Financial Daily from THE HINDU group of publications
Sunday, Oct 09, 2005
Industry & Economy
Real Estate & Construction
Investment in hotels a lucrative biz
Ch. Gopinatha Rao
There are two types of value for investment in real estate. One is the fair market value depending upon the transaction in the market and the other is the worthiness of the investment. Running a hotel business is a flourishing business today with increase in the number of tourists and increase in purchasing power of the people with the development of economy.
However, the site chosen should be able to satisfy the requirements specified by the Department Tourism. The Department of Tourism classifies hotels under the star system into 5 categories, from 1 star to 5 star. For this purpose, The Hotel and Restaurants Approval and Classification Committee has been set up which inspects the applicant hotels to assess their suitability or otherwise and also places the chosen hotels on the approved list of the department.
Approved hotels become eligible to various fiscal relief and benefits. The hotels get worldwide publicity through tourist literature published by the Department of Tourism and distributed by the Government of India tourist offices in India and abroad. Approved hotels are eligible to get the benefits under the Hotel Incentive Quota Scheme.
Minimum basic requirements
A functioning hotel must fulfil the following minimum basic requirements to be eligible to apply for classification:
There should be a well designed and properly equipped swimming pool and a well designed lobby, ladies and gentlemen's cloak rooms, equipped fittings and furniture of the highest standard.
The features of the hotel discussed in this article are:
Open terrace has a restaurant.
Development of building
Any development within the Chennai Metropolitan area has to be approved by the Chennai Metropolitan Development Authority (CMDA) to get planning permit and building permit from Corporation of Chennai,
No objection certificate to be obtained from various departments which include:
Airports Authority of India; Tamil Nadu Fire & Rescue Services Department; Police Telecommunication Department;
Bharat Sanchar Nigam Ltd; Madras Regional Advisory Committee; Urban land ceiling clearance from ULC Department;
Southern Railway; Health Department; Tamil Nadu Pollution Control Board; Department of Tourism; and Chennai Metropolitan Water Supply and Sewerage Board.
NOC obtained from Airports Authority of India is valid up to two years and renewal required for every two years. Permission from Chief Electrical Inspector to erect & operate the lifts is to be obtained and should be renewed every year. All the above regulations have been complied with.
Value of land is Rs 16 crore. Value of building 1,20,000/ sq. ft @ Rs 3,800/ sq. ft = Rs. 45.60 crore. Value of the property is Rs 61.60 crore. Expressed in the unit rate, it works out to Rs 34.2 lakh per room, excluding land value. (See table)
Net maintainable profit is worked out as follows:
Tariff: Rs 4,000/ day per room exclusive of taxes, occupancy rate being 70 per cent.
Income from rooms is Rs 9 crore, food - Rs 6.5 crore, liquor - Rs 2.5 crore, and sundries - Rs 1 crore. The total income is Rs 19 crore and net profit is Rs 7 crore after deducting working expenditure, interest outgo and other expenses.
This sum of Rs 7 crore is be shared between the landlord and the tenant. When the hotel is run by a tenant which may vary from 30 per cent to 50 per cent.
Rental value of land and buildings 9% x Rs.61.6 crore is Rs. 5.5 crore.
For an investment of Rs 5 crore, profit is Rs 1.5 crore which works out to about 30 per cent.
The author is former national president, Institution of Valuers, Chennai.
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