The grant of infrastructure status to hotel industry promises to open new avenues for this sector. Amidst economic slowdown, the industry is facing poor occupancy rate and liquidity crunch due to high cost of capital.
This week, the government included hotels with project cost above `200 crore (excluding land cost) and convention centres with project cost above `300 crore in the infrastructure sector that will pave way for easier access to capital for the industry which has been asking for the infrastructure status for over two decades now.
“It has come as a relief for the hotel sector. With cheaper funds now available for the hotels it will improve the financial viability of hotel projects. The Tourism Ministry has been quite supportive as they pushed our case,” says Vivek Nair, chairman, Hotel LeelaVenture. Nair is also the past president and honorary secretary of the Federation of Hotel and Restaurant Associations of India (FHRAI).
The Union Budget 2012 granted infrastructure status to the hotel sector but only to three-star or higher category classified hotels that are located outside cities with a population of more than one million. However, the hotel industry argued that the rider meant that only 5 per cent hotel projects could avail the benefits of the infrastructure status.
Infrastructure status will help hoteliers get loans at low interest rates with a longer repayment period. Post the infrastructure status interest rates for loans availed by the hoteliers are expected to come down to a manageable 3-4 per cent from 12-13 per cent now. The hotel industry till now could seek bank loans for only up to 10 years. But, now, loans can run up to 15 years. Also, hotel developers can now access funds raised through infrastructure bonds issued by institutions such as IIFCL and IDFC.
“Infrastructure status will also permit developers to have a higher debt-equity ratio of up to 4:1 and avail cheaper external commercial borrowing (ECBs),” Nair points out. With many hotels reeling under debt, it will help them in improving their balance sheets in the long run.
However, some in the industry feel that though this comes as a welcome step the `200 crore threshold is high and doesn’t really help budget and mid-market hotels.
“The ceiling is high as it excludes land cost. The policy is progressive but there is a shortage of branded budget and mid-market hotels in the country. The move to extend infra status to hotels will not give a fillip to the budget segment where project costs are usually less than `200 crore,” explains Rahul Pandit, president and executive director, Lemon Tree Hotels.
Meanwhile, FHRAI is now pressing for inclusion of hotel accommodation in the negative list of service tax, single-window clearance, industry status to hospitality and tourism sector.