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Indian Asset-Light, Cash-Heavy Hotel Firms Ponder Ownership


Jun 20, 2023
The 81-room The Fern Sattva Resort Dwarka Gujarat is heavily reliant on business travel, which guarantees more year-round revenue, an attractive quality to asset-light hotel management firms in India. (The Fern Hotels & Resorts)

In recent decades, fleet-footed and asset-light hotel management companies in India have notched up impressive revenues and growth without the need for heavy amounts of capital expenditure.

However, there are definite signs in India, which now has the world’s largest population, that asset-light firms are investing in hotels if the valuations are right.

Basant Sabu, associate vice president of business development at The Fern Hotels & Resorts, said his brand, which was founded in 2009, has been asset-light for all of its history.

That changed in 2020 and 2021 when the firm took an opportunistic bet and invested in the 108-room Bhanu, The Fern in Jambughoda, Gujarat State.

“We had the management contract, and it was an under-construction property. It strategically fitted with our investment criteria and the valuation criteria was also right,” he said.

Ajay Bakaya, managing director at Sarovar Hotels & Resorts, said his company is keeping an eye on this trend but for now not dabbling in it much.

“We are currently building our hotel in Sriperumbudur in Chennai, but we are highly conservative. We have two owned properties, and Chennai is the third one,” he said.

“Hotel companies have looked at different formulas from time to time. This is not a dramatic shift from the asset-management route,” he said, adding India’s economic strength means there is sufficient capital seeking to invest in hotels.

Bakaya said everyone has a different interpretation of what “valuations being right” means.

“The location must be in one of the bigger cities or at most tier two of state capitals and not beyond state capitals. … Usually, the numbers do not work out.” Sabu added.

Meanwhile, India’s hotel industry is “not as buoyant as we expected to be, but we are still well ahead of last year,” said Vivek Rathi, director of research at business advisory Knight Frank.

“During the pandemic, it was the hospitality and retail sectors that were affected the most. For hotels, occupancy and average daily rate took maximum hits, and many [businesses] faced operational losses. Many hotels went out of business. Several under construction were pushed further on in their scheduling. Those hoteliers who could not sustain the operational losses sold out to financial investors. Several gave operational management and control to brands and chains,” Rathi said.

Some asset-light management companies in India are sitting on cash surpluses that are ready to deploy.

“Our expansion plans have been funded by internal accruals. We are looking to raise more funds either through private equity or strategic investors that will help us acquire more properties, as well as more revenue-share deals,” Sabu said, adding his firm has already secured five such deals.

He said The Fern Hotels & Resorts is looking mostly at secondary city markets for investment.

“In tier-one city locations, the land valuation and replacement cost is in itself so high that it does not match with the cash-flow multiples or [earnings before interest, taxes, depreciation and amortization] multiples that are there. There is a valuation mismatch between the ask price of the hotel asset and the gross-operating profit or EBITDA being generated from the hotel. If someone were to acquire properties at these valuations, it would be even difficult to service debt on the property,” he said.

Sabu said another investment focus is city hotels servicing business travelers.

Resorts do not appear to have found their place in the investment model of asset-light management companies, Bakaya said.

“If we were to invest, it will not be in the resort or leisure segment, as the segment has not had strong, sustained demand. Resort investments do not have the same sheen as city ones. It has to be something that gives me business 365 days in a year,” Bakaya said.

Sarovar Hotels & Resorts is also considering alternatives to building hotels and paying exorbitant prices for land.

“We are suggesting mixed-use development in tier-one and tier-two cities to developers. Where the top floors can be used as a hotel and the prime real estate on ground floors can be monetized better through long-term leases to other parties operating in other sectors,” Bakaya said. “A better formula would be to lease the land and build the asset. We did that in Chandigarh. If we had to buy the land and do it, it would never have been viable. Lease rentals are part of the expenditure every year that is manageable. A good long-term lease of at least 25 years or more is viable.”

Bakaya said Sarovar is focused on “last-mile investment, not at the land stage.”

“Our philosophy is to get involved in the last stage where the operational time is three to six months, to one year at the most,” he said.

He said all Indian hotel companies are currently cash-rich.

“Every few years, there is cash surplus to build a hotel, but it will not change our strategy of an asset-light model. Growth is going to come through technology, digital platforms where one can integrate,” Bakaya said.

“The strategy is not to build assets but to get more hotels to manage. We are the only midmarket segment hotel chain to have our own GDS platform where we managed to migrate 70 hotels. The investment is going to be on technology, rather than on bricks and mortar,” he added.

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