Session Highlights

Real estate in India - Impact on hospitality

The real estate story in India is on the rise. While more than 50 bigwig foreign funds have already checked in, the first half of 2007 will see at least 25 more funds making an Indian entry. This will mean that almost US$ 10 billion of foreign direct investment will be injected into the sector. Hotel developers have already announced thousands of square metres of land.

Sanjay Bansal began by asking the panelists why real estate is showing so much interest in hospitality. To this, Shakti Singh replied, "We at DLF have different models. We are developing assets and giving them to professional management companies to run. We have signed with Hilton for our hotel projects."

Other than the plan for DLF City at Gurgaon, it recently inked a US$ 20 billion deal with the largest privately held real estate developer in the world, Al Nakheel of UAE, to build two townships in northern and western India. The companies will initially invest US$ 5 billion each in the next three years to develop about 16,000 hectares, most probably in Gurgaon and Maharashtra (between Pune and Mumbai). The townships, scheduled to be completed in 2013 with more than 70 per cent of the land already acquired, will feature an integrated combination of residential, retail and hotel properties.

DLF has already applied to statutory regulators for the second time to launch a public float that could raise about US$ 2 billion for a 10.2 per cent stake. Joint venture partners include Hilton Hotels, Feedback Ventures and the UK-based infrastructure company Laing O'Rourke. Sumit Guha explained that a rise in real estate companies entering hotel sector is posing a tough competition to hotel companies already operating in the sector. "Lots of capital is coming but no one knows where it will go," he added.

Meanwhile, Chender Baljee stated, "We are tying with partners on a revenue-share basis. We're just testing waters. The industry can adopt and grow different models, franchise, partnership, etc." Talking about the challenges in the market, Balaji Rao explained that the market is exciting but challenging. "Operators are running the market and there are no fixed returns. Land has to be valued in terms of the returns. Hotels have to enter different segments and look into a different consumer base," he said.

(From l to r) Moderator: Sanjay Bansal, Partner, Ambit Corporate Finance Panelists: Chender Baljee, CMD, Royal Orchid Hotels Shakti Singh, Director, DLF Universal Balaji Rao, MD (India), Starwood Capital Group Sumit Guha, VP (projects & development), Taj Hotels, Resorts & Palaces

Currently growing at 30 per cent per annum, the Indian real estate market is estimated to be worth more than US$15 billion with hospitality being the hot sector into which an estimated US$ 2 billion is likely to be pushed over the next three years, the bulk of it through private-equity funds. Many funds are allocating as much as 50 per cent of their planned real estate investments into the sector, as hospitality remains highly under-serviced, with a huge demand-supply imbalance.

Bansal said, "Concerns about an asset-price have led the RBI to raise the risk weightage on real estate loans extended by banks, and mortgage rates have gone from 7.5 per cent to about 9.5 per cent as a result. That's still well below the 15 per cent rates that most Indians were used to, but it's enough to raise questions about whether the speculation of the past year and a half, which has driven land prices up by 30 per cent to 100 per cent and real estate stocks up as much as 2,000 per cent may be coming to an end."

Concluding the session, he added that in future, interest rates are expected to come down. He said, "In terms of market, tier II cities will see more expansion. Valuation is a challenge and so are the government regulations."