Bankers Reluctant To Fund Hoteliers As Projections Go Awry – The Economic Times – 10-Dec-2014

December 16, 2014 - Uncategorized

Players in the hospitality sector are struggling to secure loans for their projects or to service debt as two factors, oversupply of hotel rooms and lower than projected average room rates, have made banks reluctant to extend loans to them.

“For the past 12-18 months, a large supply of hotel rooms has been added in India and the planned hospitality projects ended up overestimating their projected average room rates (ARRs), and that changed the viability of projects,” said Deven Shah, senior vice-president for debt capital markets at Kotak Mahindra Bank.

He said the sector is on the lowest priority from lenders perspective and bankers are in wait-and-watch mode to start lending again.

According to some industry insiders, other than two private sector banks that are lending with longer loan repayment schedules, lenders are generally staying away from hotel projects.

Achin Khanna of hospitality consultancy HVS said this has forced several hotel players to take loans on terms that are not feasible for hospitality projects. “Loans for hospitality projects come at 12 per cent-13 per cent repayment rates and that is too high for hoteliers to return immediately since hotels are a long gestation business,” he said.

According to industry sources,Kolkata have had issues with banks in securing loans.

The owner of JW Marriott in Kolkata denied this.

Jagmohan Garg, owner of the Radisson Blu hotel in Delhi, however, acknowledged that the pre-opening projections for the hotel were all incorrect.

“We were told by hospitality consultants that the property would make over Rs 8,000 in ARRs and we are doing a meagre Rs 5,000 rate now. We owe over Rs 300 crore to the bank and the repayment cycles are bogging us down now,” he said.

Industry insiders said Keys Ho owners of Radisson Blu at Paschim Vihar in Delhi and JW Marriott in tels, a mid-market hotel player, has issues with servicing debt. The company, however, denied it. “Problems have happened, but the difficult times are behind us and we need to tide over the oversupply of hotel rooms in the country as a whole,” said Sanjay Sethi, its chief executive officer.

Vikram Mehta, director at SSKM Corporate Advisory, said real estate developers who entered the hospitality sector don’t necessarily understand the business model. “Setting up a five-star property in a metro today is not viable and they tend to over-invest in properties and then have issues servicing their debt,” he said.

Mehta said banks should stop lending to five-star projects and look at the three star and below cat-egory to get returns. Institutional hotel developers like Brigade Developers and SAMHI have no problems securing loans since they maintain credit ratings. “If you have a good credit rating, you tend to get loans; but yes, generally speaking, it is problem plaguing the industry right now,” said Nirupa Shankar, director at Brigade Hospitality.

Commercial banks have become cautious about lending to the hotel industry ever since a State Bank of India-led consortium of banks had to restructure Rs 3,000-crore debt of Hotel Leela Venture under the corporate debt restructuring mechanism in January 2012.

In June this year, banks sold this debt to JM Financial Asset Reconstruction Company.

 

The Economic Times

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