Small developers exit hotel investments at lower valuations

An exuberant real estate market saw a large number of small real estate developers foray into the hospitality sector. These small developers, who had plenty of land at strategic locations, were trying to get into the glamorous hotel business. With hotel room shortage taking room revenues to higher levels, the hospitality business looked immensely attractive. And with foreign hotel chains looking to aggressively expand in India, even small developers could easily tie up with them for a management contract.

The scenario is very different today. With real estate prices , room rents sliding, cash strapped small realty players have been forced to put at least half a dozen hotel projects on the block. A developer has put on the block a 200 room hotel project in Ahmedabad that has a tie-up with a reputed international brand. Work on the project is around 60% complete. Similarly, two mid-size hotel projects in Bangalore, which are in the early stages of construction, and one each in Pune, Chandigarh and NCR have been put on the block. Almost all the projects are mid-size. Some developers are looking at completely exiting the hotel projects while others are looking at stake sale.

The developers are looking for equity dilution and are now willing to settle for lower valuations for their hotel projects. What is forcing the developers is not only the slowdown in the real estate sector but also the nature of the hotel industry. Hotel projects are capital-intensive and payback period is very long, compared to other assets such as housing or commercial.

Most of the projects put up for sale are by small developers who do not have the holding power. In several cases, where construction has not begun, the projects have been deferred and the developers plan to do a commercial or retail project.