'Creating hotel assets is like solving a jigsaw puzzle,' writes Nirupa Shankar, Executive Director, Brigade Enterprises
While developing a hotel, there are many aspects for an owner to consider
While there is a lot of fascination for people who own and build hotels from the public and apprehension from those in the ‘know,’ unless one is in the business of developing hotels, it is hard to understand the trials and tribulations involved in making a hotel ‘work.’ Hotels are like complex jigsaw puzzles in which hundreds of pieces need to be placed just right for the whole picture to come together.While developing a hotel, there are many aspects for an owner to consider. If one was to simplify them into eight key components, listed below are the ones worth looking into.
Good design is also about creating operational efficiencies for the hotel
While evaluating the location for a potential hotel development, an owner would generally ask the following: Does the location have ‘room’ for a hotel? Is there a catchment whose needs aren’t being addressed? Is there more demand than supply? If a new hotel enters this market in the next three years, what will the catchment look like? Is there growing demand in the area? What is the purchasing and spending power of the people residing and working in the area? Where will the demand come from? How will this locality grow in the next three to five years? It’s important to note that the location is one that has a ‘ready’ market for the new supply of rooms, in order for the hotel to be able to ramp up quickly and make healthy returns.
The more ‘ready’ and suitable a location is for a hotel, the more expensive the land is likely to be. Land prices can make or break the viability of a hotel, so buying at the right price is the key. There is no thumb rule for the price to pay for a land as it completely depends on the market rates and the revenues one can expect from the hotel. The feasibility study is crucial at this stage because over estimating revenues can lead to overpaying for the land and underestimating revenues can lead to under bidding for the property. As a result, one may lose out on the opportunity. Alternatively, if the land is too expensive, one can evaluate leasing the land for at least 30 plus years or even creating the hotel as part of a mixed-use development to keep the land cost under control.
This has less to do with the star rating of the upcoming hotel and more to do with the Facility Area Plan (FAP). It’s about studying the market and creating a product that meets market needs. For instance, it is important to understand whether one F&B outlet will suffice instead of two or whether 15% of the rooms will suffice as suites. Once the room configuration and ancillary facilities that need to be created have been decided upon, and then the owner can decide how he/she would like to position the hotel — limited service or full service, four star vs. five star. Based on these decisions, hotel operating brands can be identified, and commercial discussions can be finalized with the operator for the hotel.
Capital expenditure (Capex)
Once the brand has been finalised, hotel owners work towards understanding the brand guidelines and create a financial cost sheet for the hotel, which shows the expected ‘Cost Per Key.’ Ideally, owners and operators should work backwards on this by first identifying what the market is willing to pay per room night, which ties back to the feasibility done for the hotel. For example, if the market rate for the said product is INR 5,000 per room night, then owners and operators must work towards keeping the cost per key within INR 50-60 lakhs. The budgeted cost per key often doesn’t comgo as per plan, mainly due to certain ‘brand standards’ of the operator or the social infrastructure that the hotel is required to provide. For instance, if there aren’t adequate food joints within a safe walking distance, the hotel will need to provide at least two F&B options at the property.
The design is not just about creating a good-looking product. It’s about creating a timeless design. Apart from the interiors, it’s about creating maximum functionality and utility in every square foot. It’s about designing the rooms and public spaces in an intuitive way. It could be incorporating two plug points instead of one near the bedside table or providing the switching logic in a way that a customer need not spend much time searching for the right buttons. Good design is also about creating operational efficiencies for the hotel — in the number of service elevators, easy access to storage for the housekeeping staff, or integrating the sunlight patterns into design to ensure reduced energy consumption at the hotel.
The execution phase requires a rock-solid project management team that knows exactly what it is doing. Hotels are the most complex forms of real estate assets to develop. Just the sheer number of vendors to coordinate with, the number of consultants involved for every minute detail — from the signage, landscaping, kitchen to lighting, can get overwhelming unless planned out properly. It’s important to have the drawings signed off before the start of construction in order to avoid re-work. The design development stage needs to be carefully monitored to ensure that drawings from each of the vendors are in sync with each other.
Once the hotel is ready, the hotel operator or brand that operates the hotel is essential. But assuming one is dealing with a Tier-1 brand, it’s the GM at the property that can determine the fate of the hotel no matter how good or bad the brand is. The ‘GM’ of the hotel is like the ‘Captain of the Ship.’ He/she has to guide the hotel through calm and stormy waters while constantly assessing the changing environmental conditions and determining the direction to go forth with. Through good and bad, he/she needs to carry the team alongside and keep the morale high.
Finally, it’s the owner of the hotel that must bring everything together. Be it obtaining and maintaining the 100+ licenses required for running a hotel, ensuring that the property is maintained well, motivating the operator to push harder, ensuring taxes, interest and debt is paid in a timely manner, paying salaries and expenses regardless of whether the hotel is making money or not. As an owner, one needs to love the business and appreciate its complications. It’s a labour of love where the fruits of the labour are not always savoured. Hotels are a tough business but if understood well, they can become cash cows in the not-so-far-future and the owners might be able to relish the sweetness of their produce.