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Land Costs Drive Midrange Hotelier into Retail

According to industry estimates, India faces a shortage of as many as 150,000 hotel rooms, reports Saurav Sarkar.

india Updated: Jan 15, 2007 21:17 IST
Saurav Sarkar
Saurav Sarkar

The promoter of the budget hotel chain Lemon Tree and Red Fox Hotels says he is building as many as 10 retail-cum-hotel complexes by 2011, in cities ranging from Delhi to Jaipur, in order to use lease income to offset the high costs of land acquisition in these cities.

Promoter Patu Keswani, and other investors he declined to name, expect a t least a 20% return on investments on a planned Rs 313 crore expense to build or renovate existing buildings that are sitting on prime land in the cities he has chosen. He declined to give a list of all the cities where he is planning these complexes.

"The only way we can get land at the right prices is to" use the pricier bottom floors for retail space, says Keswani.

"I'm being forced to do it in order to get the hotel," said Keswani.

According to industry estimates, India faces a shortage of as many as 150,000 hotel rooms. Still, hoteliers in India are finding it increasing difficult to muscle into land deals as ballooning costs and an invasion of the space by real estate developers is forcing them to look at other business models. At a recent auction for a hotel site in Haryana, had a reserve price of Rs 161 crores, and whilst bidding went up to Rs 225 crores, it was led by a property developer.

The auction was later called off on grounds that the land authority thought the bid too low.

Keswani's "is a good idea, but they should be able to execute," said analyst Pratik Dalal with Emkay Share and Stock Brokers, Ltd.

"If they are planning to rope in a partner, then it's a very good business proposal," he said.

Keswani said his companies plan to lease the space to "large retailers."

No talks have been held yet with potential retailers. Keswani expects the 151 room-hotel in Jaipur with 75 to 80,000 square feet of retail space to be completed by fall 2008 and the 190 room-hotel, 65,000 foot shopping complex in Pune to be ready by spring 2009. Keswani operates four fully functional hotels in India.

The shortfall in hotel rooms has caused room rates in high-end hotels in top cities like Mumbai and Bangalore to rocket to around $400 a night. That has also stoked a market in low-end hotel rooms or budget hotels. International groups such as Accor SA have teamed up with Indian promoters to set up hotels.

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First Published: Jan 15, 2007 21:17 IST