Lead Story

Hotel project costs up 40 %

Industry cites increased land prices, constructions costs as factors

Savio Rodrigues - Mumbai

While India is reeling under the pressure to bridge the gap between hotel room demand and supply, the spiralling land prices and increase in construction costs across the country is putting a spoke in the wheel of the much needed hotel development.

According to recent real estate review figures by Knight Frank India and Tramwell Crow Chesterton Meghraj, land costs in metros have increased by a phenomenal 35 per cent and in secondary cities by 30 per cent since 2004. Simultaneously, construction costs too have gone up by 20 percent over the same period.

On account of this, industry estimates indicate that hotel project costs across the country have risen steeply by over 40 per cent. In 2004, the cost to develop a five-star hotel room in a greenfield project in a metro city amounted to Rs 1.5 crore. This cost today has escalated to Rs 2.3 crore.

According to P R Srinivas, senior manager, Deloitte Touche Tohmatsu, "Costs of building a hotel in India today has risen considerably, especially the land prices. More than market forces like inflation pushing these prices, it is its non-availability that is making land expensive. This problem will continue to persist in the coming years."

Amitabh Devendra, national head (Hospitality & Leisure Services) Chesterton Meghraj, moots that India is currently witnessing a real estate boom, which will continue to exist for at least another five years. "More importantly, real estate companies, some which have considerable interest in hospitality projects, are willing to pay unrealistic prices to purchase prime land. For example the recent mill land acquisition by DLF Group for a whopping Rs 702 crore. This aggressive land acquisition competition between real estate companies has certainly increased construction costs of hospitality projects," he says.

Anurag Gupta, MD of Majestic Properties, asserts that since the cost of building materials including cement, steel, bricks, etc constitute about 33 per cent of the total construction cost, the builders have been forced to pass on a percentage of the costs to customers with the rise in prices. The price of cement has risen from Rs 140 per bag (50 kg) to over Rs 200 over the past year and steel has risen from Rs 19,500 to Rs 27,000 per metric tonne in the same period.

While industry trends indicate that real estate companies getting into hotel projects certainly do not play with empty pockets and the increase in land prices will not necessarily deplete their coffers, it is debatable whether such a project will be viable in the long run. More importantly, the timeframe on return on investment will increase considerably. Vijay Thacker, MD of Horwarths Consultants, opines, "Previously, hotel companies looked at a period of seven to eight years to see any considerable returns. This period now has however, gone up to 10 years minimum."