Ambitious Hotel Projects On The Block
Developers Put Ambitious Hotel Projects On The Block But Prospective Buyers Find Valuations Too High
A couple of years ago the key words for a developer were `acquisition' and `project launch'; today, they are `cash crunch' and `distress sales'. Following the prolonged economic slowdown, more and more developers are selling assets that require huge investments and have long gestation period.
Most of these are hotels and huge commercial projects. Realty biggies such as DLF, Unitech and Parsvnath have put their hotel projects on the block. They also want to surrender special economic zones (SEZs). The exercise is to generate cash and improve finances, which have taken a severe hit under present market conditions.
Against this backdrop, a million-dollar question that remains unanswered, is, who will buy these mega-projects and will the valuation offered be acceptable to the developer? In fact, many hotel projects, which were earlier looked upon as money-spinners, now seem to have fallen from grace.
Consider this: Real estate company DLF has scaled down its plans to build hotels and is, in fact, selling smaller hotels or land earmarked for the construction of hotels in several cities.
Unitech is planning to sell its hotels in Noida and Kolkata over the next few months.
Parsvnath Developers, which had aggressive plans to open 100 hotels in seven years is now in talks with several HNIs (high net worth individuals) to sell its hotel properties. Parsvnath has put on hold its plans to buy land for the hotel projects.
Developers are desperate to sell them but are unable to find suitable buyers. That there is a shortage of hotel rooms in the country is well known, but equally important is the fact that hotels give profits only after completion and require huge capital investment.
In fact, the recent sale of The Courtyard, Unitech's hotel in Gurgaon, is a case in point. While the company was expecting Rs 325-350 crore for the hotel, it got a much lower Rs 230 crore. Realty analysts have pointed out that Unitech has not been able to dispose of its Saket office in New Delhi. The developer is expecting Rs 750 crore for the commercial property but suitors are unwilling to offer that kind of sum.
A fair valuation should take into account three important factors cost of land, cost incurred towards approvals and projected cash flow.
Says Ramesh Menon, founder-director of Gurgaon-based consultancy Certes Realty, "The valuations and investments in hospitality projects are based on revenue and cash flows projected over a 5 to 7-year frame.
Those numbers are being furiously recalibrated downwards from the assumptions of pre-2008." Menon further adds that most hotel operators are revising the average room tariff per night and the occupancy rates downwards, which have hit the valuations expected by developers.
In fact, industry observers claim that most hotel chains have been passing through tough times, wherein their occupancies have fallen by 58 per cent in January 2009 and the average room rates dropped by 14 per cent. The same developers, who earlier were quite aggressive about land acquisitions and raising funds now seem to scurrying for cover when their projects are being stalled for want of funds.
Says Anuj Puri, chairman of global real estate consultancy Jones Lang LaSalle Meghraj, "Developers had made their expansion plans with an eye on the booming economy and the ease with which they could generate funds for their projects. In fact, nobody had predicted that slowdown would come so soon and so sharp." A developer needs to exit from unviable projects, he adds.
Agrees Menon, "Projects, which do not generate cash flow during the construction phase would be the first to be exited. Hospitality projects announced by developers, either standalone or as part of larger development plan, would be sacrificed as they are capital intensive, and would not deliver cash flows for construction and development.
Also, most of these assets would have been capitalised, based on an inflated revenue assumption earlier. Those assumptions are no longer relevant." Menon adds that a residential project would still move forward depending on the projected demand and consumer interest in the particular locality and the project.
A real estate consultant, who has been brokering on one of the high-ticket deals, told FC Estate, on condition of anonymity, "It's really tough to find buyers in the present market as people are extremely wary of project valuations. The price offered by HNIs who show interest in buying a project, is in most cases, unacceptable to the developer." He adds that developers are still expecting boom-time valuations for their projects, which seem highly improbable in the present scenario.
Source: mydigitalfc.com
A couple of years ago the key words for a developer were `acquisition' and `project launch'; today, they are `cash crunch' and `distress sales'. Following the prolonged economic slowdown, more and more developers are selling assets that require huge investments and have long gestation period.
Most of these are hotels and huge commercial projects. Realty biggies such as DLF, Unitech and Parsvnath have put their hotel projects on the block. They also want to surrender special economic zones (SEZs). The exercise is to generate cash and improve finances, which have taken a severe hit under present market conditions.
Against this backdrop, a million-dollar question that remains unanswered, is, who will buy these mega-projects and will the valuation offered be acceptable to the developer? In fact, many hotel projects, which were earlier looked upon as money-spinners, now seem to have fallen from grace.
Consider this: Real estate company DLF has scaled down its plans to build hotels and is, in fact, selling smaller hotels or land earmarked for the construction of hotels in several cities.
Unitech is planning to sell its hotels in Noida and Kolkata over the next few months.
Parsvnath Developers, which had aggressive plans to open 100 hotels in seven years is now in talks with several HNIs (high net worth individuals) to sell its hotel properties. Parsvnath has put on hold its plans to buy land for the hotel projects.
Developers are desperate to sell them but are unable to find suitable buyers. That there is a shortage of hotel rooms in the country is well known, but equally important is the fact that hotels give profits only after completion and require huge capital investment.
In fact, the recent sale of The Courtyard, Unitech's hotel in Gurgaon, is a case in point. While the company was expecting Rs 325-350 crore for the hotel, it got a much lower Rs 230 crore. Realty analysts have pointed out that Unitech has not been able to dispose of its Saket office in New Delhi. The developer is expecting Rs 750 crore for the commercial property but suitors are unwilling to offer that kind of sum.
A fair valuation should take into account three important factors cost of land, cost incurred towards approvals and projected cash flow.
Says Ramesh Menon, founder-director of Gurgaon-based consultancy Certes Realty, "The valuations and investments in hospitality projects are based on revenue and cash flows projected over a 5 to 7-year frame.
Those numbers are being furiously recalibrated downwards from the assumptions of pre-2008." Menon further adds that most hotel operators are revising the average room tariff per night and the occupancy rates downwards, which have hit the valuations expected by developers.
In fact, industry observers claim that most hotel chains have been passing through tough times, wherein their occupancies have fallen by 58 per cent in January 2009 and the average room rates dropped by 14 per cent. The same developers, who earlier were quite aggressive about land acquisitions and raising funds now seem to scurrying for cover when their projects are being stalled for want of funds.
Says Anuj Puri, chairman of global real estate consultancy Jones Lang LaSalle Meghraj, "Developers had made their expansion plans with an eye on the booming economy and the ease with which they could generate funds for their projects. In fact, nobody had predicted that slowdown would come so soon and so sharp." A developer needs to exit from unviable projects, he adds.
Agrees Menon, "Projects, which do not generate cash flow during the construction phase would be the first to be exited. Hospitality projects announced by developers, either standalone or as part of larger development plan, would be sacrificed as they are capital intensive, and would not deliver cash flows for construction and development.
Also, most of these assets would have been capitalised, based on an inflated revenue assumption earlier. Those assumptions are no longer relevant." Menon adds that a residential project would still move forward depending on the projected demand and consumer interest in the particular locality and the project.
A real estate consultant, who has been brokering on one of the high-ticket deals, told FC Estate, on condition of anonymity, "It's really tough to find buyers in the present market as people are extremely wary of project valuations. The price offered by HNIs who show interest in buying a project, is in most cases, unacceptable to the developer." He adds that developers are still expecting boom-time valuations for their projects, which seem highly improbable in the present scenario.
Source: mydigitalfc.com