Luxury hotel chains turn to management deals to pare debt

Purvita Chatterjee Mumbai | Updated on June 03, 2014 Published on June 03, 2014

Tricky ownership: EIH (Oberoi group) has also decided to put future properties under management contract to avoid a debt trap.

Many Indian and international hospitality majors opt for contract route to limit debt exposure

Raymond Bickson, Managing Director of Indian Hotels Company, is open to managing hotels of the Sahara Group but is not interested in buying out its distressed assets. To keep its balance sheet asset-light, Indian Hotels would rather opt for management contracts than set up greenfield hotels.

Avoiding debt

“As our balance sheet suggests, we are not that rich to buy the Sahara Group hotels but would be happy to manage properties for them,” was Bickson’s tongue-in-cheek comment while declaring his company’s quarterly results recently.

The majority of the 14 new hotels planned will be on management contract instead of fresh projects as the hospitality major is weighed down by debt and widening losses every successive quarter.

“We have to become asset-light and management contracts will be the way to grow in a competitive market where there is a plethora of international brands. We have to pull up our socks in a competitive market,” he added.

Even the BSE-listed Leela Palaces & Resorts, which sold its Kovalam property to reduce debt, has now taken it back on management contract. It is now on the lookout for buyers for its Delhi and Chennai properties and is willing to go back to managing them.

EIH (Oberoi group) has also decided to put future properties under management contract to avoid getting into a debt trap.

Under a management contract, the property owner undertakes the debt and equity component of running the business while the hospitality brand/company managing the property gets a percentage of the profits.

PE investors

Except the Hyatt group, most international hotel groups such as Hilton, Radisson, Marriot and Starwood, have been operating in India through management contracts. “Management contracts have been adopted by hotels worldwide to have an asset-light model. These are usually long-term contracts to provide technical services and now most hotel chains are using this route for expansion as debt does not form a part of it,” says Anil Madhok, Managing Director, Sarovar Hotels. Domestic hospitality companies like the Sarovar Group have also been resorting to management contracts; of its 70 properties, only three are company-owned.

Those taking on the burden of debt and equity are usually real-estate owners and HNIs (high net worth individuals) who enter into ventures with hotel chains to farm out management contracts. Of late, private equity investors have also been investing in the hospitality business. “Private equity players such as Gurgaon-based Samhi and Duet have also backed international chains like Courtyard by Marriott and Formula One hotels as they set up base in India. Management contracts help hotel chains reduce their debt and equity risks,” says Achin Khanna, Managing Director, HVS, a hotel management consultancy.

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Published on June 03, 2014
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