The road ahead...

India has witnessed rapid economic growth in the past few years with a GDP growth averaging over 7.5 per cent for the period 2014-2018, facilitated by a host of economic and policy reforms by Government of India. While in general, these reforms have benefitted the Indian travel and tourism sector, which is among the fastest growing group globally, setting up a hospitality business in India and achieving reasonable scale as compared to developed economies is still a difficult task at hand.

A recent report by HVS, titled ‘Ease of Doing Business: Indian Hospitality Sector’, highlights some key challenges that inhibit the entry of fresh capital in the business, while also delving on immediate reforms needed to bring it on a par with international standards.

CHALLENGES IN LAND ACQUISITION

• Complex process for acquisition of suitable land with clear title and required land use permissions

• Government-approved land parcels are far and few in key urban locations

• Conversion of permitted land usage from agricultural to commercial purposes, a long-drawn process

• Inhibition of banks from funding any land purchases, as per RBI regulations

Notwithstanding the above, the cost of land in key urban areas is very high, which makes land cost range at an average between 30-40 per cent of total project cost. Moreover, with RBI regulations inhibiting banks from funding any land purchases, all capital required for buying land must come in the form of equity, making the project ROI lower than most global investors’ expectation for their invested capital.

COMPLEX REGULATORY REQUIREMENTS

• Multiple sanctions and licences to be obtained to construct the building

• Additional licences needed prior to opening and operating the hotel

The hospitality sector is regulated by both the central and state governments, which makes the approval process complex. Multiple sanctions and licences, including sanctioned building plans, environmental sanctions, airport building height clearances, and construction labour permits among several other constructionrelated sanctions, are needed. The average time required to obtain these clearances ranges between 12 to 18 months, adding to the time required to complete a Greenfield project.

COST OF CAPITAL

• High cost of servicing debt

• Quantum of debt available averages only 50 per cent of project cost

• Short tenure for repayment of debt

India ranks amongst the countries with the highest cost of capital for the hospitality industry. Lending norms for the industry are extremely stringent with interest rates between 11 and 14 per cent for borrowings as against an average of 4-5 per cent in most developed economies. The quantum of debt available to the sector averages at 50 per cent of the total project cost, further restricting the capital available for hotel development. And finally, the short tenure for repayment of debt which averages around 10-12 years, including the construction period moratorium. Given the cyclical nature of the business, if the hotel enters the market in a down cycle phase, it is almost certain to head towards becoming an NPA as has been evident from the last cyclical downturn.

CHALLENGES RUN FAR AND BEYOND

Once the hotel is operational, it still needs to get most of the licences renewed on an annual basis.

• Licences needed to operate a hotel in India are far too many and vary across states

• Not possible to apply for multiple licences simultaneously, and parallel applications cannot be pursued across authorities

• Lack of clarity on licences needed or process to be followed

• Absence of a single point where information can be accessed by a potential investor

• Absence of a nodal agency authorised to monitor and assist hospitality-related investments