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Emerging markets fraught with development risk
January 23 2013

Rapid development and unpredictable shifts in market dynamics are only two hurdles facing investors building hotels in countries such as India and China, according to panelists at the Hotel Investment Forum India.

Highlights
  • Timing is everything when building a hotel in an emerging market, said InterGlobe’s Uttam Dave.
  • Most investors need deep pockets to weather the bumps along the way, said Naveen Jain of Duet India Hotels.
  • Government oversight in China can both help and hinder hotel development, said Horwath HTL’s Eunice Aw.

GURGAON, Haryana—Location might be important, but timing is everything when developing a new hotel.

That’s even truer when targeting development in emerging markets such as India or China, according to panelists during a breakout session titled “Investment and operating issues for hotels as cities evolve” during last week’s Hotel Investment Forum India at the Leela Kempinski Gurgaon Hotel.   

“The first decision is when to go into the market,” said Uttam Dave, president and CEO of InterGlobe Hotels, a joint venture between InterGlobe Enterprises and Accor, which operates seven Ibis hotels in India with an additional 12 under development.

Metropolises such as Delhi, where the conference was hosted, emerge so rapidly that making that decision is easier said than done, he added. To help, Dave said his team evaluates several key factors.

“We tend to err on the side of being risk averse,” he said. “The local people know the hotel market best. What is the extent of local market supply? How are they performing?” Other factors include the presence of grade-A office space and necessary infrastructure, such as power access and a sewer connection.

The goal is to build confidence with a well-researched plan, Dave said. But even then all market dynamics—much less those in developing nations—can change so quickly that a certain amount of guts is required.

“You’re really taking a leap of faith saying, ‘This city is going to be good for me in five years,’” Dave said, referring to the typical five to seven years required to open a hotel in India.

Good investors and operators typically fall within 10% to 15% of their original feasibility forecasts and actual operating performance, he said. But even the best prognosticators fail from time to time.

“The business is cyclical,” Dave said. “Can you predict that cycle? How well can you predict it? And do you have deep pockets? Because if you’re in this business, you need to have deep pockets.”

Such risk is a big reason why investors have higher expectations in India, said Naveen Jain, COO of Duet India Hotels, which recently signed a joint venture with InterContinental Hotels Group to open 19 hotels in India.

However, the country’s rampant increases in supply have taken a hit on expected internal rates of returns compared with other markets, Dave said.

“You should be ready for 200 to 300 basis point erosion in reality. … It’s one of the reasons why I think private equity in hotels will never work in India.”

Channeling China
The Chinese hotel landscape is a bit more structured, which can help eliminate some risk, panelists said.

“Since 1978, development has been driven by the government rather than the market,” said Eunice Aw, senior consultant at Horwath HTL in Singapore.

Most developers are state-appointed, as are the sites on which they build hotels, she said.

“The barrier to entry to building top tier hotels … is not that high because it’s government directed,” Aw explained, adding that the first movers are typically the most profitable.

And more often than not, those first movers will build 5-star, luxury assets chosen by the state to raise the profile of a given city to attract further investment, she said. More than 90% of these projects are also part of mixed-use developments in an attempt to mitigate overall risk across a wider stream of revenue generators.

But the market is far from risk-free, panelists agreed. Slowing economic growth, oversupply in some major markets, restrictive government oversight and a lack of skilled labor are but a few of the obstacles a developer will face.

Tracking talent
Finding skilled labor is a challenge in most emerging markets, the panelists said.

“I believe there is a gap. If you talk to any hotel operators, any GM, he’s always complaining that he can’t get good people,” Jain said.

That’s especially true in lower-tiered, less glamorous properties, as well as in secondary markets, Dave said.

However, China is seeing some easing of that second scenario, Aw said. The country is experiencing a “reverse migration” where citizens who moved to the major urban hubs are returning back to their home markets for better opportunities and a higher quality of life.

But no matter where the market or the property, finding enough skilled associates is an industry-wide challenge, Dave said.

“The industry today seems to have lost the luster that it had a few years ago,” he said. “With a plethora of choices the young person has today, hospitality is not much more at the top of their list … because the hours are pathetic and the pay is not good.”

COMMENTS   Show All
K.V.Simon
1/23/2013 10:10:00 PM
I wonder why is the industry always complaining and grumbling about lack of quality skilled manpower ,when the Industry is totally unwilling to do something about it. Industry must put it's skin in the game and become co- creators and developers of the required talent and be ahead of the curve.
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