India is on the move – literally. The country is experiencing a dramatic surge in travel by both local residents and foreign visitors, which makes it an attractive market for new hotels.
Consider these statistics to properly appreciate exactly how lucrative the business opportunity is in India for the hospitality industry:
• India is the 7th largest country by area, with 2.5% of the world’s land, and it is the 2nd largest country by population, with 16% of the world’s people
• The country’s economy grew 8.3 % in 2010, second in the world only to China
• 64% of India’s population is between the ages of 15 and 64, with a median age of 25 years which is lower than most other countries and lower than the world average of 28 years
• India’s middle class is growing and is expected to be 41% of the population, compared to only 5% in 2005—that’s 300 million people, or equivalent to the entire U.S. population
• Tourism is the country’s largest service industry, growing at about 10% per year and responsible for about 9% of India’s total employment
• Annually there are more than 5.5 million foreign tourist arrivals and 740 million domestic tourism visits
• There are only about 150,000 hotel rooms in India – the same number as in a city like Las Vegas or a city like New York City or a city like Orlando
All this combines to represent a sizeable number of people who must travel for business, who want to travel for leisure, and whose disposable income plus young age give them the ability to travel. Therefore, it’s not surprising that non-resident Indians (NRIs) and foreign investors with hotel expertise, especially those with experience in the United States, want to bring their resources and talent to India. So what are potential hoteliers, especially investors from overseas, looking for when they consider doing business in India? Here are six issues they typically evaluate:
In all major markets, it is almost impossible to find reasonably-priced land that is suitable for hotel development. While typical criteria for “the right piece of property” include proximity to transportation and to target travelers, in India a prospective hotel developer faces the added challenges of finding real estate that is priced to allow a reasonable rate of return on investment.
Another huge challenge for all investors, foreign and domestic, is dealing with local red tape, political corruption, and outright gangsterism. These factors combine to make land purchases as well as construction projects in India considerably more difficult, slow, and expensive than foreign business people are used to.
One additional factor when considering location is the availability of infrastructure such as water, sewage, and transportation. Adequate support systems such as these are vital to a hotel’s long-term success, which means investors are keenly interested in the country’s commitment to infrastructure improvements and expansions.
Finally on the subject of location, one of the biggest challenges – and also biggest opportunities – is the subject how India can responsibly capitalize on its hundreds of historic buildings, national monuments, religious sites, and other world-renowned structures.
The country must balance maintaining the rich heritage of these locations so they retain the beauty that makes them unique – while also upgrading them to modern international levels of look, safety, and infrastructure so they can be visited and appreciated by more people from around the world.
Real Estate Laws & Regulations
India currently has no form of real estate title insurance, an issue that certainly needs to be corrected if the country wants to continue attracting foreign investors. For now, however, an uncomfortably high number of land titles are in some type of dispute – and resolving disputes often takes years due to a legal system that moves frustratingly slow. All this makes it especially challenging to verify past ownership of land so a clear title can be established and transferred to the new owner.
In addition, it is important to be aware that all real estate transactions in India require compliance with many federal and state laws, some of which are more than 100 years old and others of which are very new. Beyond compliance with these various real estate laws, investments by foreigners are subject to certain administrative regulations such as minimum amounts of land, of build-up, and of capital investment.
It’s important to note that while there are plenty of real estate laws and regulations in writing, the enforcement of zoning and land use matters can be quite lax. So while ownership of real estate in India by foreigners for hotel development is permitted, it can be a lengthy, tedious, and confusing process – and must be evaluated and completed with careful attention to every detail.
Typically, investors are funded by India’s private banks or nationalized banks, by foreign banks, or by venture capitalists. Equity required today by banks can be as high as 30% to 40%.
Loans from nationalized banks carry more stringent regulations and guidelines than those from private banks, while money from venture capitalists usually has the fewest restrictions.
Knowing about the sources of funding for a hotel project is vital to clearly understanding the investor’s preferences, priorities, and parameters.
On the one hand, most of the world’s most recognized and most respected brands – ranging from luxury to economy – are actively working to expand their presence in India.
On the other hand, because India’s franchise laws are weak, franchisors typically do business under management contracts rather than more traditional franchise agreements. If the country wants to continue attracting sophisticated franchisors and investors – and in the process, make the country’s franchise operations more sophisticated and professional – then India must enact laws and regulations that are more sophisticated and on par with accepted international franchising standards.
Successful day-to-day operations require an investor to become familiar with and to make proper decisions about many details. For example:
Licenses are required for almost every aspect of a hotel: lodging, water and sewage, liquor, food, elevator operation, fire codes, and pollution control, to name a few – plus for live performances, if you have entertainment. Investors must work closely with local, state, and national officials to be sure all licenses are obtained and maintained – and then renewed, which is usually on an annual basis.
Food and beverage operations (F&B) can be very profitable at India’s hotels, unlike at most hotels in the United States. The main reason: many social and cultural events which attract large groups and which require lots of food, beverages, and banquet space. F&B considerations in India’s hotels require more diversity and more sensitivity than almost anywhere else in the world – due to the wide range of religious, ethnic, and geographic preferences, as well as the restrictions of vegetarian and non-vegetarian diets.
Staffing options are extensive because India has a large and talented labor pool from which hoteliers can fill positions from executives and managers to housekeepers, waiters, cleaners, washers, and more. For example, there are many fine hotel management schools throughout India that graduate outstanding candidates every year for senior and skilled positions, while specialized job placement agencies can assist with finding junior and less skilled staff.
Economic Laws & Regulations
Similarly, investors closely monitor India’s guidelines for foreign direct investment. Those rules have become considerably more liberal, with procedures simplified and most restrictions removed. With limited exceptions, foreigners can invest directly in India either on their own or as a joint venture with resident Indians. Decisions on foreign investment proposals are usually made within 30 days of submitting an application. Certainly another consideration for foreign investors is repatriation of their capital investment. This is typically permitted, provided (1) the original investment was made in convertible foreign exchange and (2) all applicable taxes have been paid.
Not to be forgotten for analysis by investors is the category of taxes – both taxes that are charged by the central and the state governments, as well as the investment incentives and tax relief which are offered by these various government entities.
Two economic issues that foreign investors believe deserve particular attention are taxes on hotel rooms and real estate investment trusts (REITs). Currently, hotel room taxes are very high and need to more on par with those in other countries, while REITs do not exist and should.
REITs would attract investors – both large and small, both foreign and domestic – and would be a proven way of spurring development in India’s hotel industry.
India is a vibrant hospitality market that will attract attention from investors around the world for many years to come. There is an extraordinary opportunity to build on the country’s rich heritage, abundant tourist sites, and growing economy.
There are also major stumbling blocks to deal with including a slow-moving bureaucracy, a corrupt political system, and a bewildering array of laws, regulations, and licenses.
Certainly an investment in foreign operations is a complex decision that involves many economic, political, and social factors – and you should consult experienced professionals for current information and comprehensive advice.
However, many foreign investors are learning first-hand every day that with patience and with a long-term vision, the rewards of doing business in India can be very significant financially and very satisfying spiritually.
—Born in Mumbai, Nitin Shah earned his undergraduate degree in mechanical engineering at the University of Bombay and his master’s degree in business administration at Georgia College and State University.
Today, he is a successful banker and hotel owner in the United States. He serves simultaneously as Chairman & CEO of Embassy National Bank, a community bank located in Atlanta, Georgia, and as President of Imperial Investments Group, which owns hotels and commercial real estate.
Mr. Shah is former Chairman of the Asian American Hotel Owners Association (AAHOA), which has almost 11,000 members who together own more than 21,000 hotels.
He travels to India regularly and is familiar with the various issues that are important to foreign investors as they contemplate doing business in India. His e-mail address is email@example.com for questions.