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Hotel plots go abegging

india Updated: Apr 27, 2007 23:46 IST

Over a lakh tourists are expected in the Capital for the 2010 Commonwealth Games. The International Olympic Association has estimated that a minimum of 40,000 hotel rooms would be required to meet this huge influx. The shortfall is huge considering Delhi has only 10,000 rooms approved in both the star and budget category of hotels.

Despite this huge shortfall in hotel accommodation in the city, there is tepid response from hoteliers who are not taking up plots being auctioned by the Delhi Development Authority (DDA) 'Don't glorify criminals': BJP the sole development agency in the city. Over the last six months, 23 hotel plots have been put up for auction, but only six plots have been sold. Hoteliers blame the high reserve price set by DDA and the poor locations for the lack of response.

For instance, the reserve price of a 13,603 square metre plot in Dwarka Sector 10 was fixed at Rs 250 crore. Another 13,158 square metre plot in Paschim Vihar had a reserve price of Rs 300 crore. Both the plots are yet to find any takers despite going under hammer thrice.

“Ideally, the land cost should not be more than 25-35 per cent of the overall development cost of the hotels. But in Delhi, in case of some of the sites, the land cost alone has attributed to 60 per cent or even higher. This is bound to make the project unviable. At the end of the day, the financial projects need to be more suitable and make economic sense in the long run,” said Manav Thadani, Managing Director of the hospitality consultancy firm, HVS International.

Failing to find takers, DDA has slashed the reserve price of these plots by up to 20 per cent but this too has not helped. The agency managed to sell just two of the seven hotel plots that were auctioned in March this year after slashing the reserve price.

Experts in the hospitality industry said that DDA is auctioning the hotel plots with just an eye on the Commonwealth Games and they have failed to take into account the long-term sustainability of these projects. Sunil Rao, hospitality and leisure division, TrammelCrow Meghraj said, “The hotel industry is driven by a long term business sense. If a hotelier is planning to invest crores he will obviously think of the long term sustainability of the project.”

Hoteliers said that majority of the plots auctioned by DDA are located in east and north-west Delhi and are not viable as business propositions. “It does not make economic sense for a hotelier to invest in a plot in outer Delhi suburbs like Shahdara or Rohini. After investing such a huge amount, an hotelier will have to charge exorbitant room rents to recover his investment. Where will the clientele come from? Who will like to spend so much for staying in a hotel in Shahdara?” questioned S.P. Warty, executive director, Jaypee Group of Hotels.

Warty attributed the high reserve price and poor locations for the absence of the established hospitality industry from the auction drive. “One will find a lot of real estate developers bidding for hotel plots. For them it’s an investment,” he said.

In March 2006, DDA auctioned two plots in Jasola for Rs 388 crore — over three times the reserve price fixed by the agency. Both the plots of 10,247 sq.mt. and 8,909 sq.mt. were booked by infrastructure and real estate firm, Emaar MGF. Other developers like Parsvnath and Mumbai-based Star Realty have also made an entry in the hospitality sector.

The five-year exemption from the income tax department for new two, three or four-star hotels in Delhi and adjacent NCR towns announced recently by the Centre in the Union Budget has failed to impress those in the hospitality sector.

“How will the tax benefit help. This will not put a check to the high prices at which DDA is auctioning the hotel plots. The rates are phenomenally high and does not make any economic sense,” said Rajendra Kumar, president, Hotel and Restaurant Association of Northern India.

Kumar said that in a scenario like this where the market is not responding, DDA should enter into a joint venture partnership with the established hotel industry. “It is only then that such big ticket projects will become viable. Instead of auctioning these plots, DDA should enter into a long term lease with the hoteliers.”

“We have suggested to the government that they should permit, wherever possible, an increase in the Floor Area Ratio (FAR/FSI) to make additional floors in the existing hotels. There are many single and double storey hotels that can be allowed extra FAR for building additional floors. This will help in increasing the number of rooms and bridging the gap.”