With the sharp decrease in demand for rooms and an investment crunch owing to global recession, major developers and hospitality players have had to review their plans of development. One-fourth of the announced development plans have not materialised and many others are struggling, according to findings of the report ‘Funding Real Estate Projects For the Hospitality Industry: Emerging Perspectives’ by Jones Lang LaSalle.
In Bangalore, developers, including Puravankara and Sobha Developers, have put their respective hospitality projects on the back burner. While Puravankara was planning a clutch of projects, Sobha was planning to put up a hospitality project in the prime Central Business District of Bangalore.
The report finds that DLF, Parsvanath and other similar developers have scaled down or slowed down their expansion plans. Parsvanath, which planned to add at least 10,000 rooms, has stopped acquiring land for any future plans other than the 20 hotels for which they have already done the same. Reportedly, DLF has been in talks with various hospitality companies to sell eight to nine of their land parcels demarcated for hotel projects to raise funds. Unitech has sold its Gurgaon hotel project to reduce its debt burden.
Terming real estate the black sheep of the family, Sudeep Jain, executive vice president (India) Jones Lang LaSalle said, private banks from which loans were freely available earlier have dried up. Public sector banks which continue to lend, albeit cautiously, now require a higher collateral to lend the same amount. Non-banking finance companies are either not lending or are looking at returns of over 20 per cent. Even private equity interest in the hospitality sector has all but dried up, said Jain.
Hotels which have opened recently have faced the brunt of the cost fluctuations. Steel and cement, which form a significant chunk of the civil construction costs, are down about 40 per cent from their peak prices 12 months ago. Greater costs were incurred on construction as it happened when commodity prices peaked. Despite the increased amount of investment the developers had to put in, they are now having to settle for reduced revenue prospects.
With low occupancy rates, hoteliers have been forced to cut their Average Room Rates (ARRs) to attract both their business and leisure customers. The occupancy rate has also negatively affected the other closely-linked revenue sources like food and beverage, conferences and banquets.
Traditionally, most developers have tended to plough back the surplus they earn, into their business via investing in land banks. This makes them highly dependent on external sources for funding. But with the present market conditions, investors are quite cautious when it comes to investing in or lending to hospitality projects. With many real estate companies trading below their book values, the public equity scenario has taken a beating, says the report. “Real Estate Index has fallen up to 80 per cent from its peak. Going ahead with secondary offerings or rights Issues would likely meet a negative investor response,” said Jain.
