Market slowdown to affect hotel development
Posted by paragjani on July 23, 2008
With real estate stocks being hit adversely by the market slowdown, the phenomenon is expected to have a spiralling effect on hospitality development in India. Most real estate majors with a series of hospitality developments in their portfolio are affected by this trend. This may lead to a stall or delay in the completion of projects as well as a revision of the project expenditure. Over the past few months, real estate stocks have seen a major downfall, with an average of 60 to 65 per cent drop in the share prices during 2007-‘08.
“There is not only a slowdown in the market, but also an alteration in project costs with the configuration of interest rates,” says Prem Subramaniam, Head, Infrastructure Development Finance Company (IDFC).
While financial market analysts expect the decline in real estate stocks to continue in coming months, they also speculate that hotel projects will be stalled due to lack of liquidity and equity funding in the markets. On the contrary, hospitality consultants feel that projects that are already secured with funds will not be affected.
“The projects which have already tied up for debt or with equity fund providers will not suffer, but the ones that are seeking funds may see a three to four month delay in completion of the projects,” says Amitabh Devendra, Strategic Advisor – India, Molinaro Koger.
Akshay Kulkarni, Director – South Asia, Cushman Wakefield Hospitality says, “It may be wiser for developers to complete projects that are currently in progress, rather than shelve them for completion at a later stage. Projects that are being developed with realistic assumptions will continue to be viable. However, those projects undertaken on the basis of hyped operating figures will suffer.” Consultants also feel that listed developers will need to stick to their delivery dates — otherwise, it might affect their market valuations further.
Industry experts also agree that though funding agencies are available, the firms will be cautious to invest in hospitality projects. This affects the debt raising capacity of the entire real estate sector (including hospitality projects). “Lenders will be more conservative to invest, and a lot will depend on the credentials of the developers and the promoters,” feels Homi Aibara, Partner & Consultant, Mahajan & Aibara. Although market analysts speak of the lack of liquidity in the market, capital investors are being more vigilant of their real estate partners before jointly partnering projects.
“Presently, the market is observing a rationalisation in pricing. We have the capital, and are looking to fund developments. However, the delay seems to be on the developer’s end,” says Vishwas Bhatia, General Manager – Hospitality Division, Future Capital Holdings.
The industry has already been affected by inflation and increase in the prices of construction raw materials. Also, the ongoing political situation and the unstable Union Government have an impact on financial markets of India. They in turn affect the stocks. “The industry is experiencing a double whammy, and with the cost of funds going higher, the hospitality companies’ promoters will be forced to dilute their equity or look for partners for their original assets,” adds Subramaniam.
Industry experts also believe that an overall slowdown of the economy may lead to a price correction across the markets.
