In a press release dated back in the year 2017, issued by Louvre Hotels, it quoted,” India, with its fast-growing economy, it’s global tourism potential and a significant under-penetration of branded hotel rooms, represents a new opportunity and a strategic market of more than 1.2 billion inhabitants for the group.” Before 2020 or before the pandemic hit to be precise, India was witnessing a high rate of flocking by investors toward the hospitality sector.
Not just through PE investments and M&As, existing global hotel chains were continuously opening new properties validating the high potential and scope in the sector.
However, between 2020 and 2021, the majority of listed companies reported negative profit growth and low revenue growth. The hotel industry is a capital-intensive one, and as occupancy rates dropped, many players were forced to stop new investments. As a result, a major supply-demand gap occurred, leading to a stressed financial environment, high cost of capital, weak credit risk management and poor performance indicators, leading to hotels being labelled as non-performing assets.
“Hotels are a bit of an outlier in the real estate world when compared to other real estate classes. The reason for this is that, according to PWC (2016), developers frequently build other asset classes including residential, retail, and commercial properties to sell off floor space to generate returns. Regarding the hotel asset class, this is untrue because the investor must participate in both the hotel’s construction and operation, either directly or with the assistance of a management firm.
RevPar, supply, and demand are a few of the obvious metrics that are monitored in the hospitality sector based on historical trends. From an operations perspective, these variables show the overall health or performance of a market. Occupancy and average daily rate are two more factors that are considered in the calculation in addition to these (ADR). It would be reasonable to assume certain financial parameters for which investors may accept financial risk given that a hotel is an asset that generates income. The Internal Rate of Return (IRR) and Net Present Value are examples of these factors (NPV).
But, in the current scenario, due to factors like the resurgence of domestic and foreign tourism, the restart of international flights, a recovery in corporate travel, and improving leisure and wedding demand, the Indian hotel industry has recovered to its pre-Covid levels.
The listed hospitality players are the beneficiaries and testimony to this pick-up. Over the last year, most hotel stocks have given returns between 30 to 80 percent. Shares of hotel brands like Lemon Tree Hotels, IHCL and Mahindra Holidays and Resorts have soared in the past year, and since the start of the year, the stock has rewarded positive returns to shareholders.
In the June quarter of 2022, there has been a 244 percent increase in demand for hotels across six major cities, Delhi, Bengaluru, Chennai, Goa, Hyderabad and Mumbai, according to Hotel Momentum India Report 2022.
The good news is, after a two-year pause brought on by the Covid-19 outbreak, the country’s hospitality sector is again seeing significant investments in both new hotel projects and sales of existing ones.
With leisure travel reaching pre-Covid levels and business travel showing signs of improvement, hoteliers are becoming more optimistic. According to JLL’s research, new projects accounted for almost 70 percent of all transactions in the hospitality sector in the first quarter of 2022. The other transactions were conversions, with some involving brand changes. In the majority of conversions, non-branded hotels were changed to branded hotels.
The degree of interest in investment opportunities is high. Institutional players are back in action while family offices are actively seeking acquisitions. Banks that previously avoided the industry are now more at ease reviewing applications. As they recognise local demand, investors are exploring new potential options in the hotel building.
In comparison to pre-pandemic months, key micro-markets in metropolises like Mumbai, Bengaluru, Hyderabad, Pune, and Delhi NCR are recording average daily rates of over 15 percent. This is encouraging for investors who deferred investments due to the market’s volatility.
And for new investment opportunities, Bengaluru is hot, Chennai is on the rebound, Kolkata is changing, Mumbai is ripe for investment, and Delhi is of course a mixed bag!