High land prices in India mean no cheap hotels

August 15, 2013 5:47 pm

High land prices in India mean no cheap hotels

By Henny Sender

Sites available in China to those who promise to create jobs

Nothing happens quickly in India. It has now been six years and counting since Lemon Tree, a local chain of mid-market hotels with money from private equity group Warburg Pincus, started to build a hostelry in Mumbai. Acquiring land, whether from the government or from private hands, is both expensive and time-consuming. There is no central land registry or simple mechanism to do title searches. The construction process is hampered by lengthy approvals, changing regulations, archaic zoning and weak infrastructure. Lemon Tree now has about 3,000 rooms in India. Meanwhile, Seven Days Inn, a hotel chain in China that Warburg Pincus invested in around the same time, six years ago, has about 40,000 rooms. It is not just hotels in India that are hostage to this frustrating process. Hospitals, retailers, logistics companies and manufacturers all face the same infuriating dynamic.The drastically different experiences in the two countries has to do with the price of land and the differing approaches the governments take toward land development and land use rights.

As India’s growth continues to fall well below its potential, one of the issues that has been neglected is the availability of land and the approval process, which is marred by corruption, lack of transparency and inefficiencies.

“You can’t buy quickly, you can’t build quickly, you can’t scale quickly and you can’t plan with certainty,” says one frustrated investor. “The whole process is ambiguous.”

China is hardly the role model, given the corruption around land use right transfers and the pollution and environmental degradation at so many industrial sites. But at least in China land is available for those who promise to create jobs; indeed the government uses the availability of land as a way to attract industry.

But in India, land is too expensive, and by keeping so many restrictions around its use, the government has choked off the development process instead of accelerating it. Land prices bear little relation to the cash flow that Lemon Tree or a lemon seller can hope to realise from the business they plan to build on it.

The problem is aggravated by India’s lack of infrastructure. Elsewhere, an entrepreneur can move to the outskirts of a city where land is cheaper. But in India, because of the lack of infrastructure, that is not a viable option. The country has far fewer cities with 1m people than China, which means investment increasingly focuses on a few megacities that grow ever more congested because of that lack of infrastructure.

The lack of transparent process serves those who park black money in land rather than those who want to use land to create wealth. Transparency would give government officials less discretion and less power.

All this is particularly ironic since the whole miserable process is justified in the name of democracy – raising questions about what exactly democracy in India means.

You can’t buy quickly, you can’t build quickly, you can’t scale quickly and you can’t plan with certainty. The whole process is ambiguous

– Would-be investor in India

For example, Alliance Tire bought a parcel of land from the government in Gujarat for a new factory a while ago. The land was in a choice location near a port and roads to that port.

The government paid villagers who would be relocated but after a year, the villagers were still agitating for more money and Alliance Tire went back to the government and received a different plot. The location was not ideal but the company did not want further delays.

In all too many cases, villagers have not been fairly compensated, but in other cases, their protests may be more about maximising possible payouts than about fairness and democratic process.

Now to return to Lemon Tree. The Indian hotelier originally hoped to be able to charge $30-$50 a night. But instead, it had to charge $50-$100, going more upmarket than planned and targeting a more limited customer base. Given the high cost of land, it could not charge such low prices and make the economics work.

One hundred dollars is a lot of money by Indian standards; better for most travellers to stay with friends or relatives. By contrast, China has several hotel chains with 100,000 rooms that cost less than $20 and one that charges a mere Rmb100, or about $16 a night.

When India’s growth started slowing to below 6 per cent, where it is today, many observers hoped that such poor performance would be a catalyst to force change.

Recently, the rupee has fallen to new lows, bringing with it fears of much higher interest rates and inflation. Yet entrepreneurs and investors see no hopeful signs of change on the horizon. And while the well-heeled travellers have an abundant choice of luxury hotels, the less well off are mostly doomed to continue to camp out with their relatives.