The Hindu Business Line : HDFC fund to invest in hospitality sector

The Fund will tie-up with equity investors who own hotels abroad or who have a hospitality management team such as Abu Dhabi Investment Authority or Capital Land.

Chennai , Dec. 16

HDFC Property Fund is all set to blitz into the country's hospitality sector with an investment of $1 billion (Rs 4,500 crore) over the next four years in luxury/budget hotels and hostels for IT/ITES employees. The 9-year Fund plans to combine with equity investors experienced in hotel management to build 4-5 star deluxe hotels in the big metros.

A part of HDFC Venture Capital Ltd, the Fund will be investing $150 million or 20 per cent of the $750 million, it plans to raise offshore, in the hospitality sector and leverage it to raise a further $600 million in debt taking the total investment to close to $1 billion.

Explaining the rationale of investment mechanism and exit strategies in a chat with Business Line, Mr K.G. Krishnamurthy, Managing Director and CEO of the Fund, said: "The hospitality industry has been doing exceptionally well in the last three years and is a sector that Funds like us would want to invest in."

The Fund will tie-up with equity investors who own hotels abroad or who have a hospitality management team such as Abu Dhabi Investment Authority or Capital Land. It would buy the land, get a contractor to develop it and an operator to design and run the hotel.

Mr Krishnamurthy said that the Fund is factoring a conservative average room rent of $340, much lower than the going rates in similar hotels in the metros. The Fund will exit by either selling the hotel to the operator or by listing it on the stock markets.

The Fund is in the process of finalising its approach on the budget hotels of which it plans to put up 30-35 in Level II and Level III cities. It has factored an average rent in the $70-90 range. "One school of thought is: why not build our own brand? Maybe tomorrow an Accor or an Ibis will come and buy us out. But some say that our job is not to run hotels, so find an operator to manage it," Mr Krishnamurthy said.

IT/ITES employees typically have a problem in finding affordable accommodation in the big cities. "We want to put up 300-400 room hostels with 2 beds in a room and charge around $110 (Rs 5,000) a month. We can scale this up and list it as a real estate investment trust (REIT)," he said.

The Fund has already discussed this with Infosys Technologies among others and Mr Krishnamurty said that all of them have evinced interest.

These hostels would be run through agencies that provide house-keeping and catering services.

Investment in schools

The Fund plans to invest 10 per cent of its total corpus or about $75 million (approx Rs 350 crore) in education and health-care. "No longer are these looked at from a charity point of view. We don't understand the education business but just as there are operators in hotels, there are companies such as Educomp on the education side, which manage schools but don't have the capability to own them. So we want to invest in 20-25 schools, give them to an operator to run it and then exit," Mr Krishnamurthy said.

The exit for the Fund will either be by selling the school to the operator (who would have made enough money in the meantime by running it) or list it on the exchanges. HDFC Property Fund has already invested Rs 1,000 crore raised in the domestic market in 18 projects such as residential townships, industrial parks and serviced apartments across cities such as Bangalore, Pune, Chennai, Hyderabad and Kolkata.

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