Why big corporates invest in hotels?

Tue, 24 Jan Pre-Open

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Return is perhaps the most important criteria while making any type of investment. However, anecdotal evidence seems to suggest that the above statement does not hold true when it comes to investments in the hospitality sector especially from large corporates. It is true that hotels need huge investments in infrastructure while returns are dependent on occupancy rates which tend to be seasonal in nature. However, a cursory look at the investment portfolio of top businessmen across the world reveals that majority of them own a hotel chain which if not into a loss, earns return which is grossly insignificant.

Take the case of the Mexican telecom tycoon Carlos Helu or for that matter the famous Saudi investor Prince Al-Waleed Bin Talal for example. Both of them have significant interests in hospitality business. Back home too we have Tata's and Ambani's who are active in hospitality business. Now, since their investments hardly seem to generate returns that match the risk profile of such long gestation seasonal projects one might wonder what could have been the incentive for investing in such projects. They could have easily made more money by investing in other businesses.

Well, there is no direct answer to this anomaly. True that the marginal utility of money for these corporate honchos is very low hence they can afford to explore risky ventures. But after all every business decision has to have a sustainable return rationale when one is dealing with the shareholders money.

Nonetheless, if one were to ignore the monetary angle there are some intangible benefits from operating a hotel chain as well. For instance, the Taj Group of Hotels provides various benefits to the Tata's when it comes to organizing corporate events. Further, group managers also get to use the properties at concessional rates when on travel. When it comes to the ITC group it is the synergy between the hotel and other businesses that comes handy. Paper, matches and toiletries business act as a feedstock for the hospitality venture.

Again the lease model where individual hotel is leased out to the property owners has offered attractive options to the hoteliers to expand their geographical presence without much of a capex. In such a model the property owner gets a share from the earnings (for renting out his property) which saves the outflow on property expenditure for the hotelier. Such lease models are attracting more corporates to the hospitality business.

However, a closer look reveals that the intangible benefits outlined here do not seem to outweigh the return inconsistency associated with hospitality projects. But still the corporate honchos are holding to their ventures. Perhaps the monetary returns are irrelevant for them. Strange, isn't it?