Hotel Developers Miffed at DDA’s Land Policies

As Delhi prepares for the 2010 Commonwealth Games with wider roads and an expanded commuter train network, a key part of the plan involves the capital’s land owner auctioning sites for hotels that would come up in time to meet an estimated shortage of 30,000 rooms.

The Delhi Development Authority (DDA) plans to auction as many as 28 hotel sites in Delhi that in turn would generate at least 6,598 additional rooms. But several hoteliers complain that DDA appears to be offering sites that are not attractive or lucrative, hurting the ability of some of these hotels to become profitable in the long term.

“The reserve prices and sale prices suggest that no hotel project can be viable, and hence, you have seen no credible hotel operator bidding for (DDA) sites,” said Uttam Dave, head of development for Accor SA’s South Asia unit. Accor is one of the world’s largest hospitality firms in terms of number of properties and is currently trying to expand its presence in India.

“From (the) hoteliers’ perspective”, the locations of plots, the amount of area that can be developed on the land, the segment of the hotel market that DDA has chosen for given plots, and development regulations are all problems, Dave added.

Officials at DDA, which is part of the Union urban development ministry, could not be reached for comment.

Most of the plots DDA has auctioned in the past two years are on the outskirts of Delhi, in neighbourhoods such as Shahdara CBD, Paschim Vihar, Jasola, and Mayur Vihar. These locations are at least an hour from the city’s two airports and a significant distance from the center of the city.

DDA’s choice to sell, rather than lease, also makes life more difficult for hoteliers, who have to fork out vast sums of money to own the property while they could typically lease it for a smaller amount.

At a recent auction by the National Buildings Construction Corp., a hotel plot in South Delhi was sold to Hotel Leelaventures Ltd, for Rs611 crore, making it a prime candidate for only a luxury hotel.

Meanwhile, some experts say, what Delhi needs more of are budget-class or more affordable rooms. Luxury hotel rooms go for as much as Rs16,000 a night in the city with a top-end suite at Delhi’s Maurya Sheraton costing Rs1.25 lakh a night.

Meanwhile, Indian Railway Catering and Tourism Corp., in contrast to DDA, has created a long-term leasing model for its land under which developers, who meet certain conditions like reserving a portion of their rooms for under Rs2,000 a night, are allowed to build or redevelop IRCTC properties.

Land that is sold requires a higher initial capital investment while leasing of government lands, under public-private partnership models like IRCTC’s, has lower up-front costs, said Siddharth Thaker, associate director, HVS Consulting’s India unit. As a result, said Thaker, leasing of government lands typically allows more budget hotels to come up. DDA has recently been slammed by a court for exceeding the wide latitude it is given in rejecting bids during auctions.

At a March 2006 auction for a five-star hotel plot in Shahdara Central Business District, Aman Hotels Pvt Ltd, part of the Ambience Group, placed the highest bid at about Rs170 crore, slightly ahead of the reserve price of Rs167.4 crore and outbid 50 other bidders. DDA decided not to accept the bid without offering Aman Hotels a reason in their initial response.

Instead, it sought a higher price at a reauction, which the court permitted in September 2006. After failing to get any bidders for the plot in the reauction, the court then ordered DDA to accept the initial bid from Aman, stating, “there is something drastically wrong at the end of DDA and if DDA continues in such fashion then, certainly, it will lose its credibility.”

According to the court judgement, prior to the March 2006 auction, DDA unsuccessfully tried five times, from June 1996 onward, to sell the Shahdara property at a reserve price that initially began at about Rs65 crore. The land continues to sit unoccupied next to a sprawling retail complex as a a de facto cricket pitch for local children. It wasn’t clear why the land is still undeveloped.

Aman Hotels could not be reached for comment.

In the meantime, said HVS’s Thaker, other hotels are coming up in Jasola and Suraj Kund that will render the Shahdara five-star plot unprofitable for hoteliers.

Hoteliers such as Vilas Pawar, CEO of Choice Hospitality India Ltd, believe that even if there are enough hotel rooms for the 2010 Games, the DDA’s policies are still not conducive to long-term development of hotel projects in the city.

Pawar’s company manages and franchises hotels in India under US-based Choice Hotels International Inc. brands such as Clarion, Comfort Inn, Quality Inn, and Sleep Inn.

The “long gestation period” for a hotel project, said Pawar, requires “7-10 years” to get a return on investment for developers. As a result, he said, “a one-month Games deal does not justify the investment in a location.”