Billions of rupees invested in hotels riding on tourism recovery
--BY TAMISH GIRI
On October 11, 2014, the foundation stone of Sheraton Kathmandu Hotel was laid in Kantipath, Kathmandu. Construction of the much-anticipated five-star luxury hotel began in earnest in February 2015, with the aim of welcoming guests in 2020. However, due to a series of setbacks, particularly the Covid outbreak, the hotel has yet to be completed eight years later. The project has not only missed its completion deadline by three years, but costs have also skyrocketed.
MIT Group Holdings Pvt Ltd (MITG) is currently overseeing the construction of the five-star hotel. Upon completion, the hotel will have a total of 218 guestrooms, as well as a basement, lobby, health club, spa, temperature-controlled swimming pools and fitness centres. The project will also include the construction of a retail shopping centre, food court, seminar hall with a capacity of 1,000 people, two additional seminar halls, three meeting rooms, and a boardroom. The hotel building complex will consist of three basements and 18 floors, with a total floor area of 40,755.00 sq m. It was initially estimated to cost $75 million.
Suresh Chitrakar, the project manager of Sheraton Kathmandu Hotel, shared that the external structure of the five-star hotel project is almost complete, and work on the interior will commence soon. Although he was hesitant to disclose further details, he revealed that the project's costs have escalated due to COVID-related delays, inflation, and rising dollar exchange rates. The construction had to be halted for nearly a year. Despite missing its initial completion deadline, the hotel was supposed to open by mid-2021. However, due to the Covid-19 pandemic, this deadline was postponed by another year, and more than a year later, the project's progress remains slow.
Chitrakar estimated back in 2021 that the construction pause had increased the project's expenses by more than 55%. He further said that updates on the hotel's feasibility and a new completion deadline are yet to be announced.
Similarly, the construction of two other five-star hotels, Dusit Thani in Namo Buddha owned by Omstone Asia, and a hotel being built by Shanker Group in Bhagwati Bahal, Naxal, are also still not operational. Although both hotels were estimated to open in 2020, they are still in the final stages of completion, and costs have surged significantly.
Despite the challenging circumstances brought on by the pandemic, Marriott Kathmandu has managed to establish itself and is now operating steadily. According to Sumit Kumar Agarwal, vice chairman of MS Group, which owns the hotel, the property is currently achieving an average occupancy rate of 70%.
Agrawal revealed that the construction of the five-star project started in 2016 and was originally scheduled to be completed within 40 months but was delayed by six months. Fortunately, the hotel was able to begin operations in the 42nd month, generating some revenue. Agrawal noted that the project's estimated cost only increased by close to 1%, thanks to the completion of construction works within the stipulated deadline. The estimated cost of the project, according to Agrawal, was Rs 7 billion.
According to the feasibility report for Marriott Kathmandu, the cost recovery period for the project was predicted to be 9 years, with an estimated cost of $145 per day per room and an annual occupancy rate of 59%. However, after the COVID-19 pandemic, Agrawal reports that the recovery period has increased by two additional years, with a room booking charge of $165 per day and an annual occupancy rate of 66%. Agrawal further explained that the refinancing scheme has been crucial in helping the hotel recover the expenses related to bank loans and the investment in the project.
The construction of another highly anticipated project, Hotel Crowne Plaza, owned by CG Holdings, has been pushed back due to the pandemic. This is a franchise of Intercontinental Hotel and is situated in Jhamsikhel. Abhishek Goyal, the project coordinator of the hotel, shares that the construction work began in 2020 but was later stopped due to the lockdown. Although construction resumed in 2021, it was again halted by the second wave of the pandemic. The consecutive halts have not only pushed back the project but also increased the cost, he adds.
After facing a severe downturn during the height of the Maoist insurgency in the early and mid-2000s, the Nepali hotel industry gradually recovered and has witnessed rapid growth in the last 5-6 years before the COVID pandemic. The return of political stability in Nepal has made the sector a lucrative one, with new hotels and resorts opening across the country with substantial investments. The Department of Industry (DoI) registered over 516 new hotel projects between 2014 and mid-January 2020, with investments totalling Rs 96.38 billion, which is a clear indication of investors' interest in the sector.
The hotel sector has emerged as one of the most attractive investment opportunities in Nepal. In the fiscal year 2019-20, the Department of Industry registered 91 new hotel projects, indicating strong investor interest. Nepal's hospitality industry mainly comprises star hotels, boutique hotels, and resorts, which cater to high-end foreign and domestic tourists. In addition to these, budget travellers are also accommodated by tourist standard hotels and homestays. As per the Department of Tourism, Nepal currently has 17 five-star and 28 four-star hotels. According to the Hotel Association Nepal (HAN), as of December 2019, there were more than 100 new hotel projects in various stages of development in different parts of the country.
Hoteliers share that they import around 10% of the items for hotels from the third country, while around 30-50% have to be imported from India which jacks up project cost. According to Agrawal, the cost of building a project, which costs IRs 10 million in India, goes up by 210% in Nepal. Customs duty, taxes and transportation costs account for over 50% of the cost, he added.
Likewise, Binayak Shah, vice president of the Hotel Association of Nepal, said that Nepal is one of the most expensive countries in Asia in terms of the cost of doing business. This affects the investors as well as the projects, he added.
The cost of starting a project in Nepal has been growing higher with the rising inflation post-COVID and the ongoing Russia-Ukraine war. Likewise, Nepal ranks 94th out of 190 nations in terms of doing business, according to the World Bank.
In the meantime, the average occupancy rates of hotels in Nepal have not been encouraging. According to Tek Bahadur Mahat, CEO of HAN, the average room occupancy of hotels is only around 25%. However, he adds that it might improve with the upcoming tourism season. Mahat also said that hotels in Nepal are mostly seeing Indian and Bangladeshi tourists at the moment.
Tourist arrivals were hit badly by the COVID pandemic but are now getting back on track. In February, 73,255 international tourists visited Nepal, compared to only 19,766 in the same period last year and 9,146 in 2021. The growing number of tourists has been a positive development for hoteliers and upcoming hotel projects.
It is expected that the relaxation of travel restrictions for Chinese citizens will have a positive impact on the Nepali hotel industry. Prior to the pandemic, more than 150,000 Chinese tourists visited Nepal annually, making them the second-highest group of tourists after Indians. According to the Nepal Tourism Statistics, 2021, Nepal welcomed 169,543 Chinese tourists in 2019.
The inclusion of Nepal in China’s approved destination list is a positive sign for the hoteliers, and the under-construction hotels that were previously struggling due to the pandemic can now see a brighter future. According to HAN CEO Mahat, the increased Chinese footfall will lead to a rise in room occupancy rates and will give hope to hotel investors. “They are starting to believe that they will get their investments back,” said Mahat.