Hospitality industry crisis: EIH says there are up to Rs 6,800 crore worth of assets for sale
Hospitality industry is currently having a good time with high occupancy rates and rising room rates. Yet, a prolonged depressed market till 2016 is taking a toll on the sector. Realty developers are now putting their over-leveraged hotel projects on the block as super-profits from their residential projects have dried up.
Hospitality industry is currently having a good time with high occupancy rates and rising room rates. Image source: Reuters
By Sumit Moitra
Updated: Tue, Jul 17, 2018
Hospitality industry is currently having a good time with high occupancy rates and rising room rates. Yet, a prolonged depressed market till 2016 is taking a toll on the sector. Realty developers are now putting their over-leveraged hotel projects on the block as super-profits from their residential projects have dried up, leaving them with little cash to splurge on their failed dream projects.
"The industry has suffered from high debt and sluggish demand between 2008 and 2015 as a result of which there are up to Rs 6,800 crore worth of assets for sale today. More hotels with distressed balance-sheets are likely to join this pool with the new insolvency laws introduced in June 2016," East India Hotels (EIH) in its annual report.
East India Hotels is one of the leading hospitality group in the country that manages Oberois and Trident brand of hotels in the country, including the one at Hyderabad which is up for sale now.
Trident at Hyderabad is a classic case of what's wrong with the hospitality sector of the country.
Leading hotel brands in the country have gradually moved away from creating hotels themselves to derisk themselves and instead got into management deals with real estate developers who took up the entire risk of putting most of the capital.
"Capacity addition in the hospitality sector over the past five-six years since 2012 has been significantly high, and the interesting aspect was that most of these capacities entered the market at the same time. Those who are well capitalised, didn't put in equity thinly and didn't leverage too much will go through. While those who leveraged too much are ending up at the National Company Law Tribunal looking for sellers. We have seen such instances like Viceroy Hotels and Trident in Hyderabad to begin with," Anarock Property consultants chairman Anuj Puri told DNA Money.
"In is not the business of real estate developers to invest in the hospitality industry. But they were making so much money building and selling residential properties that they ended up splurging on creating hotels. With residential property sales stopped, the fund-flow dried up and the music stopped," Puri said.
The Oberois got into a deal with real estate developers LN Sharma & Associates and Basil Infrastructure Projects to set up two five star hotels, Trident and Oberoi at Madhapur Hitec City at Hyderabad.
However, due to the uncertain demand scenario, the project suffered delays and significant cost overruns, change in plans due to changing market dynamics and has now landed up in National Company Law Tribunal.
Viceroy Hotels, another Hyderabad-based company, is a listed entity that runs Hotel Marriott and the Courtyard at Lower Tank Bund Road along with chains like Minerva Coffee Shops, Bluefox Bar and Eat Street. It has also been dragged to the NCLT by its creditors.
Things might turn for the better with demand now outstripping supplies in most metro cities.
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"Looking ahead, improved hotel performance across most major cities over the past two years is expected to continue. This, coupled with diminishing new supply in the pipeline, will have a positive impact on the hospitality industry," EIH told its shareholders.
"With inventory coming down over a period of time, we see the pain getting reduced to some extent while occupancy rates have gone up," Puri said.
- The industry has suffered from high debt and sluggish demand between 2008 and 2015, EIH said
- The Oberois deal to develop two five-star hotels in Hyderabad has landed up in National Company Law Tribunal