In survival mode throughout the pandemic, many owners of India's independent and boutique hotels and small, regional chains have opted for the safety umbrella provided by the larger hotel brands and global companies.
Being in the hotel business during a pandemic has been tough for hoteliers of all experience levels, said Steve Borgia, founder, chairman and managing director of India-based INDeco Hotels, which has two open properties.
“The hotel entrepreneur of the pre-pandemic era will have to be different from the hotel entrepreneur of the post-pandemic era," Borgia said. "Now [she or] he has to be alive to the challenges and constantly innovate and lead from the front."
Nandivardhan Jain, founder and CEO of hotel investment consultancy firm Noesis Capital Advisors, said in India the major hotel companies manage approximately 160,000 rooms, which accounts for approximately 16% of the country’s inventory. Hoteliers at branded properties have been better insulated to cut rates, he added.
“With COVID-19, there is a contraction in demand," Jain said. "Most of the branded hotels have reduced room rates to attain occupancy levels. This has a cascading effect on independent hotels, [with] quite a few … struggling to service bank debts."
Since the onset of COVID-19, travelers throughout India have shown an increased interest in staying with hotel brands, said Basant Sabu, general manager of business development and feasibility at Concept Hospitality, which manages the Fern Hotels & Resorts brand.
“This pandemic period has acted as a catalyst for the same," Sabu said. "Guests are looking for safe, secure and hygienic places to stay — this environment they feel [was] better provided within the confines of branded hotels."
He said even if independent hotels in India do have the same high standards, the perception they do not is hard to counter.
“It has become slightly easier to convince the [owners] of standalone hotels to go for branding as they see the gradual shift of customers as well from non-branded space to branded space,” he said.
Added to the problems of Indian independent hotels is that online travel agencies remain strong, accounting for almost 35% of bookings, Borgia said.
“For a stand-alone hotelier, negotiating this is difficult," Borgia said. "Also, established brands have a large sales force, so including one more property for sales is very simple. Extending existing infrastructure of sales, operations and management is easy.”
He added staffing quality should improve as more hotels go the branded route.
“It is difficult to get people and retain them. The best go overseas, [and] the good ones start off on their own,” he said.
A Class Apart
Hotel conversions from independent to branded properties should steadily increase this year, Jain said.
"Going forward, the next 12 months will see some more action in the hotel conversion segment," he said. "We have recently concluded two hotel operating company transactions, Spree Hotels and 1589 Hotels."
Indian hotel owners have been impressed by examples of successful integration of independent hotels into the branded ecosystem of companies, Jain said.
“What impressed the acquirers the most is these companies’ ability to migrate unorganized hotel room inventory to organized segments by branding independent hotels under one of their formats. Such conversions are adding tremendous value to all the stakeholders and is strengthening the hospitality industry,” he added.
Borgia said he brought in brand BluSalz to manage and market one of his properties, the INDeco Nature Resort in Yercaud.
“The thrust was to be able to provide that element of luxury and class to our customers," Borgia said. "We need professional management in the hotel segment, especially in stand-alone, heritage, eco and rural hotels. If it is luxury, then the guests should be given that level of luxury that only professional management and trained staff can give.
“A stand-alone [hotel] will struggle very hard to give that level of service," he added. "I will have to do some hand-holding initially since running a boutique hotel is sort of guerrilla warfare. If this proves successful, then it may pave the way forward. The priority is to offer high-end service so that the [average daily rate] can also grow up."
Sabu said he has been involved in the conversion of approximately 200 rooms during the pandemic.
“Interestingly, our conversions or rebranding during this pandemic have been mostly in the leisure space,” he said.
Approximately 80% of hotel contracts signed in India during the pandemic have been franchise management agreements, but investments from funds and equity have not been so prominent, Jain said.
“There has been interest from high-net individuals, family offices, private equity and venture capital funds for investment in the hospitality physical asset class, but the valuations they look for are in deep discount to the fair market valuation,” he said. “The assets that are under stress, the owner will sell it only if he can clear his debts and is left with something to take back to his home."
Sabu said everyone is a buyer, and he expects more discounted hotels to hit the market.
“One needs to realize that in India, for the majority of hotel owners, the hotel segment is just one segment to be in … just a part of a diversified portfolio that is not leveraged much. They tend to construct their hotel assets with cash flow as and when available,” he said.
Sabu added investor interest has been concentrated mostly on hotels with between 50 and 100 rooms in the independent segment.
Pandemic-era policy measures by India’s central bank have also helped keep distress out of the picture.
Sabu said the price correction everyone was waiting for did not appear.
“Conversions were mostly through asset-light engagement models like brand makeover, franchises, revenue shares and fixed leases,” he said.