Hoteliers agree the asset-light model’s popularity has grown in India due to the influx of international brands looking to grow quickly. Building a hotel from scratch isn’t easy as you need anywhere from 35 to 80 permits, which inevitably delays projects. Moreover, the cost of acquiring land and building a hotel is another deterrent. It’s hardly surprising that even local groups such as Indian Hotels—which has brands like the Taj, Vivanta, and Ginger—and EIH, with brands like the Oberoi and Trident, are adopting the asset-light model. To be clear, Indian Hotels isn’t selling all its properties and shifting to only management contracts and franchisees, but it is leaning towards an asset-light model. Today, 67% of its assets are either owned or on a long-term lease and only about 33% are based on management contracts/franchisees. However, of its 30 hotels in the pipeline, less than 10 are owned properties and over the long term it sees half of its properties run as a fee-based business. “There’s nothing like a right or wrong model. Value creation in owning an asset like Taj Lands End [in Mumbai] is so significant that you need a 100 management contracts at a lower level, 50 at a mid-level and 20 at an upper upscale or luxury level to compensate for the income we have from Taj Lands End alone,” Puneet Chhatwal, managing director and CEO of Indian Hotels, tells Fortune India.

Even EIH is looking at an asset-light future. On August 1, after the company’s annual general meeting, executive chairman P.R.S. Oberoi said the company owned too much real estate and the aim was to reverse the ratio of owned properties versus managed ones, which currently stands at 70:30. Such a strategy may finally allow it to ramp up its presence significantly. Today it stands at barely 24 hotels in India despite being one of the oldest hotel chains in the country. “Management contracts are a natural progression for hotel companies that have invested significantly in the real estate business to establish their brands. Management contracts allow you to extend your brand and operational expertise to other real estate assets,” says Vikram Oberoi, CEO and managing director of The Oberoi Group.

Obviously, hotels in India are banking on the boom in the hospitality sector. A 2017 Boston Consulting Group and Google India report expects the hotel industry to grow at 13% annually to $13 billion by 2020. The industry is also optimistic as the number of hotel rooms at 115,000 is still short of demand. A report by ratings agency ICRA says average occupancy has improved to 66% from 62.5% in 2015-16, and average room revenues have grown 2-3% over the past one year to `5,800 and above. “Hotel occupancies have improved across most markets in the country, supported by slow supply addition and improving demand-supply dynamics,” Pavethra Ponniah, sector head and vice president, corporate sector ratings, ICRA, said at the report’s release in June. “The muted supply pipeline will continue to support increase in occupancies until they peak in 2021-22 at 69-70%.”

In many ways, the asset-light model holds the key to growth for the Indian hotels industry. That’s where Marriott has an edge. It has perfected the business of managing hotels without owning them. Its 30 brands have more than 6,000 properties across over 120 countries. No wonder it doesn’t plan to stop at just 100 in India. Arne Sorenson, president of Marriott International, told Fortune India earlier this year that the chain planned to go to 200 “in a handful of years”. He said one of the challenges was the high GST rate for hotels: “Hotels that trade about $110 a night are taxed at 28% and there is no other market in the world at 28% taxation. Hotels under $110 are taxed at 18%. There is no other market in the Asia Pacific region with this kind of taxation... Even though the business is doing well, the business would do that much better with the lowering of GST.” The question now is: Is the Taj group of hotels in danger of being knocked off the top slot? The rate at which Marriott is going, maybe. But, going by the Taj group’s plans of setting up 500 entry-level Ginger hotels over the next few years, maybe not.

(This article was originally published in the September 2018 issue of the magazine.)

Ritz-Cartlon

Marriott takes on Indian hotel majors with asset-light strategy