Leasing of hotels has emerged as a promising business model, but a lot depends on the brands’ risk appetite.
OVER THE PAST few years, the iconic Hotel Ashok, in the heart of Lutyens’ Delhi, has been grappling with an uncertain future. First, there were talks of disinvestment, and of late, plans are afoot to lease it out for 60 years to allow private players to redesign, rebrand and run the business. It may sadden old loyalists, but the leasing model seems to be gaining traction as real estate is exorbitantly priced and no one is too keen on large-ticket exposure.
The hotel industry has witnessed two key business models – brand-owned and operated properties and those managed by brands under management contracts. Now comes the leasing model, under which a brand takes over both day-to-day running and the P&L of the asset, for which the lessor gets a fixed return and at times, an added revenue share, as per the deal. According to Saurabh Gupta, Managing Partner at the Gurgaon-based hospitality consulting firm Hotelivate, “Leasing works for property owners who are looking to invest in the hospitality industry but need the comfort of assured returns. It also incentivises fresh capital to enter the sector. In addition, leasing of hotels allows brands to grow robustly, thus paving the path for some investments.”
Leasing of hotels is yet to take off in a big way in India (even the ITDCowned Ashok is getting few offers), but some operators are quite bullish about its growth prospects. “We handhold owners until the completion of the asset, and when the hotel is ready, we take possession,” explains Zia Sheikh, Chief Managing Director and Chief Executive Officer of Svenska Hotels. This Swedish boutique hotel chain runs as many as 21 properties in India while 20 more projects are on the cards. Svenska started onboarding leased properties in FY2014/15, around the same time when the model became prevalent in the Indian market.
Some hotel chains are getting leases directly from owners, and most of the luxury properties are now managed for 10-35 years. “These are typically very long-term leases, say for 25 years. The minimum guarantee is what an owner would typically expect to receive in the first or the second year until the hotel stabilises. After that, revenue share usually kicks in,” adds Sheikh.
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February 10, 2019