Which segments will benefit from the uptick in hotels?

The leisure segment is expected to do very well, but choice of the location is important, says Manav Thadani

Last December, the erstwhile team of hospitality consulting firm, HVS India, broke away and founded Hotelivate. At the Hotel Investment Conference South Asia (HICSA) 2018 earlier this month, Hotelivate announced a partnership with US-based consulting firm LW Hospitality Advisors (LWHA) and launched its Singapore office. In an interview with BusinessLine, Manav Thadani, founder-chairman, Hotelivate, shared his insights about the hotels sector. Edited excerpts:

After long, the hotels sector is in an up-cycle. How long will it last?

For the first time in five to six years, rates have gone up over the last one year. They are expected to go up this year as well. I think this up-cycle will last four to five years. Purely because a lot of it is demand-led and there is not much of supply. It’s not easy to add supply because that will take another three to four years at least.

Will this uptick benefit all segments of the sector?

There will be two types of growth. One, the mid-segment — the price segment between ₹3,000 and ₹5,000 — will have higher growth.

Next, leisure will do extremely well. Growth will come out of leisure locations; not so much from city locations.

Leisure could be anywhere — in the mountain, on the beachside, on the riverside, safari area. I am still not too sure on the religious tourism part of it. But to me, leisure is working. We at Hotelivate have been doing at least 10-12 projects in just leisure over the last year; it used to be around one, now, it’s about 10.

What is your view on the trend on management contracts?

Management contracts are not really picking up. There have been conversions taking place but not many new management contracts. The number of new contracts last year, in 2017, was lower than in previous years. Going forward, once the new hotels come online, there will be more contracts.

New management contracts — where a new hotel is constructed and then managed — are not happening. But existing hotels are getting converted; for instance, an Aloft into a Marriott.

Do you expect more IPOs from the hotel sector now?

The sector has just had its first IPO (Lemon Tree) after many, many years — nearly a decade. It was fully subscribed. There could be more IPOs in the sector in the next two to three years and we will not have to wait another decade for the next one.

That said, I don’t think upticks or downturns necessarily determine IPOs. Each company is different; each IPO is different.

On the other hand, with some hotel companies still heavily in debt, do you expect consolidation?

A lot of it has already happened. Some more assets will perhaps be sold; it has not necessarily taken place at the required pace. The ongoing clean-up act that is taking place in the banking sector is good for the hotel industry.

What will be the impact of new models such as Oyo and Airbnb on the sector?

I think Oyo, Airbnb and such other models will have an impact. They are all fighting for a certain segment of the market or rate and, certainly, that segment gets affected. This results in some price cutting, which then has an impact on the next layer of hotels that are priced higher. So, there is the cascading effect.

Will it impact the growth of the hotel industry?

A little, but that’s part of the game. I was reading that, in some cities, Airbnbs have been given a limitation; so, some home owners cannot rent for more than 10 days a month. That’s how the governments are regulating, because these vacation rental companies do not necessarily pay all the taxes that other hotel companies do. Will that regulation come to India? I doubt it.

Is the Airbnb kind of model picking up in India?

Yes. It is. It’s doing well. There are volumes but I cannot comment on whether they are giving away too many discounts. But there is traction for people to go and try out an Oyo or Airbnb.

Is the market big enough to accommodate everybody?

I am a firm believer in free trade and feel that they should continue to operate. But I think there should be equal taxation; it’s an unfair playing game right now. All restrictions are placed on hotel companies and not on companies such as Airbnb. But some incident could happen that will bring them into the regulatory fold.

Is the hotel sector focusing on the domestic or foreign tourists?

In India, you have to be more focused on the domestic and leisure traveller. I am most bullish about leisure travel. If you ask me, India can open another 100 leisure locations and they will all do well. But that doesn’t mean that you can open leisure hotels anywhere. There has to be some unique location and charm to that location that will attract domestic travellers.

What is the break-up of the organised and unorganised segments in the sector?

It is very difficult to say, as today, the organised sector suddenly includes Oyo and Airbnb and such models. I know the organised sector is around 1,40,000 rooms right now. I would say you can double that number easily to account for the unorganised sector.

Is the government doing enough for the sector?

Not enough. First of all, the 28 per cent GST (on rooms with tariff of ₹7,500 and above) is unhelpful. I am not saying that it should be zero or something, but we have completely out-priced ourselves compared to the neighbouring countries we would typically compete with.

Also, I think that while roads and infrastructure are improving and airports have been announced, it is not at a fast enough pace.

There are two areas that the government should take a decision on. One, of course, is the taxation part. The other aspect is we have an amazing coastline, but we are stuck with restrictive CRZ norms that don’t exist in any other country. Why aren’t we taking advantage of the coastline and developing our leisure sea tourism? Look at Indonesia, Sri Lanka, Thailand, Malaysia, China — they all are taking advantage. In some way, the ease of business has not come into the hospitality sector.

How is the MICE (meetings, incentives, conferences and exhibitions) segment doing and what is the potential?

MICE is growing. But I think we are still waiting for some of the bigger, better, convention centres to open. The Mumbai centre is opening next year. In Delhi, there are talks, but nothing has happened, though Pragati Maidan is being revamped. For some small and mid-market hotels, MICE is the only thing that makes them survive. So, I think it’s a critical segment and it will continue to grow.

What about F&B (food and beverages)?

F&B in hotels is continuing to be on a decline. I wouldn’t want to recommend more than one or two restaurants in some of the hotels. When I was growing up, we used to visit hotels frequently for lunch and dinner. Today, this is very rare; we end up going to free-standing restaurants.

On a per square foot basis, it costs far more to create a restaurant than a room or meeting space area. So, you are spending more, but getting less revenue. Your operational expenditure is higher and margins are smaller.

On a per square foot basis on profitability, restaurants don’t make much sense.

What are the objectives of the tie-up with LWHA?

When we broke away from HVS India, LWHA reached out to us for a tie-up. It is a well-known entity in the US. We have always said that we want to grow in Asia Pacific. The reason why we started Hotelivate was to grow and it made sense to have a tie-up in the US — most of the hotel chains are from there.

LWHA operates in that part of the world, while we are pretty strong in the Asian market, and will be growing. The Singapore office announcement is a step in that direction. LWHA does pretty much what we do — valuations, feasibilities, asset management, investment advisory. They don’t do conferencing, executive search. That leaves us with the opportunity to potentially tie-up with someone else in the space.

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