Indian hoteliers seek fast growth in asset-light mode
 
Indian hoteliers seek fast growth in asset-light mode
11 DECEMBER 2018 9:19 AM

As India’s domestic travel pool increases, the country’s hoteliers seek aggressive growth by going asset-light, although there remains room for those who decide not to go down this path.

REPORT FROM INDIA—The Indian hotel industry is becoming increasingly asset-light as hoteliers seek aggressive growth, according to sources.

“The asset-light model is catching on in India as it is the only way a brand can grow fast. The case of Marriott (International) is a point in case. Many a time the owner does not have the ability to manage,” said Arvind Nandan, executive director of the Indian office of business advisory Knight Frank, who added the presence of a brand makes it easier to get properties off the ground and profitable.

Different hotel firms have different road maps to reach the point of being asset-light.

“Every hotel chain has its own growth strategy,” said Rattan Keswani, deputy managing director of brand Lemon Tree Hotels and director of management company Carnation Hotels. “We were clear since inception that in the initial stages we will build our own hotels and manage them to establish our brand strength and credibility. After which we would move on to a management model to fuel our expansion plans along with owning or leasing hotels.”

“It is beneficial for the owner who can outsource the management of the property and earn returns,” said Vishal Kamat, CEO of Kamat Hotels. “For the hotel brand managing the property it is a double-edged sword. … The biggest negative is that after (management has) nurtured the property to become a successful one, the owner can go in for a change in the management contract.”

Kamat Hotels is bucking the trend in India and not rushing to become asset-light, he said.

Abhijeet Umathe, director of business development at Keys Hotels, said remaining asset-heavy can weigh a company down.

“As a chain when we deploy capital to build a hotel we look for a return of 18% to 20% return on a cycle average. As procurement and building on location takes time, this management model affords us a quick way of expansion,” Umathe said.

“It is impossible for a hotel-owning company to procure land, build so many keys and scale up in a very short time on a purely asset-heavy model,” he added.

Scaling heights
Despite negatives, the benefit of adding keys in a very short time without heavy investment is motivating hotel chains in India, Nandan said.

“The financial resources required to build a hotel are high, and the payback begins after eight or nine years,” he said. “Brands need deep pockets, and there is limited availability of capital, so managing existing properties after bringing it to the level of the brand standard is a quicker route to growth.”

“The (Indian) hospitality industry is booming, and there is demand for keys, so to take advantage of this a brand’s expansion points in the direction of the asset-management model. If not all, a majority of the players are bound to take this route,” Nandan added.

Keswani said that is very true of his Lemon Tree Hotels and Carnation Hotels.

“In the last six years we have added nearly 3,600 keys. We have a portfolio of 48 managed properties of which 21 are operational and the rest will be operational over the next few years. Had we built these hotel ourselves, the capital required would be enormous and of course it would not have happened so soon,” Keswani said.

That is true of Keys Hotels, too.

“At Keys, just a third of our (21-asset) portfolio is owned,” Umathe said.

Keswani added loyalty has a role in most chains going asset-light.

“Our marketing banks on a large extent on our loyalty program and digital distribution strength,” Keswani said. “For such programs to run successfully we need to have a pan-India presence offering similar, standardized facilities. This can be fulfilled by the management route,” he said.

Kamat said Kamat Hotels, which has 11 properties, a mix of owned and leased assets, only looks at management opportunities that have a good wavelength with the owners and fit into its growth strategy. At the moment we are not looking very actively at asset-light management for our chain.”

For Lemon Tree one solution is being managed by its sister company Carnation.

“We entered into a tripartite agreement with the owners in a brand and license contract. The fee on gross revenue is tiered, but on an approximation it ranges between 8% and 12% of total revenue,” Keswani said.

“The asset-light management model requires a differing set of skill levels. The marketing of the managed properties, their financial accounting and bookings need separate managerial talent,” Kamat added.

Keswani said “in terms of return, on an estimate, the profit generated from an owned property is equal to that of the profit generated by six to seven managed hotels. However, the capital employed is inverse. The management concept thrives on people and ability to manage them, including the owner of the property.”

“There are challenges, but challenges also bring out opportunities, and we are geared to take advantage of them.” Kamat said.

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