Hotel deals: It's a buyer's market

Returns down in hospitality; buyers looking for a bargain; owners unlikely to get back investment

Even as about 30 branded hotels and 40 non-branded properties and land parcels are on the block in the hospitality industry, experts say for big-ticket transactions, it might turn out to be another wait-and-watch year, unless the economy improves and the asking prices of most of these assets fall.

For most companies, the primary reason for selling properties is debt reduction. Leela Hotels, for instance, has been undergoing corporate debt restructuring for its Rs 4,300-crore debt and has to complete the process by March 2014. Experts say the hotel chain would have to get some of its assets off the shelf.

At a time when returns in the hospitality segment have not been rewarding, to say the least, many transactions have been stuck due to the high prices sought by owners. "The seller wants to get back at least the price he invested. No transactions are likely to happen on profit, as buyers are in a mood to bargain. There could be distress sales now," said Ajay Bakaya, executive director, Sarovar Hotels group.

Even if prices decline, additional challenges abound. These include political uncertainties, a falling rupee and policy paralysis. Buyers have been hit by the negative sentiment and are weighing investment options between India and other countries. "There are concerns about the larger macroeconomic scenario and deals will start only when there is clarity on this issue. Policies are not well defined; all the rules that govern your investments are just so fluid," said Kaushik Vardharajan, managing director, HVS India.

Also, arranging funds hasn't been easy. Real estate company DLF's proposed deal for Aman hotels with its founder Adrian Zecha had to be called off due to valuation and funding issues. DLF has also been trying to reduce its debt burden by hiving off non-core businesses, including assets in the hospitality sector. "Hotel is a long-term business. The gestation period is long. Several real estate companies have burnt their fingers after having invested in boom time," said K B Kachru, executive vice-president, Carlson Hotels.

Oversupply
With room supply outpacing demand and average room rates stagnant, hotel chains have been struggling to stay afloat. However, for long-term investors, this is a good time to buy assets. Companies such as Samhi hotels and Ireo have invested in the Indian hospitality sector and accumulated funds for more such opportunities. Equity International and GTI Capital, owners and early investors in Samhi, have agreed to invest about $100 million in the company's expansion plans.

After Goldman Sachs announced its plan to exit its Four Seasons investment in India, more private equity investors are looking to offload investments. Credit Suisse's investment of Rs 220 crore ($55 million) in the Park Hotel in 2007 is expected to find its way out soon. Kotak Private Equity, too, is keen on exiting its investment of Rs 11 crore in Pride Hotels group this year. "We are planning to go for public listing this year. Our PE investor could wait till then to decide on an exit," said S P Jain, managing director, Pride Group of Hotels.

An analyst said it wouldn't be easy to exit in the current market situation.