels.”


Mandeep S. Lamba, President (South Asia), HVS ANAROCK

HVS ANAROCK estimates outstanding debt to be close to Rs 50,000 crore, based on their research across nine major cities and taking into account only the organised sector, with hotels of 80 or more keys. Mandeep S. Lamba, President (South Asia) says, “In the event the RBI does not allow restructuring of debt, we anticipate a significant default on repayments, which will not just severely impact the sector but also the economy. We believe that the government will allow one-time restructuring of debt as the NPAs that could emerge in the absence of any relief would be a big blow to the banking sector.”

Most analysts we spoke to claimed that many players for whom hotels is not a core business, are looking to either partly or fully exit from the sector and use the funds to either repay debt, which has been stressed, or use the monetised value to offset cash-flow shortages or losses in their core business.

There are reasons why we will witness a slew of distressed properties hunting around for buyers.

Debt servicing

Under immense stress due to mounting debts, owners are most likely to either opt for debt restructuring or give in to the pressure and sell off their assets.


Jaideep Dang, Managing Director (Hotels & Hospitality), JLL

The former isn’t an easy road, as Jaideep Dang, Managing Director (Hotels & Hospitality), JLL points out. “Debt servicing is going to be the biggest challenge for hoteliers, even as debt restructuring and/or equity infusion is going to be the need of the hour. However, debt is hard to get and is also likely to come at higher interest rates, which will further make debt servicing challenges. So, it’s a vicious circle.”


Saurabh Gupta, Managing Partner – Investment Advisory & Asset Management, Hotelivate

Saurabh Gupta, Managing Partner – Investment Advisory & Asset Management, Hotelivate, monikers the pandemic as “a WW2-like event for the hospitality industry. Almost all hotels will become an NPA if the conditions (of debt) are not changed or relaxed”. Through the lockdown, hotels have struggled to pay salaries and other fixed operating costs with zero revenues. “These are the conditions for a perfect storm. But fresh, high-quality hotel stock hasn’t hit the market as yet. If the loans are not re-structured after the deadline on August 31, we expect a panic situation, which may cause sellers to come to the market,” he contends.

In several hotels, the entire amount of the owner’s share of profits goes towards debt servicing. Thacker points out, “While the banks cannot take action up to March next year, these loans will be in trouble and will have further difficulty in restructuring under current guidelines (since they are in default) or even raising working capital loans.”

The situation is rather precarious if one goes by what Gupta indicates and there is likely to be a sharp rise in NPAs. Just to offer a perspective: Rs 43,000 crore is the total outstanding debt of the entire hospitality industry across several existing hotels and under-construction projects. “Bhushan Steel is at 35,000 crores and Essar Steel at Rs 55,000 crore. So, these are small debtors in a Force Majeure event and not necessarily willful defaulters. Almost every debtor will not be in a position to pay up even if lockdown is fully lifted across the country. So, all hotels with sizeable loan-to-value ratio will turn into an NPA.”

Gupta points to another whammy: In this kind of a bloodbath, there will be no buyers to sell or auction the hotels to. “Will the RBI pay heed, then,” he asks.

Owner-operator relationship

The growing burden of financial management—debt servicing, paying of salaries and wages as well as recurring fixed costs—lies solely with the asset owner. The logical corollary, then, is a stress on the owner-operator relationship. “Given the extent of business impact on the sector, I do feel that some owner-operator relationship stress will end up in parting of ways, amicably or otherwise,” predicts Lamba.

Or, will they really? Even Lamba admits operators have put their best foot forward. Gupta adds, “Most brands have reduced fixed expenses, deferred their fees and postponed CAPEX. An operator takes away 7-9% of the topline in good times. Right now, owners have 0-10% of their normal collection so the operator’s fee has been inconsequential and mostly deferred.”

A way of managing stress is the deployment of some amount of pragmatism at both ends. Thacker points to the futility of straining the relationship, “except if either party is being cussed. If there is a mature handling of cash flows and the operators can draw reasonable business possible under the circumstances, a strain between an owner and operator is not fruitful. Holding on to rates could reasonably be a long-term value benefit, with a sense of balance”.

The real test will be the agreement clause signed by the two, under which an owner cannot sell to a competitor, particularly if the latter is among the handful of buyers.

Who would the buyers be, then?

A consolidation of the industry will most likely be the big fallout of the pandemic and the havoc it has wreaked on businesses, but Lamba doesn’t expect to see too many big brands buying distressed assets. “Most now follow an asset-light model of growth. However, a select few hotel-owning groups, with access to third-party capital, are likely to be active and look to further consolidate their presence.”

For hard assets, Gupta reports some interest from a few PE funds, special situation funds, family offices and UHNIs if the valuations are sensible. “Debt capital is going to be hard to come by for hotel acquisitions, so we may see largely equity-backed deals. We expect a few brands getting absorbed into bigger hotel companies for a strategic-level advantage in share swaps/ non-cash deals.”


However, selling of distressed assets may not be as easy as it was in the past. As Thacker suggests, “Owners will be forced to sell due to their sheer inability to operate, or equally by the plan to divest one or two assets and save the others. The real challenge will be in the valuation gap and the limited buyer universe.”

For now, it is a classic wait-and-watch game for asset owners. Lamba reveals, “For now, most are waiting for the moratorium period to end and for relief measures from the government before they decide their future course.”

The consolidation of the hospitality industry

What’s predictable is how the industry will consolidate in India. Lamba claims operators without deep pockets will find it difficult to survive the impact of the pandemic. “Also, hotel owners will look to move to larger, better-established operators. I think franchising and soft branding will gain momentum.”

2020 is pretty much going to be a reset year. “Marketing strategies, guest mix, F&B preferences and brand loyalties could change dramatically,” says Dang. “Hotels will need to focus on alternate scopes and usage of their real estate in the short-to-medium term.”

For now, it is difficult to predict when the recovery from the pandemic will be possible but most experts are predicting a complete opening by Q3 of 2021. “We expect FY22 to be an in-between recovery year, where the fear psychosis will reduce and people will start travelling for work and pleasure. FY23 should be a good year with maximum recovery,” says Gupta.

Dang predicts that debt and equity funds and High Net-worth Individuals are most likely to play a role in consolidation. “Hotel brands are not likely to invest since their revenues have bottomed out and they may not have dry powder to invest.”

According to Thacker, investors working with brands could lead the pack in picking up distressed properties, possibly with a sliver stake by brands. “And that’s where the restriction on sale in the contract will create a challenge. Of course, if it is an IBC-forced sale, that restriction has no real meaning. Hopefully, owners will deal with their assets more meaningfully without going into IBC.”

Who will be most affected and how will revival happen?

There is no way to understand which segment would be worst affected, with the highest number of distressed hotels. Lamba says, “All kinds of assets will be in the transactions market based on the level of stress from borrowing or the need to monetise these assets for safeguarding, other interests of the owner.”

It’s ultimately not about hotel segments or cities, but more about exposure to debt. “Hotels with higher debt will face more challenges. In terms of revival, mid-scale will emerge faster than a luxury. Hotels around airports and the ones with larger conference facilities are likely to recover later,” claims Dang.

India was fast moving towards creating an infrastructure for large MICE events and conferences in a bid to attract more global business and persuade Indian corporates to look at what is available at home. It was a great move in normal times, but in a world shut down by a pandemic, it has proved to be disastrous as lockdowns, with no sign of easing out, have seriously impacted big hotels with MICE orientations

“These big assets need large volumes of man and material movement. Smaller boutique hotels should bounce back faster since a large part of the 22B USD spent by Indians on overseas trips shall remain unspent,” contends Gupta. “In China, budget hotels in key cities have bounced back faster since people and companies are now more value-conscious.”

Hotels in Tier 1 market are always in high demand by national-level hotel investors. “We don’t believe they will transact at distress pricing. I think buyers should check their expectations and be content if they manage a deal which is sensible from DCF-led valuation in Tier 1,” he adds.
“Tier 2 and 3 always work better for regional and local investors. Only distress deals are expected here due to a rather limited buyer universe.”

Equally under stress is the luxury segment due to large debt amounts and a sharp business-value drop. “But then, the owners may also have more strength,” muses Thacker. “On the other hand, a mid-market hotel may have lesser monetary exposure but the owner’s capability may also be more limited. So, it is difficult to categorise by hotel positioning. Expect some high-visibility hotels (across markets) to face major challenges. And I mean high visibility in local markets where the hotels are situated, but carrying a well-known brand.”

The situation on the ground continues to be fluid, with operators and owners fighting hard to deal with this disastrous situation in the best way possible. Unfortunately, as countries open and then shut quickly due to a second wave of infection, the challenges faced by the hospitality industry is likely to extend to the beginning of 2021, forcing several to give up and sell of the asset along the way.

Advice from the experts

Hotelier India asked experts for their advice to hoteliers on how to deal with the unprecedented crisis forced by COVID shutdowns.

Mandeep S. Lamba, President (South Asia), HVS ANAROCK

“I don’t think there are any easy solutions to the problems. We have very good leadership quality for hospitality in India and it is heartening to see how our industry has maintained its grace and poise, even without any real relief from the government in most trying times. Leaders have been largely mature, sensitive and agile in their dealings, limiting the pain and suffering by taking a longer-term view. My only advice would be, sadly, for all the players to prepare themselves for a long haul. This slowdown isn’t likely to change by Diwali or Christmas, as I sometimes hear from the views being expressed.

Much as the diehard optimist that I am, I do think we need to get our heart out of the way when we are reviewing the disruption from the pandemic outbreak. On the flip side, once we have a vaccine, the rebound for our sector will also be a phenomenon we have never witnessed before. So, let’s just stay together and help each other to the best of our ability to weather this storm. Our success lies in huddling together.”

Jaideep Dang, Managing Director (Hotels & Hospitality Group), JLL

“My advice: Reduce fixed costs, operate lean, restructure capital and be open for haircuts on underlying real estate valuations.”

Saurabh Gupta, Managing Partner – Investment Advisory & Asset Management, Hotelivate

“It may be argued that the hospitality sector, often criticised for its high fixed costs and low ROCE, was overdue for a major course correction. Perhaps, COVID-19 has only exacerbated the already festering problem, which needs a deeper solution with exponential results.

This crisis is bound to push all hotel owners, management companies, franchisors and operating teams to go back to the drawing board. Questions have to be asked, rules have to be rewritten and mindsets have to change. The industry needs to push the boundaries of its thought process and derive deep and lasting value by working on a confluence of austerity measures, inventiveness and adaptation.”

Vijay Thacker, Director, Horwath HTL India

“Cash management was, and is the key. But as the lockdown prolongs, this advice becomes theoretical because cash is running out quickly. I would advise the banking sector and RBI to grant a one-time restructuring of debt. It will save hotels and prevent the build-up of the NPA issue for the banks.”

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