Chains are wild about India – but it’s not an easy catch

It’s not that India is now ‘the next big thing’ after China; it has always been big in its own right. Yet chains have expanded much faster in China, and even in Asia’s third most populous country Indonesia, rather than in India.

Marriott International has 500 open hotels in Greater China, and only 144 in India despite entering the subcontinent in 1999. It plans to open another 100 hotels in India by 2025, according to Rajeev Menon, Marriott President APAC, excluding Greater China.

Accor has more than 530 open hotels in China, and 140 in Indonesia, but only 56 in India. Its Chief Development Officer Asia, Andrew Langdon, aims to correct this paltry number to 200 in five years.

India is incredibly complicated. It's a country where the number of licenses required to build a hotel could go from 50 to 70 or even 210, depending on the market, according to sources. Land cost can be as high as 50% of project cost versus the acceptable 15% to 20%. Interest rates are anywhere from 12% to 14%. Moreover, mortgages, now extended to 15 years from 10 years, are still short when compared with 25 to 30 years in the West.

These are legacy issues that stall development and in turn impact chains’ efforts to grow management or franchise contracts quickly.

Owner challenges

COVID-19 has exacerbated these long-standing problems, according to panelists on “Owners Challenges: Is Anyone Listening?” at the recent Hotel Investment Conference South Asia (HICSA) organized by Hotelivate.

Sonica Malhotra, joint managing director of MBD Group, said forget about high land costs or high interest rates, which are “much talked about” already. “The banks are not susceptible to lending to hotels at this point in time; they think it’s a very, very tricky asset class,” she said, adding if that funnel dries up, owners have to address more equity, and the expansion of the industry also goes down.

MBD has several hotels branded Radisson Blu and is in a joint venture with Deutsche Hospitality to develop MDB Steigenberger Hotels & Resorts in India.

Malhotra also warned of a “systematic issue” where in-flow of external capital will likely dry up. “External capital, be it Brookfield or GIC investing in hotels, comes into India because there's a great degree of interest arbitrage between their cost of raising funds internationally, then deploying it in India. The returns delta made sense for them to deploy more and more capital for this territory. But interest rates have really heated up – be it in the U.S. or the U.K., and that the delta between their cost of capital and the returns they are getting in India will shrink in the future."

The “very few funds” which are looking at hotels in India as their investment opportunities will “further dry up” in the next two to three years, Malhotra said, adding that this should bother most of the hotel owners and subsequent ones in the industry.

These days, talent acquisition and retention bothers her a lot, too.

“Talent acquisition has become quite a tricky aspect, as well. With two years of COVID-19, entry-level [staff] probably think this is not a very stable industry to be in, so getting their confidence back and retaining them is a challenge,” Malhotra said. “Also, some of the best hoteliers have probably moved to asset management companies, even real estate companies for that matter, because they feel these companies have turned out better than others in COVID.”

So why build hotels?

When asked why they build hotels when other asset classes give higher returns, Nirupa Shankar, executive director of Brigade Enterprises, said she has been defending this question for at least 14 years. Brigade is a leading property developer that has a hospitality division overseeing its serviced residences, clubs, hotels, resorts and convention centers.

“We’re a public-listed company and every quarter at least 100 analysts will ask us why you’re in hotels because among real estate it’s probably the most complicated asset class with the highest risk but the lowest return. Usually, you get compensated for your risk with higher returns,” Shankar said.

She further explained, “When you do residential, it’s cyclical – you buy land, build it, sell it, then it’s over. But assets like office, retail, hotel give you annuity income and we like to have that balance between both. The current residential market is really hot, but when it's not, the annuity income portfolio is what actually sees you through.”

Hotels also have “a halo effect,” Shankar said. “For instance, if I have a mixed-use development and I put a 5-star hotel there, it ‘premiumizes’ the entire development – my office, my residential – you can’t put a value on that.”

It's profitable

Halos aside, India hotels are profitable in general, according to Nandivardhan Jain, CEO of Noesis, an investment advisory firm based in Mumbai.

“Most of the hotel chains in India have demonstrated promising financial results for the last financial year,” Jain said. “For example, IHCL [Taj Hotels] reported an 85% increase in revenue, 247% increase in EBITDA, and INR1,003 crore [$125 million] in profit after tax.”

However, to be successful in India, international chains must adapt to local market preferences, particularly in guest service, Jain added. “Emphasizing Indianness in operations is also essential. International chains need to modify their formats and place greater emphasis on F&B offerings. For example, the newly opened Ibis hotel in Mumbai features a vibrant and youthful F&B facility that is distinct from other Ibis hotels.”

Perhaps the complexity of doing business in India was what led Accor Chairman and CEO Sebastien Bazin to let slip during a conference in 2021 that “we never made money in India, probably won't make any money in India.” He said the same thing again at the NYU investment conference in June of this year.

When asked to clarify, Accor's CEO Premium, Midscale & Economy Division, Asia, Garth Simmons, said, “The India market is proving to be more buoyant than we might have thought a few years ago and we are now more optimistic about the market’s future potential.”

He added, “The post-pandemic bounce back has been better than anticipated with 20.5% RevPAR growth in 2022 versus 2019. Corporate and MICE demand is back, on account of the strong domestic economy, and we are now forecasting a 25% RevPAR growth in 2023 versus 2022. The majority of this growth is led by stronger ADRs, leading to better profit margins.”

Marriott’s Menon said India chalked up the strongest recovery in APAC for Marriott coming out from the pandemic, largely driven by the domestic market. “By the end of last year, we were 120% recovered. In the first quarter of this year, our India RevPAR growth was well north of 30% over 2019. These RevPAR gains are coming as much from secondary and tertiary markets as from the resorts and big cities.”

Marriott has hotels in 40 cities across India. This will grow to 50 cities in the next two years.

“The perception of India has shifted from positive to partly positive to very positive,” Menon said. “India is moving from a $3.5 trillion economy today to a $7 trillion economy in five to seven years. Few markets in the world can match that.

“Then, there's the demographic advantage – it's now the most populous country in the world and 50% of the population is still below 25 years old. When you think about where they will be 10 to 30 years from now, the potential is immense. The domestic market is incredible – 1.4 billion people acquiring wealth. And India is focused on powering up its infrastructure – new airports, road connectivity, new railways coming in – something China did very well many years ago. That means people’s ability to travel, to take short breaks, to spend time with family and friends increases even more.”

Overcoming the challenges

It’s not impossible for chains to have as many hotels in India as they have in China one day. Today, Marriott – not India’s storied chains such as Taj Hotels or the Oberoi Group – is the largest operator in India by number of rooms, according to Menon. The chain has 28,000 rooms and a pipeline of 70 hotels representing another 9,000 rooms. This puts it on track to reach a targeted 250 open hotels in India by 2025.

Marriott’s strategy in India is to partner established local families or businesses that have deep roots in the country and in many cases are real estate developers who have the ability to develop real estate in a state or city, Menon said. They include Mumbai-based K Raheja Corp., with whom Marriott has six open hotels and two in the pipeline, and Prestige Group Bangalore, with three open hotels and seven in the pipeline.

“Over the years, we've also worked closely with the government,” Menon added. “Arne Sorenson used to meet with Prime Minister Modi and recently we had Tony [Capuano] in India and the opportunity to meet with PM Modi again. One of the things we talked about was reducing the number of licenses and pushing for a single window clearance. So, we try to help work through the challenges that the broad industry faces, even with the state governments in many cases.”