By Aditi Shah
MUMBAI, April 11 Starwood Hotels & Resorts
Worldwide Inc got a 104-room hotel up and running in
India in less than 12 months, bypassing years of red tape by
rebranding an existing property instead of building a new one.
Capitalising on distress in the Indian hospitality sector,
international operators such as Starwood and France's Accor SA
are teaming up with investors to acquire hotels from
debt-laden domestic owners and reopen them under their own
Such conversions can help global players expand more quickly
in a country where hotel construction has slowed since the
downturn in 2008 as developers shun capital-intensive projects
often delayed by bureaucratic and regulatory hurdles.
"This is the first time we are seeing a reasonable number of
assets on the market at the same time," said Gaurav Bhushan,
chief development and investment officer for Asia Pacific at
Accor. "There have been hotel assets for sale in the past but
they have been more sporadic," he said.
Slowing economic growth, an increase in the supply of hotel
rooms and growing competition from foreign operators is hurting
local chains such as Hotel Leelaventure Ltd Royal
Orchid Hotels Ltd and Kamat Hotels (India) Ltd
, which are selling assets to ease debt in a country
with high interest rates.
"In India, some people are seeing the writing on the wall
and are trying to get ahead of that," said Nikhil Manchharam,
vice president of acquisitions and development for South Asia at
Starwood. "The debt stress levels are getting higher, triggering
existing owners and operators to look for options," he said.
International operators hope to succeed where local players
have stumbled because they have deeper pockets and economies of
scale that allow them to wait longer for an economic recovery.
India's growth likely slowed to a decade low in the fiscal year
that ended in March.
Early this month, Starwood, in partnership with Samhi, a
Delhi-based hotel investment firm backed by U.S. real estate
investor Sam Zell, launched its first conversion property in
India - a 104-room hotel in the western city of Ahmedabad under
its Four Points by Sheraton brand.
Starwood and Accor are leading the hunt for conversion
opportunities in a country where the hospitality sector is
expected to grow to $36 billion by 2018 from $17 billion in
2008, according to research firm Technopak Advisors.
"You haven't seen these conversions in India before because
there wasn't enough existing supply. The more mature a market
becomes and the greater the supply added to it, you will see
more opportunities for a brand change," said Accor's Bhushan,
who has worked on similar transactions elsewhere in Asia.
Compared with building hotels, which can take three to six
years in India, buying and converting them can take less than a
year, reducing development risk, although conversions also
require the new operator to be flexible in terms of building
design. Sometimes costly improvements are needed.
In India, the supply of hotels coming onto the market tends
to be best-suited to the mid-market brands of global players.
Accor's Bhushan said speed comes with a trade-off.
"You have to balance that to make sure the property is
consistent with the brand you represent and operate in the
country or it can have a negative impact," he said.
BUY VERSUS BUILD
On April 1, the purple Royal Orchid sign on the Ahmedabad
hotel came down to make way for the Four Points by Sheraton
logo. Samhi bought the hotel from Royal Orchid last April for
670 million rupees ($12 million) at a yield of 10.5 percent and
agreed with Starwood in February to convert it.
A yield is the hotel's annual income divided by the cost of
By comparison, the average yield on prime hotel assets
across Asia-Pacific was 5.8 percent, according to a report by
Savills, a UK-based property consultant.
Samhi is spending another 50 million rupees to refurbish the
hotel, enhancing fire, safety and security standards and
upgrading the rooms, which will be completed by the end of June.
"There is a shift from greenfield development to acquisition
and if this experiment is successful there will be a flood of
opportunities," said Ashish Jakhanwala, CEO of Samhi, which has
built four hotels in India and plans to develop 18 more.
Samhi is in talks with another hotel owner to take a 50-year
lease on a property in the Delhi region, and another in the
resort state of Goa. It is in separate discussions with Starwood
and Accor to refurbish and convert the locally-branded hotels.
Return on capital employed - a measure of profitability in
the hospitality sector - on acquisitions is about 13 percent
over two years, said Jakhanwala, whereas in new development
projects it takes five years to earn 15 percent.
Accor, which wants to add 10 hotels a year in India, said it
is in talks with hotel owners in the west and south of the
country to convert properties to its mid-market Mercure brand.
Starwood, which also plans to add 10 hotels a year in India,
said it can quicken that pace by 20-30 percent if it can find
the right properties for conversion. It has looked at 30 to 40
potential hotels since January but is in talks with owners of
just two, one in the Delhi area and another in Gujarat.
"There is an opportunity for sure but when you roll up your
sleeves and start digging, it gets quite complex and it does not
always fit the bill," said Starwood's Manchharam.
In some cases the quality of construction is poor or it is
badly designed, and Starwood often has to upgrade fire and
safety systems to meet its standards.
"A conversion is never going to get you 100 percent of what
you want. It is always going to be a compromise," said
Manchharam. "You need to see what you are willing to compromise
without it having an impact on your brand."