The hotel industry in India is seeing increased investment from businesses for which hotels are not their core interests.
Sources said this trend is a mix of passive investment and co-branding leading to the creation of standalone brands, with the businesses including Adani Group, Deventure Hotels, Shikhar Group, 7 Apple Hotels & Resorts, and others.
The jury is out on what is driving this investment — passion or hardcore business acumen.
Gaurav Sharma, managing director of hotels, India, and senior director of hotels, capital markets, Asia, at business consultancy JLL, said in most cases, when people from core businesses start looking at hospitality, it is not some impulsive move.
“Whether it is family offices, institutional investors, private equity firms, high-net-yworth individuals or individual investors, they are all process-driven. They are seeing real structural opportunity in Indian hospitality. At the end of the day, it is the fundamentals that matter,” he said.
He added instead of chasing trophy properties that feed their ego, such business leaders are making decisions based on what makes money in the long run.
Solid investment fundamentals drive 90% of decision-making.
“Maybe 10% is personal preference,” Sharma said.
One “outsider” business moving more into hotels is food, beverages and consumer-goods conglomerate DS Group.
Its business head of hospitality, Nathan Andrews, said most of DS’s businesses are natural extensions of its expertise in flavors and fragrances, manufacturing, and distribution, and its foray into hospitality was a combination of that discipline and the firm’s knowledge of providing reliable service, just in that case in the arena of aspiring Indian lifestyle.
“The entry into hospitality was part of a deliberate diversification strategy,” he said.
Sonica Malhotra, joint managing director, Malhotra Book Depot, said her firm’s core industry was the education sector, which it has been part of for 70 years.
Both DS and MBD acquired their first hotels at the turn of the century.
“In 2000 or slightly earlier, my father Ashok Malhotra decided to diversify into hotels. ... The passion for building hotels and luxury properties is deeply rooted, but it is equally supported by a strong financial understanding and a keen focus on sustainable growth,” she said.
She said MBD has one hotel, the 131-room Radisson Blu MBD Hotel, Noida, but “we are the No. 1 performer [across] the entire Radisson Blu properties in the Asia-Pacific region. … No. 1 in revenue generation, revenue per available room or guest satisfaction. Our performance indicates that in the luxury segment we understood the luxury part of the business extremely well.”
It did have another hotel, she added, in the Indian town of Ludhiana, which was sold to Blackstone.
Surplus cash
Sources said ample cash flow from successful non-hotel businesses increasingly are being funneled into hotels.
"There is a clear demand-supply mismatch in the hotel industry. As India’s economic activity keeps growing and expanding, businesses are generating healthy cash flow from their core operations, and they are looking for places to invest it," Sharma said. "These are not casual investors. They are plugged into what is happening at the macro level, and they can see the opportunity. They want to diversify, and they are actively looking for the right spots to put their money in.”
Andrews said the demand for hotels in India is rising due to more people traveling and the country becoming more of an investment hub. There's been an increase in corporate travel, meetings and conferences, all signs of strength in the hospitality industry.
“Weddings continue to be an attraction for our industry. We anticipate significant growth driven by the rising ambitions of Indians and India’s emergence as a premier investment destination,” he said.
MBD’s Malhotra said her firm’s move into hotels needed the support of a brand to be able to understand how the nuances of the hospitality industry worked and for it to grow in that particular journey.
Recently, it made a jump forward with Radisson Hotel Group, signing a master franchise agreement for Radisson Collection and Radisson Red across India.
She said new hotels in that agreement will be co-branded as Radisson Collection MBD and Radisson Red MBD.
Exits and education
Industry insiders pointed to non-core hotel businesses’ exit strategies of eventually divesting hotel portfolios at notable premiums.
They are also wanting to learn the processes and disciplines of the industry.
One case in point is business Mankind Pharma, which monetized its hospitality portfolio under management contract with Marriott International for approximately 8.45 billion Indian rupees ($88 million).
"Investors are building assets, and those assets are changing hands," Sharma said. "Last year alone, we saw 28 deals worth $567 million in which hotels moved from one group to another. That is a 67% jump from the year before. Most of these transactions were driven by private equity, listed companies and institutional capital."
Malhotra said MBD is now fully within its strategy of building a strong hotel portfolio, with plans to expand to 50 hotels across India and add more than 5,000 keys over the next 10 years through a combination of owned, managed and franchised properties.
Supporting this strategy, it recently monetized one of its marquee mixed-use hospitality assets through a strategic divestment to Blackstone, “enabling greater capital availability for future developments alongside earnings generated through the asset-light business model,” she said.
Sharma said many opportunities for these businesses come from filling in demand gaps.
“Based on what we have been tracking, the majority of management contracts signed last year were in the mid-market and upmarket segments," he said. "We are talking about 424 contracts in total. Roughly 38% were in midscale, about 20% in upper midscale and upper scale combined and only 9% in luxury. And that is just looking at the top 10 to 12 brands.
“If you include homegrown brands, the numbers shoot up quite a bit. Most of these properties are going to come up over the next four to five years."
Both MBD and DS said despite the tilt for passive investment, they both have the ultimate goal of building their own brands.
“I was very clear that we did not want to have a management contract with any brand as then our learnings in the trade will be zero. We would always remain an investor and forgo our entire experience to whoever is operating the hotel," Malhotra said.
Andrews said DS's growth strategy is focused on strategic expansion by leveraging its expertise in asset management and brand partnerships.
"We are actively targeting key markets with high growth potential, including tier one and tier two cities. By carefully selecting locations, we aim to capitalize on increasing domestic and international tourism. We aim to establish a diverse portfolio that includes both city and resort properties to cater to a wide range of travelers," he said.
For cash-surplus companies, the modus operandi appears to be to build and go asset-heavy.