India's luxury hotels swap global brands as revenues slump
Less than nine months after opening the first hotel in Mumbai under its brand, Hong Kong luxury chain operator Shangri-La Asia handed the keys back to the owner.
Now, United States-based Starwood Hotels & Resorts Worldwide is in talks with the same owner to take over management of the property under its St Regis brand, people familiar with the matter said, as part of a shake-out in the luxury segment of India’s ailing hotel industry.
Slowing economic growth and an oversupply of new hotels conceived during the boom years of 2006 and 2007 have led to falling room and occupancy rates in India, straining relationships between hotel owners and the global chains brought in to run them.
But while some global operators are leaving, others like InterContinental Hotels, Hyatt Hotels and Starwood are jumping in, using the now unbranded hotels to accelerate their expansion in a country they believe has long-term potential.
“More than half the future deals we are looking at are conversions in the four- and five-star category,” said Dilip Puri, India head and regional vice-president for South Asia at Starwood, which runs 38 hotels in India and plans to have 100 in operation or under construction by next year.
Puri declined to comment on Starwood’s interest in the erstwhile Shangri-La. The hotel, now called the Palladium, is owned by mall developer Phoenix Mills, and both the company and Shangri-La declined to comment on why the partnership ended.
Shangri-La, however, appears to be betting big on mainland China: about half of the 27 hotels it plans to open, or are under construction, over the next two years will be in China, according to the company’s website.
Six years ago, a night at a luxury hotel in the Delhi region cost on average 10,429 rupees – about US$259 at the time and on par with several five-star hotels in Singapore.
Occupancy rates were an enviable 74 per cent, according to hospitality consultants HVS, as business travellers flocked to India, an economy that was then growing at nearly 10 per cent.
Since then, economic growth has halved, reducing the flow of corporate guests, who make up about 70 per cent of the business for five-star hotels in cities like Delhi and Mumbai.
Average room rates in the capital region have also almost halved to about 6,850 rupees (HK$854), while occupancy rates have fallen to 55 per cent, according to HVS.
The declining economy and falling revenues have sparked a blame game between hotel owners and operators, prompting the “reflagging” of several properties.
Operators say the owners are demanding unrealistic returns after overleveraging themselves, while owners say operators overpromised on performance.
“The relationship is breaking because somebody made a promise and the reality is far from the promise – both due to economic reasons and sometimes due to performance lapses,” said Ashish Jakhanwala, chief executive of Samhi, an Indian firm that owns hotels.
Global players with long-term ambitions are encouraged by the prospects for India’s hospitality sector, where revenues are expected to more than double to US$36 billion by 2018 from US$17 billion in 2008, according to research firm Technopak Advisors.
Starwood is emerging as one of the more aggressive players in India. About 86 per cent of the company’s pipeline of new rooms is outside the United States, mostly in the Asia-Pacific.
India is Starwood’s fourth-largest market by hotel numbers and by the end of next year will move up to third place, overtaking Canada. By building its brand locally, Starwood also hopes to court the loyalty of Indians travelling abroad.
“This, we believe, is a huge opportunity for us … our growth and distribution in India therefore has a much larger strategic significance,” Puri said.
Other operators are also expanding.
Hilton, controlled by private equity giant Blackstone, exited a handful of properties in India last year while opening three new hotels. This month, it also announced plans to open its first Conrad hotel there next year.
Hyatt, which runs 17 hotels in India and has 40 under development, is in advanced talks to manage a 228-room Delhi property that until the end of last year was a Hilton, according to people familiar with the matter.
Dhruva Rathore, Hyatt’s South Asia vice-president of development, declined to comment on his company’s interest in the former Hyatt but said India was a key market.
“We actively seek conversion opportunities that fit within our brand portfolio and enhance our presence in key markets,” he said.
London-based InterContinental, which runs 18 hotels in India and aims to have 57 over the next four to five years, is also seeking to take over two hotels that were run by Hilton in New Delhi.
Douglas Martell, InterContinental’s vice-president for operations in southwest Asia, said he was approached by the hotels’ owner, Eros Group. Hilton declined to comment about the properties, and Eros did not respond to requests for comment.
“They felt that the properties were not being maximised, their performance was not being maximised, and would we be happy to take a look at them,” said Martell. He said reflagging will be a growth driver for the company in India.
“At the end of the day, some people are going to feel that they just do not have the right brand on their hotel.”
Shangri-La Asia is part of the Kerry Group, which controls the company that publishes the South China Morning Post