HAI debates decisions that can forever change the hospitality landscape

Shayan Mallick

Hotels witnessed a tectonic shift in business paradigm during and post-Covid. As pandemic spread so were the lockdowns. The industry faced stressful two years, unprecedented financial pressure, shutdowns, layoffs and so much more. With the pandemic subsiding, people once again resumed travelling. The industry is steadily bouncing back, surprising even the pundits on the speed and scale of recovery, changes in markets and segments and more.

And while recovery continues to be a work in progress, and at a healthy rate, pandemic has also disrupted industry and stakeholders’ plans for growth and expansion. Bruised as the industry is, there is also dire need for new supply to accommodate country’s growth aspirations from travel and tourism. The Government wants Travel & Tourism to be US $ 1 trillion sector by 2047 in order to transform the country into a developed and self-reliant nation by 2047, when India completes 100 Years of independence.

This may augur well but also what has not changed for the sector is delays in clearances, licenses, costly loans, that the industry says will continue to jeopardise new supply, and hence the socio-economic contribution that the sector can make towards a developed, employed, and prosperous nation by 2047.

In a session titled ‘View from the top’ at the recently concluded HAI (Hotel Association of India) Conclave, top industry stakeholders that included Jyotsna Suri, Chairperson & Managing Director, Bharat Hotels; Priya Paul, Chairperson, Apeejay Surrendra Hotels; Patu Keswani, Chairman & Managing Director, Lemon Tree Hotels and Ranju Alex, Area Vice President – South Asia, Marriott Hotels India along with Arvind Singh, Secretary, Ministry of Tourism, Government of India, participated in a discussion on the pandemic, its aftermath, impact on hotels and new supply, challenges and more.

Moderated by Shereen Bhan, Managing Editor, CNBC-TV18 the session delved deep on decisions that can change the hospitality landscape in the foreseeable future.

Post-covid Boom

Hotels were probably the worst affected by the Covid crisis, resurrected by its resilience. As Suri puts is, “That’s what has pulled us through.” And the current level of business, for the property as well as the group’s growth and bottom line, is in a dream run. As the Covid ebbed, people are travelling with a vengeance. Some of the hotels have even reported 2021, despite a devastating second wave and months long total shutdown, their best year ever.

While pointing the surge in travel and accommodation demands in the domestic market and the “expected normalcy to come back even in international travel,” Singh, however, also points that new supply have slow down because there was a lack or shortage of investment in the last few years and there is definitely a need to pace up the industry. However, what is also happening is that a slew of states like Gujarat, Karnataka, Maharashtra, Punjab, Rajasthan, and Kerala, have all accorded the sector industry status and there is renewed hunger for the sector’s growth and investment.

Singh said, “States like J & K is very hungry for new industries. I know of hotels and groups, investing in the Northeast. We have been able to award two islands for the development of resorts in Lakshwadeep, and also some facilities are now coming up in Diu. A few years ago, this was unheard or unthinkable that there would be projects happening in these parts of the country, Daman and Diu, Kashmir valley, North East, Lakhshadweep, all these are work in pipeline.”

Post-Covid, ARRs, occupancies and bottom line have recorded healthy growth. Park’s Paul agrees. “The demand is really-really encouraging. We, as a company are up 19 percent over 2019, and occupancies were 91 percent in the half year. So remarkable performance. We see a resurgence, not just in leisure travel and leisure travel to cities, we see business travel, coming back. And, I will say ‘revenge business travel’ too! I think a lot of companies are having their off sites, having their conferences, because, as you said, too much of zoom. We all need to be meeting and chatting and, having the physicality of meetings,” Paul added.

Besides there are continuing growth as well, however one that should be taken with caution. Marriott is easily looking at adding at least 60 odd more properties to reach a portfolio of 200 and more hotels by 2025, from the current over 141 hotels.

According to Marriott’s Alex, “A couple of trends that we have seen is that there is a huge amount of growth that’s happening in tier two and tier three cities, which we had not witnessed earlier. In fact, and pleasantly surprising, we signed the maximum number of hotels during the Covid. So somewhere in the owner community, there is a positive vibe that things are going to work. And that’s why we have so many signings and Marriott has seen and I’m sure other companies have seen it too. There is positivity in in the country about this industry growing further on.”

Impact / Challenges

Covid nevertheless scarred the industry, new inventory supply, balance sheet, among others, in ways that will continue to resonate for years to come. Commenting on the new supply, Paul said, “I think the next five-seven years, there’s a huge shortage of rooms, precisely because many projects have been stalled. The supply, whether its tier 1 to tier 10, is just not there.” On the financial front, Suri says that it is not easy to write off the two years that have gone by. “While we are definitely looking a lot better than we were, but to write off those two years, it is going to take us some time.”

Singh concurred. He said, “The last two years was a spec. Bottom lines were affected. The balance sheet was affected. Certain measures had to be taken. So, we were in dialogue with the industry and the relevant ministries.” And now, according to Singh, whatever is left out of that or whatever policy tweaks are required to take the industry further to the next level are being discussed.

He however also drew attention to the emerging landscape. “We are seeing a change in the economic landscape in the country. As predicted, we will see a faster urbanization in the country, we see a growing middle class and a largely young population. So, to take note of that, naturally we have to increase the supply of accommodation in the country. And we are already, because of the post Covid surge in tourism, facing the shortage of supply of accommodation in certain pockets of the country. You must have heard reports of tariffs going through the roof in some parts of the country where people are unable to book rooms. So naturally we are in dire need, and we are talking to the finance ministry, discussing policy measures that are required to give a fillip to increase the supply.”

Supply & investment

New inventory supply and investment are intrinsically linked. However existing rules and cost of finance and delays have been some of the biggest deterrents stemming the growth in the sector. Keswani’s Lemon Tree has emerged as one of the top industry players today building their fortune on owner and management model.

“The creation of supply in India is nearly impossible. My company has built 6000 rooms in the last 15 years. And we are the largest contributors to room supply in India. The first room in the first hotel, I think cost 40 lakhs. The last hotel cost 2 crores (for each room). So, the inflation has worked backwards. When we talk of inflation in India, and you say it is 5 per cent, in the hotel space it is 2X, because we are unorganized.”

Offering the reality check by means of an example, Keswani said, “Let’s take an example like I own a small stake in a hotel in Manhattan. The loan is for 40 lakhs, the interest rate is 4 per cent. The repayment, 90 per cent, is after 30 years. The entire structure of the financial debt is 75 percent of the total investment. So, for a US$ 100 million project, you invest US$ 25 million. You get US $75 million at 4 per cent, and you pay 80 per cent of that US$ 75 million after 30 years.”

In contrast the cost of financeweighs far too heavier in India, whether in terms of the rate of interest or tenure. “Now look at India. It’s not got any industry status. So, you get 7 year loan. You get it at 10 per cent because the RBI says it’s risky. And therefore, it’s nearly impossible to build a hotel in India on a standalone basis, you always need some additional funding for some level.”

Way forward

Adequate hotel rooms will be one of the key growth drivers towards achieving US$ 1 trillion Travel & Tourism economy by 2047 as the Government aspires. That requires addressing some basic issue and things like industry status that can drastically reduce the cost of finance will go a long way in helping India achieve its tourism targets.

“We need to address the fundamental issues, which is the cost of finance, tenure of borrowing, and which is related to the industry’s long pending demand of granting infrastructure status. The infrastructure status given to the industry is as per an old definition when committee under Mr. Rangarajan sat. It was recommended that if you did a hotel project of 3 star and above, in cities with populations below 1 million, then you could qualify for infra status,” Singh said.

What the hotel sector needs is easy finance, longer tenure, cheap loans, a moratorium period, as is done for infrastructure projects such as power, roads or airports. Besides there are old rules which are far removed from today’s realities, like ‘below 1 million population’ criteria.

Agreeing the need to redefine the infrastructure qualifying criteria, Singh said, “From my experience in airports, what I saw was that pre COVID, the largest vital civil aviation sector in the country was growing at 10 to 12 per cent. The largest volume of traffic growth was seen in tier two and tier three airports, like Ranchi 45 percent plus, Bhubaneshwar 28 percent, Bagdogra 25 percent plus, Guwahati more than 25 percent. If this is the kind of growth and up shift in air traffic that we’re seeing, naturally there should be a corresponding investment in accommodation. And I think it calls for a relook at the definition,” Singh said.

Suri points that the one-time loan restructuring will go a long way in helping the industry emerge stronger and with new growth ideas. “We got support. We had ECLGS scheme that came in two phases. The first phase was a little bit tight. Second one is definitely far more helpful. The only thing that I still talk about, and I have been I’ve been carrying that torch for a long time was about the one-time restructuring. If we got a little bit of relaxation from there, and I said it time and again that our industry is so resilient that it will organically grow out of this crisis, which is exactly what is happening. I have always asked for four years as against two years.”

While commenting on adding new supply, Apeejay Chairperson, Paul, strongly batted for lower interest rates, licensing and uniform rules and regulatory practices across the states.“How do you encourage that supply? Some of it is Ministry of Finance. Some of that is banking, loans and interest rates. Whether it’s an infrastructure industry or necessity, how do we get more rooms built? And I think one of the things is of course the interest rates. And it is also the licensing and approvals and making them quicker and fairer,” she said. She also pointed that some states have 30 licenses, and some have 5 and there is need to create uniform blueprints.

Marriott’s South Asia AVP also batted for the policy makers to grant infrastructure status that will help the sector with its growth aspirations. She said, “There are issues in trying to get the funding, in trying to get the bureaucracy out of the way and actually getting a hotel to stand erect and then open. But I think things are getting better. So, we just have to walk around with the integrities of it. I think industry status will help the community in a large way to get where it wants to be. But personally, as a representative of an international company, I can tell you there is a lot of positive vibes.”

“It is so difficult in this country, from a financial perspective or from a regulatory perspective or licensing perspective to build assets, unless we radically change. You cannot become a US $600 billion industry. You have the weakest link in hotels and fundamental infrastructure. I don’t see how we are going to get there. I would love to see it but unless we have a distinguished gentleman like Arvind Singh ji (Secretary – Tourism, GoI) or our honorable Prime Minister make direct intervention, it is not gonna happen,” Keswani said while concluding.