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HOTELS Interview: Building a strong portfolio in India

After leading a team that built Accor’s platform in India and acquiring more than 35 assets, Ashish Jakhanwala founded SAMHI Hotels Pvt. Ltd. in 2010 to provide a multi-branded hotel development platform in the Indian sub-continent.

The company attracted investment partners Equity International and GTI Capital Group, and is developing an asset base under brands like Fairfield by Marriott, Hyatt Place, Courtyard by Marriott, Four Points by Sheraton and Formule1. It also has financial joint ventures with Marriott International and Accor.

SAMHI has developed a pipeline of more than 3,400 rooms across 22 hotels in 10 cities. It has four hotels open and two at preopening stage, and by first quarter 2014 it will have eight to 10 hotels open with the remainder scheduled to open by the end of 2015. SAMHI is also at advance stages to acquire three operating hotels, which it expects to be part of portfolio by end of 2014.

HOTELS asked Jakhanwala about his plans for SAMHI and his outlook for India’s hotel market.

Ashish Jakhanwala
Ashish Jakhanwala

HOTELS: What are the biggest challenges facing SAMHI at this time, and how is that different from a few years ago when the vehicle was created?

Ashish Jakhanwala: Volatility of currency, impending national elections next year and the very slow pace of economic reforms have definitely dented India’s attractiveness as an investment destination. Hence, availability of capital is constrained, and we believe investors’ risk-adjusted return expectations have gone up. However, we have seen a softening of domestic interest rates over the past 12 months, which has improved our local borrowing costs.

The drop in asset prices and a large number of hotel assets available for transaction has made the landscape very interesting for buyers. One of the biggest challenges when we set up SAMHI was to balance long-term growth prospects with very high asset valuations. However, we are able to grow the portfolio with good-quality and well-priced acquisitions, which as the current economic cycle recovers will yield good results.

The combination of a general slowdown in economic growth and the new supply that was created during the peak economic cycle (2005-2009) is causing yield compression in many markets.

Interestingly, we have noticed double-digit growth in room nights sold in each market, which is an indicator of demand growth, but the average occupancies have dropped due to increased inventory. However, with the current state of capital deprivation, future supply is very limited, and with demand pacing up over the next few years, we do foresee yields bouncing back to healthy levels, if not the peaks of the last economic boom.

Also, the public markets in India, as perhaps in other parts of the world, are very cautious, and the classic private equity investors are in withdrawal mode. Hence, liquidity is limited, and one needs to build a reasonable scale with good risk cover to attract high-quality liquidity.

HOTELS: How do you feel now about SAMHI’s decision to develop in the limited-service sectors?

Jakhanwala: The segments we invest and develop hotels in are the core of our business plan and strategy, and we remain committed to it. However, to clarify, we use the term “value for money” instead of “limited-service” as that concept is questionable in India. Even budget brands offer extensive service levels relative to the western markets.

We believe at the current level of asset prices we can even acquire a few hotels in the upscale segment at low valuations, allow them an attractive rate positioning and draw volumes. We do not invest in hotels where we are reliant upon the luxury traveler or positioning. Not that we don’t believe in India’s potential in the luxury segment — we just feel scaling up that model is challenged. 

HOTELS: Where and what do you see as the greatest opportunities, and again, how has that changed since SAMHI’s inception?

Jakhanwala: Correction in asset values and withdrawal of “easy money” creates some interesting opportunities. The fact that we stand here as almost the only multi-branded institutional hotel owner is another interesting position to be in.  

We were very concerned about high asset valuations when we started and were preparing a long-drawn, development-based approach to scale. However, the first discussion we had with our shareholders was to make a menu for acquisitions and put in a team to execute that plan. The menu was made, and we believe we at least have put the starters on the table.

We also find that most of the capital in hotels in India is from either the brands themselves (largely local Indian hotel companies) or high-net-worth individuals. There is almost an absence of institutional hotel investors. This was the biggest gap in the Indian hotel industry. Quality of asset management was poor, and decisions were not entirely made on financial logic.

We believe that our model, which follows that of a hotel REIT (though we are privately owned), allows us to make better (and sometimes very dispassionate) investment decisions, drive performance through appointed hotel operators and manage our balance sheet better.

HOTELS: Many people hear about all the bureaucracy that impedes hotel development in India. How much of this is reality, how much is fiction and how has SAMHI best addressed such issues to date?

Jakhanwala: There are challenges with respect to the regulatory environment, but we do believe that some part of it is overstated. What most companies fail to do is to understand and underwrite these challenges well, which leads to dissatisfaction later.

HOTELS: What is your forecast for near-term hotel development in India?

Jakhanwala: I see a consolidation phase over the next two years. However, don’t expect major transactions in India as you see in western markets since total hotel supply in India itself is very small. Non-serious players will exit in favor of institutional owners.

We will also see high-net-worth individuals continuing to acquire assets and keep cap rates low on those transactions. Real-estate ownership is still a favored investment in India. 

We are not underwriting improvement in RevPAR over the next 18 to 24 months in most markets. If we are wrong, we will only walk out happier. Our underwritings forecast rates for 2020 at levels we have already seen over the past few years. It doesn’t show our pessimism about India, but only cautious optimism.

HOTELS: What are the hot markets for development going forward?

Jakhanwala: You may call us boring, but we restrict ourselves to the top 10 to 15 cities across India and don’t expect to change that point of view.

In Delhi, the new airport and infrastructure development will continue to provide growth. We will see a momentary dip in RevPAR once all the hotels at the airport open, but these will get absorbed and induce further demand to help overall market growth.

Goa, India’s only and premier beach resort, will continue to see healthy performance driven by increasing visitation numbers (from domestic users) and very high barriers to entry for new development due to environmental regulations.

Bangalore, the Silicon Valley of India, has proven all hotel consultants wrong, who predicted doomsday due to a rapid increase in supply between 2000 and 2008. The city has demonstrated impressive growth and continues to be amongst the top markets in India in terms of new office development and absorption. 

HOTELS: How are hotel financing terms changing right now in India?

Jakhanwala: Unfortunately, there hasn’t been a significant change in financing terms (especially debt) for hotels in India. We are still constrained by tenures and self-amortization requirements from local banks, and interest rates are fairly high. However, for companies such as ours, which has a growing portfolio, we are still able to use re-leverage to sometimes fund future growth.

HOTELS: What practical advice would you offer brands trying to gain a greater presence in India?

Jakhanwala: Patience is a prerequisite. Second, they need to invest in building the brand in local markets. One needs to appreciate that many established brands, especially in the budget and mid-market space, are strong in their home countries and have little or no recall outside and in Asia. Hence, when they enter India, they should be prepared to invest capital to build the brand before they expect the owners to start putting it on top of their hotels. Unfortunately, most brands expect owners to take risk and use the income from them to build brands. This exposes owners to high risk in initial years.

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