How the hotel industry will transform with big funds and leaner business practices

Here's what will change India's hotels: big funds that are pumping in money and asking for leaner business practices and a future far brighter than that predicted by many experts.
Xander Group Inc finds the Indian hospitality sector so hot that the investment firm has picked up stake, over the past few years, in hotels such as Sinclairs in Ooty, Devi Garh in Udaipur, Mariott Hotel and Convention Center in Pune, Devi Ratn in Jaipur and so on.
Like Xander, whose retail unit Virtuous Retail plans to build several high-end malls across the country, global firm Duet Group, which manages more than $2.7 billion of equity, has invested hugely in Indian hospitality. More such players-and they include SAMHI, Lemon Tree, Accor, InterGlobe, RMZ, etc-are revolutionising the way branded hotels are built and maintained in India.
These firms constitute what Kasuhik Vardharajan, managing director of global hospitality consultant HVS Hospitality Services, calls "institutional investors" and they are currently funding 20-25% of the new hotels that will be built in the country over the next five years. "[They] bring with them a disciplined approach to developing hotels, focusing on maximising return on investment and optimising exit strategies," he notes, emphasising that this is a departure from the past trend: of hotels being financed either by high networth individuals or real estate companies.
"We expect this percentage [of their investment] to increase going forward," states a report that Vardharajan co-authored with colleague Yashaas Rajan; this report will be released on Monday. It contends that armed with market research and due diligence, such investors ensure that unfeasible projects are not developed on a whim and that new supply is not added to markets indiscriminately. According to the report, "as part of their drive to reduce input costs, [these] investors are questioning the brand standards dictated by hotel companies and the relevance or requirements for some of them".
That's good news indeed.
THE 5-STAR ITCH
With an estimated shortfall of 2 lakh rooms, branded hotels in India have a goldmine of opportunity before them. However, luxury chains will likely face more challenges in the face of the Eurozone crisis, inflation, slower domestic growth, downgrades, politics, low occupancy etc.
However, rapidly growing work force, higher domestic travel and interest from institutional investors will make mid-segment and budget hotels far more hot than ever
ROI VS RETURN ON EGO
Mumbai-based hospitality expert Timmy Kandhari, a former PwC veteran who is now managing director at Sapphire Professional Services Pvt Ltd, agrees, "If you can't justify the spend on a room with the charge you are going to fix for that, that is a recipe for disaster."
A Mumbai-based official at a hotel group that runs luxury chains in many parts of the country confirms it is such "whims" that "create a lot of troubles in the medium to long-term for any hotel chain". "Such irrational exuberance is not going to be tolerated any more in the industry... these new players [institutional investors] are resetting rules and making the industry more cost-conscious," he asserts. "When others start doing things with financial rigour you cannot keep doing things on a whim," he adds, referring what he calls "injudicious use of money by certain industry champions". Many big luxury chains didn't respond to queries from ET Magazine about how much emphasis they place for return on investment (RoI) while developing and managing hotel properties.
Unsurprisingly, thanks to more such investors putting money in branded hotels, not only will new players in the hotel business have to control their purse strings, but they will also have to look at options to boost RoI such as mixed-used developments-that offer multiple benefits of a range of customers from hotels to malls to convention halls, etc.
"India definitely has the potential to attract the international MICE [meetings, incentives, conferences, and exhibitions] market and also increase the domestic market with all the cultural and geographic variety we have to offer, but we need the infrastructure in place before this can happen," notes Vardharajan.
According to the soon-to-be-released HVS report, Pune saw the second-highest growth in occupancy among the cities surveyed, driven by the MICE. Lately, the city has hosted numerous large-scale events and has even merged as an alternative location to Mumbai. Clearly, the focus is on RoI instead of return on ego, avers Vardharajan.