The Hindu Business Line : Investment in hotels a lucrative biz

There are two types of value for investment in real estate. One is the fair market value depending upon the transaction in the market and the other is the worthiness of the investment. Running a hotel business is a flourishing business today with increase in the number of tourists and increase in purchasing power of the people with the development of economy.

However, the site chosen should be able to satisfy the requirements specified by the Department Tourism. The Department of Tourism classifies hotels under the star system into 5 categories, from 1 star to 5 star. For this purpose, The Hotel and Restaurants Approval and Classification Committee has been set up which inspects the applicant hotels to assess their suitability or otherwise and also places the chosen hotels on the approved list of the department.

Approved hotels become eligible to various fiscal relief and benefits. The hotels get worldwide publicity through tourist literature published by the Department of Tourism and distributed by the Government of India tourist offices in India and abroad. Approved hotels are eligible to get the benefits under the Hotel Incentive Quota Scheme.

Minimum basic requirements

A functioning hotel must fulfil the following minimum basic requirements to be eligible to apply for classification:

For five star category, the façade, architectural features and general construction of the hotel building should have the distinctive qualities of a luxury hotel.

The locality including the immediate approach and environs should provide suitable ambience. Adequate parking spaces for vehicles should be provided.

The hotel should have a minimum of 25 numbers of lettable bedrooms, all with attached bathrooms with the most modern shower chambers with 24 hours of service of hot and cold running water. All public and private rooms should be fully air-conditioned and should be provided with superior quality carpets, curtains, furniture fittings in good taste. The services of professionally qualified and experienced interior designers of repute could be utilised for this purpose.

There should be an adequate number of lifts working efficiently with 24 hours service.

There should be a well designed and properly equipped swimming pool and a well designed lobby, ladies and gentlemen's cloak rooms, equipped fittings and furniture of the highest standard.

The features of the hotel discussed in this article are:

The hotel is of international standard at Chennai and functioning profitably for the last five years. The building has two basements, ground floor and 12 upper floors with a total built up area of about 1,20,000 sq. ft. No deviations have been made from the approved plan.

In the first basement, two banquet halls are located and part of basement is used for parking cars. The ground floor accommodates a main lobby and a coffee shop.

In the second basement, the air conditioning plant, LT panel room, main stores, house keeping, laundry, pump and boiler rooms, staff locker room staff kitchen and dining, administration accounts and purchase department are located.

Containerised DG set, 2 numbers of 750KVAX, transformer room 1250 VA, RM,G/breaker panel room have been provided in the ground floor.

The first floor has multi cuisine restaurant, a bar and the main kitchen.

The second floor has a swimming pool with open deck in front health club and executive offices.

The upper floors except the top most floor are provided with 12 rooms in each floor and about 100 sq. ft service apartment. The upper most floor has 2 executive suit and 3 luxury suites. ie 120 base 113 keys.

Open terrace has a restaurant.

Three elevators - 2 numbers having capacity of 16 passengers and the third with a capacity of 20 passengers travelling from upper basement to terrace. Two service elevators with 1,000 kg capacity travelling from lower basement to the terrace have been provided.

The hotel has rich look with gold leaf ceilings, Italian marble, well adorned with a large size Chinese chandelier cascades down from a mini atrium with open spiral staircase leading upwards. The hotel offers facilities such as bar, restaurant and business centre. The exterior is finished with structural glazing, Alco panel and rough granite cladding.

The superior rooms are with a large work desk with built-in broad brand access, speakerphone, international direct facility personalised voice mail, personalised safe and a mini bar.

Total built up area = 1,20,000 sq. ft

Development of building

Any development within the Chennai Metropolitan area has to be approved by the Chennai Metropolitan Development Authority (CMDA) to get planning permit and building permit from Corporation of Chennai,

No objection certificate to be obtained from various departments which include:

Airports Authority of India; Tamil Nadu Fire & Rescue Services Department; Police Telecommunication Department;

Bharat Sanchar Nigam Ltd; Madras Regional Advisory Committee; Urban land ceiling clearance from ULC Department;

Southern Railway; Health Department; Tamil Nadu Pollution Control Board; Department of Tourism; and Chennai Metropolitan Water Supply and Sewerage Board.

NOC obtained from Airports Authority of India is valid up to two years and renewal required for every two years. Permission from Chief Electrical Inspector to erect & operate the lifts is to be obtained and should be renewed every year. All the above regulations have been complied with.

Example

Value of land is Rs 16 crore. Value of building 1,20,000/ sq. ft @ Rs 3,800/ sq. ft = Rs. 45.60 crore. Value of the property is Rs 61.60 crore. Expressed in the unit rate, it works out to Rs 34.2 lakh per room, excluding land value. (See table)

Net maintainable profit is worked out as follows:

Tariff: Rs 4,000/ day per room exclusive of taxes, occupancy rate being 70 per cent.

Income from rooms is Rs 9 crore, food - Rs 6.5 crore, liquor - Rs 2.5 crore, and sundries - Rs 1 crore. The total income is Rs 19 crore and net profit is Rs 7 crore after deducting working expenditure, interest outgo and other expenses.

This sum of Rs 7 crore is be shared between the landlord and the tenant. When the hotel is run by a tenant which may vary from 30 per cent to 50 per cent.

Rental value of land and buildings 9% x Rs.61.6 crore is Rs. 5.5 crore.

For an investment of Rs 5 crore, profit is Rs 1.5 crore which works out to about 30 per cent.

The author is former national president, Institution of Valuers, Chennai.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page