Deluxe Debts

Don't fall for the changing Mumbai skyline. If all the gleaming new five-star hotels in the busy metropolis suggest ever-growing prosperity, think again. Things are quite different on ground zero.

In the past two years alone, five new properties have come up, and another five almost ready—adding over 4,000 rooms. But all these projects were conceived between 1995 and 1997, a good time for the hotel industry when rooms were difficult to get. FDI was growing, business was high, hope even higher. And then came the economic downturn, the stock exchange debacle, 9/11, the December 13 Parliament attack, war clouds.

Mumbai, used to receiving 35-40,000 visitors every month, has been getting half that number in the past few months. The 90 per cent occupancy which The Leela enjoyed at most times with a captive clientele from the diamond, software and textile industries nestling in SEEPZ and North Mumbai, is today down to an average 60. South Mumbai hotels—mainly Taj and Oberoi properties—are even worse-placed, they average at 50 per cent, even with furious undercutting of rates. According to an investment banker, 75 would be the breakeven occupancy.

North Mumbai, with its proximity to the airports, was the dream target. Land was available, and the only big player was The Leela. Other deluxe properties were at Juhu, some kilometres away. No wonder, swank properties came up in no time. But these eight new hotels will now fight tooth and nail with those already existing.

Hotel business in Mumbai doesn't come cheap at Rs 1 crore per room. Servicing the debt for a Rs 150-crore loan on a 300-room hotel at the lowest rate of about 11.3 per cent would be over Rs 15 crore a year. A senior IDBI manager says hotels have been a disappointing investment: "Our money hasn't been coming back." The institutions took all the precautions: a 1:1 debt equity ratio, a substantial 30 per cent or more of promoters' funds and a loan of no longer than seven years. It wasn't enough.

Leela's Captain Nair expects the first hotel to shut shop within two years if business doesn't get a revitalising shot.

Hotels are indeed prime properties, and already tossing with the idea of selling them. Poonam International, a hotel in Worli, for instance, changed into upper-end apartments in the '80s. Analysts expect the first victims to be stand-alone properties. Says Yogesh Dhawan, VP, The Regent: "It'll depend on each one's staying power and the flexibility the lending institutions show in debt restructuring." The Leela has taken the lead to request the lenders for a moratorium. Says the IDBI official: "The end will be either a one-time settlement or a debt restructuring which means either mercy killing or postponing the debt."

The larger chains, however, say this is only a passing phase. Sarabjit Dhawan, vice-president of the 42-hotel ITC Welcomgroup, sees his two new properties as strategic investments. Hotels, he says, are long-term plays based on business logic that obviously cannot factor in natural and man-made disasters. He claims to be happy with the performance of the 400-room ITC Grand Maratha that opened this January and awaits the opening of the new 250-room ITC Grand Central in Lower Parel. It will compete with Taj and Oberoi for South Mumbai business.

Sanjiv Malhotra, VP, Oberoi Hotels and Resorts, says that groups such as his which use their own funds are not under the debt burden. He argues that Mumbai will remain India's commercial hub, and therefore his South Mumbai business cannot be affected for too long. But the northern end will see over 3,000 rooms being added to the existing 2,500. Dhawan expects business to look up starting October. The Oberoi group is strategically developing a 600-room first class hotel in North Mumbai, to provide a cheaper option with quality service.

The industry is now trying to make the government see the benefits of a thriving business. Malhotra says that one person employed in the hotel industry raises 20 allied jobs. In comparison, he claims, the software industry accounts for only four. In the meantime, while business is suffering, the consumer's definitely the king.