You can lease Delhi's Taj Mansingh if you have Rs 400cr to spare

Given the hotel's prime location, it is obvious that there will be some serious bidders trying their luck when an auction is held in the second half of this calendar year.

Taj Mansingh Hotel, New Delhi. Courtesy Taj Hotels

IMAGE: Taj Mahal Hotel on 1, Man Singh Road, New Delhi, was once the location of a small hotel named Fonseca's till the Taj group, with difficulty, leased it and opened it in 1978. Photograph: Kind Courtesy Taj Mahal Hotels.

The location of this hotel can't get better.

This is 1, Man Singh Road, of Lutyens’ Delhi. Housing luxury hotel Taj Mahal, operated by Indian Hotels for 39 years.

Decks have been cleared for the auction of this property, minutes away from the seat of central government authority.

It is obvious that there will be some serious bidders trying their luck when an auction is held in the second half of this calendar year. New Delhi Municipal Council, which owns the 3.78 acres on which the 294-room hotel stands, will conduct the auction.

Taj Mansingh Hotel, New Delhi. Courtesy Taj Hotels

IMAGE: The Man Singh Road Taj, when it opened, changed the hotel scene in India's capital, which till then had only the Oberoi Intercontinental and The Ashoka. Photograph: Kind Courtesy Taj Mahal Hotels.

There are many unknowns. Investors who are keen to bid for the Taj Mansingh (its popular name after the road on which it is located) seek more clarity about the entire process, to evaluate the case and secure internal approvals. NDMC has not come out with details yet.

When it had first decided on auction, it had got SBI Caps to execute it. That did not happen as Indian Hotels challenged the decision, first at the high court and then at the Supreme Court. Indian Hotels’ lease had expired in 2011.

The financial terms on which NDMC had offered this asset to Indian Hotels is not known and there has been no recent auction in the area. But we have some sense of older auctions in the city. For example, Accor Hotels, which in 2009 won an auction to set up twin hotels (Pullman and Novotel) in Delhi’s Aerocity, is understood to have paid an upfront licence fee of Rs 220 crores to Delhi International Airport Ltd and an annual fee of about Rs 8 crores, with a five per cent annual escalation clause for the 30-year lease. The two hotels have 670 rooms and also enjoy commercial space.

Taj Mansingh Hotel, New Delhi. Courtesy Taj Hotels

IMAGE: This Taj became famous for many of its eateries like Casa Medici, the city's first Italian restaurant, the House of Ming which brought Sichuan food to Delhi and the popular Machan. Photograph: Kind Courtesy Taj Mahal Hotels.

Then, almost a decade before, the Leela Group acquired a three-acre lot near prime diplomatic area for Rs 700 crores. And, pumped another Rs 900 crores to build a 260-room property. It is a different story that Hotel Leelaventure has for three years tried to find a buyer for this hotel, to reduce its debt.

It is unlikely that the Taj gets sold with the land. If it did, the valuation could cross Rs 1,500 crores. Some aggressive bidders might even pay a couple of hundred crores more, say experts. In the more likely event of a lease, the upfront fee could be Rs 300-400 crores, with an annual fee based on some revenue share model.

Indian Hotels was willing to pay a guaranteed annual Rs 21 crores for the first 10 years, Rs 25 crores for the next 10 years and Rs 30 crores for the last 10 if NDMC would have renewed its lease for a 30-year period. These were based on revenue projections. The actual pay might have been higher.

The Leela, Delhi. Courtesy The Leela

IMAGE: The Leela Group acquired a three-acre lot near prime diplomatic area for Rs 700 crores. And, pumped in another Rs 900 crores to build a 260-room property but is finding it difficult to turn a profit. Photograph: Kind Courtesy Leela Group.

In addition to licence fee, a new operator would sooner or later also have to invest heavily on renovating the 40-year property. EIH is investing Rs 325 crores to completely redo the 51-year-old Oberoi Delhi which has 283 rooms.

Renovating the Taj could cost as much as Rs 300 crores, a challenge for any entity to make money, as the operating earnings might be only Rs 70-80 crores. Indian Hotels, which has earned a profit from the property all these years, could be more aggressive in the bidding than others.

That apart, there is much interest in the asset.

“We would be very keen to evaluate the opportunity but, as of now, there is no information on the bid structure. We also hope NDMC gives adequate time for institutional buyers to evaluate prior to bidding,” said Ashish Jakhanwala, managing director and chief executive officer at SAMHI, a company owning 18 hotels operational under the Hyatt and Marriott brands.

Bigger domestic hotel companies like Oberoi Group and ITC could also come into the fray. And, some sovereign wealth funds.

Novotel, Aerocity, New Delhi. Courtesy Novotel

IMAGE: There have been earlier hotel auctions in the city. For example, Accor Hotels, which in 2009 won an auction to set up twin hotels (Pullman and Novotel, above) in Delhi’s Aerocity, is understood to have paid an upfront licence fee of Rs 220 crores to Delhi International Airport Ltd and an annual fee of about Rs 8 crores. Photograph: Kind Courtesy Novotel.

A couple of other executives in the sector said it was difficult to take a call to bid or not at this stage. Knowing the tremendous billboard effect of the Taj, there are brands that could go for it only for the location and, therefore, be willing to settle for a relatively lower return than they would have for other properties.

Sector officials also say the lease period has to be longer than the 33 years that was initially offered to Indian Hotels. “Since a large capital investment would go and returns will be spread over a number of years, the lease period has to be longer.”

“The location does not get better for a hotel. We do not wish to speculate on the new terms on which NDMC will auction the property. Any brand realises there will be a huge cost associated with the asset. Therefore, commercial sense has to support a strategic vision of owing this hotel,” said Raj Rana, chief executive officer at Carlson Rezidor, which operates 84 hotels under brands like the Radisson and Park Plaza.