Incredible India

Whilst India clearly holds great potential for an exciting new era of hotel development, RLI catches up with Peter Barge, CEO of Jones Lang LaSalle Asia Pacific and Chairman of Jones Lang LaSalle Hotels, in HOng kong to share his thoughts and beliefs on why it is imperative that we learn from the lessons of the past
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 When it comes to hotels, the downturn or bust tends to come a lot faster than it does for other forms of property investment. In Asia, hotels don't have five- and ten-year corporate leases to shield them. In most cases, they don’t have alternate users, they have high fixed costs, high upkeep, high usage of energy and they are staff-intensive. If you didn't sell that room last night, there is no way that the lost sale will be recouped tomorrow.

I have been involved in the hotel industry all my working life and the industry has been good to me, and taught me its ‘enduring truths’; I have lived through many boom and bust cycles around the world and watched those truths play out.
In my experience, the big winners have been the traders, ‘buy low, sell high’, and the real long-term holders whose financial strength has enabled them to weather storms, take up buying opportunities in down times and who have focused on hotels in prime locations.

When I reflect on all of those hard-learnt lessons that I have discovered over 40 years, I am regularly told: ‘interesting but they don’t apply to India’, ‘India is different, hotel development ownership and operations in India are setting a new paradigm’ and ‘the industry is on a roll and the sky is the limit’.

Any talk of the sky being the limit evokes within me thoughts of gravity and that old saying: ‘what goes up must come down’. Don’t get me wrong, I am incredibly bullish about India’s tourism potential, the Indian hotel industry opportunity and India in general. If I wasn’t, I wouldn’t have invested so heavily in the 3,000-person operation we have here under Jones Lang LaSalle Meghraj — and how can you not be impressed with India’s five years of above eight per cent GDP growth.

No other country can boast as many first-class hotels regularly quoted as the best-in-class in the world. Globally, India management is spreading around the world in the front- and back-of-house roles and, increasingly, general management. India hoteliers are becoming the Swiss of old.
The government estimates that India needs upwards of 150,000 branded new hotel rooms by 2010, more than double the current figure.

So you may rightly say — the stars are aligned but those lessons of the past are still valid and some of things are still a concern: land is becoming too expensive for viable hotel development, particularly where hotels are needed now. The embedded cost of land can be up to 70 per cent, this is double the rate in many parts of the world.

Unless the government designates land specifically for hotel development, then how will hotel development compete in the open market with alternate use? In my experience, rarely anywhere globally, in prime locations, does land have an economic best use as a hotel.

So land is an issue in Indian cities, the Government needs to take a page from the Singapore songbook and designate sites for only hotel development. Provide it under a freehold or long leasehold arrangement dependent on economics and release the land at a pace that corresponds with likely room demand.
Whilst the stars are aligning on the demand side of the hotel story, one needs to be cautious of the perfect storm that could be brewing on the cost side and it’s this side that impacts supply. I mentioned land issues previously, but costs in all areas are going up right across India: labour, materials and energy, for instance; time costs too, hotel development times are blowing out and government regulators and approval authorities are struggling to keep up. Having to obtain 65 approvals and licenses to operate a hotel is ridiculous — let alone the opportunities that open up for corruption.

Then there is the most sensitive cost of all: debt. India has one of the region's highest interest rates and in the fight against inflation; expect it to rise and further impact industry viability. Inflation in India is still a concern although it has come down from a peak of 6.3 per cent year-on-year in March. Costs impact competitiveness as customers look
for substitutes.

Another area of concern is the level and frenzy of new announcements of hotel development. I just don’t believe it, in fact if 40 per cent of what's announced is developed, I will be surprised and even then I think the time lines will blow out.
These ‘me too’ announcements are giving a false sense of achievement as politicians and bureaucrats cite press releases as new supply predictions and an alleviation of supply bottlenecks.

For the full article please see the RLI January 08 issue