In the last decade, the Indian market has seen a sudden boom in the hospitality segment. Many new chains have entered this market successfully. Moreover, this segment has also attracted a lot of real estate players. A lot of these real estate players entered the space with luxury and upscale projects, but most of them had to either sell or close shops. One major question prevails; can hospitality business fetch similar growth as real estate? According to some experts, ‘No’, hospitality industry requires serious players and more dedicated hospitality experts to run the business. Over the years even the lending pattern by the banks and financial institutions has changed. Banks have now become more cautious while lending. But still a lot has to change in the lending business. In more established markets like the US, hotels pool in funds for much longer periods with a lower rate of interest whereas in India banks lend at much higher rate for a shorter period.
One of the key sessions in HICSA discussed about the lending pattern of the banks. The session titled, ‘The Great Indian Hotel Debt’, was moderated by one of the leading industry expert Kartick Maheshwari, Partner, Khaitan & Co. The session included eminent speakers which included; Anoop Bali, Chief General Manager and CFO, Tourism Finance Corporation of India; Ashwin Mehta, Managing Director, Pankti Management Consultancy; Conrad D’Souza, Member of Executive Management and Chief Investor Relations Officer, HDFC; Nitin Arora, Sr. Vice President CCG, Axis Bank; Punit Malik, Group President and MD Corporate Finance, Yes Bank
Speaking about the current scenario of the hospitality lendings and the latest trends, D’Souza said, “In the early 2000’s, developers saw hotel business as real estate. But in 2008-09, a lot of developers saw challenges when it came to completion of projects and getting operators. That made the ARR’s decline. Now that phase has gone, we are now in an inflexion point. People will see more consolidations happening now. The big challenge now is to get long term capitals. We need lenders with more patience.”
Speaking about the focus favourable choice from a banker’s perspective Arora said, “Budget and Midscale segment are always favourable for us. Also the location of the project matters a lot. When it comes to chains or standalone hotels, we generally prefer chains. As they have a much bigger presence and their brandings are more. Also most of the bookings happen online for branded properties and the fetch more value than the independent hotels.”
Bali said that never compare the hospitality segment with real estate. He further added, “Stress happens while lending to luxury and upscale brands. Midscale segment is stable. After 2010, the supply has become more than demand. Hotels could not get good occupancy. Promoters had challenges due to this instability. A lot of the hotels that were opened during this boom have shut or changed hands. Only the serious players are still there and they will continue to be in the industry. Do not compare the hospitality business to real estate business. A lot of real estate players have invested into this business but they couldn’t take off.”
Mehta who is from a consultancy had a different opinion and he feels that the hotel investment faces a huge challenge of undercapitalisation. He said, “Hospitality is a capital intensive industry. In India we are capital short. Most of the projects are under-invested and bankers have to pump in more. Undercapitalisation is a huge challenge in this market. Short tenure capital is again a challenge. Now bankers have started lending for 10 to 15 years tenure, which is a good sign.”
Further the panellists discussed about trends in investment. Also are banks looking at lending for new projects at the moment?
Arora said, “We have done a couple of Greenfield and brownfield projects, as a bank we fund both. But we lend by strong promoters and conservatory numbers and backed by debt equity and the competition. My personal opinion is refinancing an existing hotel as there is an asset here. Hospitality is a good business for banks. It is an interesting space, but we invest with precaution.”
Malik feels that investment in Tier I markets are far safer than investing into smaller cities, as the dynamics changes rapidly. He said, “Last few years there have been a lot of Greenfield projects. Now I am not seeing any new hotels coming soon. We also do a lot of refinancing and have learnt a lot from the past. We usually prefer to invest in Tier I cities as we have not had any good experience at the Tier II cities. In these smaller cities the dynamics changes rapidly. Also, we prefer experienced operators. We are open to support new projects in future.”
Contradiction Malik’s opinion on the smaller cities, Bali said, “There are two types of promoters; hospitality people and the real estate players who thought of making money. Real estate players went into the luxury space and mixed development projects. We have started funding more budget hotels in the Tier II and III markets and have never faced any issue. Typically the Indian market depends on the domestic customers. Future of Indian hospitality will be good as there will be more competition.”
Last year the Government of India passed the Bankruptcy and insolvency act 2016. This code acts as a new security for the investors.
When asked about will this code help in recovery of debts Bali said, “With the new code coming in, institutions have been given strength to recover debts. Now suppose we file a case with NCLT, insolvency professionals will move in and resolve the issue in 180 days with an extension of 90 days. Creditors can now set conditions and only the Supreme Court can put a stay order. Promoters will be now willing to settle the debts to bank on time, which is a good step. But still the code is in a very nascent stage. It is based on the US and UK’s insolvency code. This will surely help us to recover from bad assets. Even promoters and unsecured creditors can approach and file a case, he added.