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July 30, 2007

"Room With A Queue"

Business Today has an article on the boom - and the associated risks - in the hotel industry. It includes a box on the rising number of PE investments in the industry.
The demand-supply mismatch of hotel rooms is so acute that even the stand-alone, mom-n-pop hotels are quoting room tariffs that are 40 to 50 per cent of five star rates. That probably explains the announcements of $10 billion in investments over the next five to 10 years, with $3 billion expected to materialise over the next four years. The capacity addition: 70,000 rooms across all categories. That's an incredible number compared to the scenario even two years ago. Back in 2005, the foreign direct investment (FDI) in hospitality was 1 per cent of the $10.3 billion that flowed in. However, the hardening of interest rates since the time most of these announcements were made may prompt a rethink on the size of investment.

The segments that most of the investors seem to be interested in are budget and mid-market. The reason is pretty straightforward. The five stars in India are overpriced, with an ordinary room costing $400 a night or upwards, excluding taxes. Compare that with a destination like Singapore, where you can get a five-star room for $200 a night. That leaves a huge chasm in the economy segment, which may or may not be shoestring but is certainly not lavish. And it's a chasm that players like Lemon Tree, Roots Corporation, Sarovar Hotels, Royal Orchid Hotels, Uniglobe and others hope to fill.

Hope is the operative word here. "In India, the embedded cost of a hotel project is 60 per cent, which is the cost of the land. Compare that with the US, where only 15 per cent is the land cost and 85 per cent is the construction cost of a hotel project," explains Patu Keswani, Chairman and Managing Director, The Lemon Tree Hotel Company. That, Keswani says, makes it extremely tough for a budget or economy segment hotel to sustain its low prices for long. Case in point: Roots Corporation's Ginger Hotels, which created a flutter with its sub-Rs 1,000 room rates, but ultimately had to revise them upwards. Besides, given that the hotel industry sustains itself on domestic tourists, who are largely price conscious, the budget and economy segment is a natural driver for growth.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.