REITs -Impact on Hotel Industry Report.

HOTEL REITS
AnactionagendaforgrowthforHotelsinvestmentindustry
An exclusive report
REAL ESTATE INVESTMENT TRUSTS
IMPACT ON HOTELS INVESTMENT INDUSTRY
A NEW ERA OF GROWTH FOR HOTELS INVESTMENTS SECTORREITS

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REITs - IMPACT ON HOTELS INVESTMENT INDUSTRY
Contents
Executive Summary 3
Global Success and acceptance of REITs 5
Hotel REITs
The impact of REIT in Hotel Industry in India 6
Solving financial challenges for small and
medium sized hotels companies 8
Solving financial challenges for growing
medium sized hotels and hospitality
companies 9
Conclusion 12

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Hospitality sector to attract over USD 200
billon in the next three years in India.
The Indian hotel industry presents an exciting business landscape &
opportunities for both multinational and domestic players. According to a
recent report by global database and research service for hotel construction
projects, tophotelprojects.com, around 300 branded hotels will come up in
India over the next three to four years constituting about 17% of Asia’s hotel
constructionpipeline.Morethan200newhotelsspreadacrossnearly50brands
are expected to be operational in the next four-to-five years in India. India’s
hospitality sector is likely to see investment in excess of $200 billion over the
nextthreeyears,withinvestorsshiftingtheirfocustoAsia’sgrowingeconomies.
Hotels and tourism is the largest service industry in India, with 100%
FDI allowed in Hotels sector, and with the formulation and introduction
of REITs(Real Estate Investment Trusts) India presents an enormous
opportunity to the Hotels industry. In fact, the sector attracted
second highest FDI amounting to USD 3.2 billion in 2013-14 in India.
HOTEL REIT-HOTELS REAL ESTATE INVESTMENT TRUST
A new era of growth for Hotels Investment Industry.
The vast and fast-paced hotels and real estate sector of India imperatively
requires reliable and transparent investment vehicles like REITs, for
prospering optimally, drawing more FDI, contributing more to the national
GDP and emerging fast as one of the largest and most prosperous
hotels and real estate markets of the world in the nearest future.
Executive Summary

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As per the latest estimates of world-famous Cushman & Wakefield,
the magnitude of the real estate and hotel assets under all categories
which can qualify acceptance of REITs in India, will reach the level
of US$20 billion by the year 2020; and by this capacity of market
capitalization, the REIT market of India is most likely to rank
among the top five biggest markets of the Asian Subcontinent.
A Hotel REITs is a public listed company that owns and operates income-
producing hotels and resorts. Hotel REITs own hotels or resort properties
and could include different types of properties such as limited service,
full service, resort, conference center, suite and airport properties. Hotel
REITs derive value from the underlying value of hotel properties the REIT
owns and from the income generated by those properties. Hotel REITs is
a hotel company that offers common shares to the public. A REIT has two
unique features — its primary function is managing income-producing
hotel properties and distribute its most of the profit to its shareholders.
REITs - Real Estate Investment Trusts have been in
the news in India lately ever since SEBI issued guidelines in 2013 for REITs
to come into existence within the regulatory framework. Investors, both
wholesale and retail, now will have another avenue to invest in the real
estate sector through a regulated fund route. Hotel REITs will help investors
channelize their investments into India’s realty and hotel sector through
a regulated mechanism and create hotel and real estate companies that
continually delivers maximum value and wealth to all its stakeholders.

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REITs have been in existence in
over 30 countries worldwide and
REITs own approximately $1 trillion
of commercial real estate assets,
including listed and non-listed
REITs. In US itself, 172 listed REITs
on NYSE has a market capitalization
of $619 billion [by NAREIT]. REIT
is high dividend yield investment
instruments worldwide and has
historically increasedinvestor’stotal
return and lowered the overall risk.
REIT approach to real estate
investmentacrosstheglobe.Withthe
latest news from India, 31 countries
now have REIT regimes in place, a
group that includes both developed
markets and developing economies.
Remarkably, a decade ago there
were only a dozen countries with
REIT legislation, and just over 20
countriesasrecentlyasfiveyearsago.
Global Success and acceptance
of REITs.

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FACTORS FAVOURING SUSTENANCE OF REITs
IN INDIA.
1. India’s steady and fast economic growth
inevitably demands more hotels, commercial
and industrial buildings, modern offices,
conference centers, and other objects of
real estate mentioned above in future years.
2. REITs will also help the overleveraged
companies in getting themselves deleveraged.
Small to big investors will get promising and
secure investment options in the real estate,
which are rather less risky and uncertain
than those in the under-construction
properties for getting regular income.
3. Thus,REITsaremostlikelytoinfuseafreshand
brightleaseoflifeintothehotelandrealestate
sector of India. Besides these benefits, other
benefits and facilities offered by REITs are the
following --- A less risky investment avenue to
general investors; investment diversification;
regular dividends; better liquidity situation;
transparency; bright growth prospects;
improvement in Debt-Equity ratio in the Hotel
and Real Estate Market; tax efficiency, etc.
4. Availability of Hotels sector financing from
more structured, institutional sources will
help in reducing the over dependence on a
particular means of financing. In this context,
HotelREIT’swillassistinstreamliningtheHotel
sector by creating a transparent mechanism
for raising finance from public domain.
5. Specifically in the context of hotel sector,
introduction of REITs will bring pure equity
capital which will assist in improving the
debt-equity balance in the hotel industry,
through provision of equity financing
and thereby assist in the growth of a
more stable and mature hotel industry.
6. Hotel REITs will offer investors another
option or avenue to include Hotels in their
investment portfolio. Further, well managed
REITs may offer higher dividend yields
which may be higher compared to other
investments. Hotel REITS dividends are
secured by stable rents from long term leases.
7. Compared to investing directly in hotel
Hotel REITs
The impact of REIT in Hotel Industry in India
An action agenda for growth, a bright and new era of growth
for hospitality industry.

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properties, REIT investment offers the
advantage of liquidity – the ease of
converting assets into cash. Hotel REITs
are listed on the stock exchange and the
trading of the shares in an REIT can be
done throughout the trading day. Individual
investors enjoy a tax-exempt distribution
which comes in the form of dividends in
the REITs structure. The process of buying
or selling a REIT is transparent and flexible.
Moreover, there are a lot of external controls
and monitoring of REITs, which increase
transparency and corporate governance.
8. REITs are required to comply with corporate
governance, information disclosure, and
financial reporting standards laid down
by the Regulator. In this sense, there is a
regular information exchange and availability
of information in the public domain and
therefore REITs bring more professionalism
and transparency in Hotel industry.
9. Hotel REIT is collective pooled investment
instrument just like Mutual Fund, invest
primarily in completed and revenue
generatinghotelproperties.Therentalincome
generatedwillbedistributedamonginvestors.
While REIT is professionally managed liquid
investment option, investor can invest in
smaller amount and have exposure to real
estate and hotel properties as well as diversify
its portfolio. SEBI has issued the REIT -Real
Estate Investment Trusts (REITs) Regulations
and notification in September, 2014.
Challenges for REITS
1. There are several challenges to overcome
before the successful implementation of
REITs in India. To begin with, title certification
in India is an ambiguous and cumbersome
process,andthiscomplexitydiscouragesmany
potential foreign and domestic investors from
buying into income-yielding hotel properties.
2. Anotherissueisthevaluationmechanism.Real
estate valuation in India is largely unregulated
and lacks a standard code of practice or ethics.
In order to implement REITs, the government
will have to address these issues via making
and amending multiple legislatures.
3. To remove any regulation hurdle coming in
the way for foreign investors putting money
in the newly created Real Estate Investment
Trusts ( REITs) structure, the government has
proposed allowing overseas investments in
this space within the FEMA regulations. The
proposed relaxation is expected to help those
entities which are registered and regulated
under the SEBI norms, to access foreign
investments through their REITs. REITs can
be listed and traded on stock exchange
like shares or any other security and also
help create new platforms for raising of
funds by real estate and hotel companies.
4. However, high and glamorous success of REITs
in the future years will largely depend on the
taxation of REITs, stamp duty and taxation for
offshore investors, stamping of agreements
associated with the transfer of property
to the REITs, and efficient administration
and management of the REITs in India.

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Solving financial challenges for small and
medium sized hotels companies
One of the key challenge that Indian Hotel industry specially Small and medium enterprises ( SMEs ) face
is the lack of adequate finances and high capital cost. However, there are innovative ways to manage
financialchallengesinHotelbusinesseslikenewsourcesofraisingequitycapital,publiclistingonSMEstock
exchange,attractingprivateequityinvestorsfromdomesticandinternationalmarketsandwealthcreation.
For growing medium size hotel companies seeking to raise capital, an SME public listing on an SME stock
exchange can be a superior route to growth. SME stock exchange platforms provide a great opportunity
to the medium sized hotel companies to raise equity capital for the growth and expansion. SME public
listing and issuing an IPO on a SME stock exchange will help unleash the valuation of SME companies and
in the process create wealth for all the stakeholders, besides enormous income tax benefits. All small
and medium hotel companies have the potential to grow into big multinational companies, provided
they get adequate capital support. The SMEs now have the great opportunity to grow into big public listed
multinational companies by getting themselves listed on a SME stock exchange. This concise report will
help medium sized Hotel enterprises to be well prepared to transform their medium sized company into a
successfulandwealthypubliclistedcompanythatcontinuallydeliversmaximumvaluetoitsshareholders.

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Small and Medium Enterprises Sector - The
next big revolution across the globe.
World over, dedicated SME trading platforms or
exchanges are prevalent. Some of the known
stock markets for SMEs are AIM (Alternate
Investment Market) in UK, TSX Ventures in
Canada,GEM(GrowthEnterpriseMarket)inHong
Kong, MOTHERS (Market of the high-growth and
emerging stocks) in Japan, Catalist in Singapore
and the latest initiative in China – Chinext and in
India as BSE SME and NSE Emerge. As a matter of
fact, NASDAQ also started as an SME exchange.
Unleash the business valuation &
multiply the valuation to 100 times over.
The Top 10 advantages of SME public
listing for medium sized hotels enterprises
seeking to raise capital are stated below:
1. Easier access to equity capital and
better funding opportunities: Going
public and coming out with an IPO on
an SME exchange provides hotel SMEs
with the equity financing opportunities
to grow their business from operations
to expansion to inorganic acquisitions.
Access to equity financing lowers the debt
burden leading to lower financing costs
and healthier and wealthier balance sheets.
2. Enhanced Value creation and unleashing
the business valuation many times over.
Valuation of a company is determined
by many factors, one of which is class of
company-whether public listed or private
limited. Going for a public issue of capital
will enhance the company’s visibility.
Greater public awareness gained through
media coverage, publicly filed documents
and coverage of stock by sector investment
analysts will provide the hotel SMEs with
greater profile and credibility. This can result
inmorediversifiedgroupsofinvestors,which
may increase the demand for that company’s
sharesleadingtoanincreaseinthecompany’s
value and enhanced value creation.
3. Balanced Risk Management for
promoters: SME public listing will help
Hotel Small and Medium Enterprises
promoters and owners to distribute the
risk of business efficiently. Listing the
company would facilitate expansion of
the investor’s base, which in turn help
company get secondary market for equity
financing, including private placement.
Solving financial challenges for growing
medium sized hotels and hospitality companies

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4. Easier and efficient entry and exit
platforms for private equity and other
strategic investors leading to increased
participation from private equity
investors: The presence of a market-driven
transparent trading platform provides
with a ready and easy entry and exit for
strategic investors. Listing not only offers
the investors flexibility for entry and exit,
but also the confidence required for any
such transactions. The listing would result
in an increased participation by venture
capital players as they would have a ready,
transparent and tax-efficient exit route.
5. No long term capital gain tax: Normally,
transfer of unlisted shares attracts long
term capital gains tax of 20% and short term
capital gains of up to 30%. Whereas in case
of listed shares, tax on long term capital
gains is nil and short term capital gains is
15%, provided the transaction has been
subjected to securities transaction tax (STT).
This preferential tax treatment on transfer of
listed shares is also available to shares listed
on SME Exchange. Listing on SME Exchange
is a valid tax-planning tool and could, thus,
lead to enormous tax saving for hotel and
tourism SME entrepreneurs & investors.
6. No tax on fresh equity infusion in the
company: Recently the Finance Act, 2012
imposed a tax liability on fresh issuance of
equity shares by an unlisted company to
investors other than “Registered Venture
Fund”, if the issuance is made at a value
more than the fair value. This could make
SMEs subject to heavy tax outgo, since they
often go for fund raising through equity
issuance to investors. Such a tax liability,
however, does not attract if the shares
of the company are listed on recognize
stock exchanges, including SME Exchange.
7. Transform Indian growing Hotels SME
into Global MNCs, corporate image
creation, better visibility and strong
brand building: Going for a public issue
is most likely to enhance the company’s
visibility. Greater public awareness gained
through media coverage, and research
coverage by sector investment analysts
provide the SMEs with greater visibility
and help brand building which otherwise
may remain a dream especially for SMEs.
8. SME listing on stock exchange can
facilitate growth through strategic
investments and SME mergers and
acquisitions and private equity from both
domestic & international investors: The
hotel SME companies in their effort to have
forward or backward integration for growth
and expansion may take a strategic stake in
other hotel SMEs. Domestic & International
investors repose faith in listed SMEs. Listed
SMEs are likely to get strategic investments
from both, domestic and international
investors as well as from private equity and
strategic investors. Instead of a direct cash
offering, using shares for an acquisition
can be a tax- efficient and cost- effective
vehicle to finance such a transaction.
9. Incentive mechanism for employees:
ESOPs and any other share-based
compensation plan of listed company
have an immediate and tangible value
to employees. This, in turn, serves as a
talent retention tool. This can serve to
ensure stronger employee commitment to
the company’s performance and success
10. Strong Corporate governance & financial
controls: Though the requirements for a
company listed on SME Exchange are not
as stringent as that for Main Board listed
companies, nevertheless SME listing ensures
that the company has drawn up the internal
controlsystemsandsetupminimumrequired
framework of corporate governance. This,
in turn, lends sustainability to the business.
Business Blueprint to transform
the medium sized hotel companies to
Global MNCs.
Start preparing as soon as possible:

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• Begin the preparation of listing process
early enough so that your pre listed
company acts and operate like a public
company at least a year before the IPO.
• Commit substantial resources to the
IPO process and build the quality
management team, robust financial
and business infrastructure, corporate
governance & investor’s relation strategy
that will attract the right investors.
• Don’t underestimate the amount of time
the IPO journey will take or the level of
accountability and corporate governance
required by a public limited company.
SMEs should start preparing to outperform
competitors on key benchmarks:
• Investors base an average of 70% of their
IPO investment decisions on the financial
performance of the company especially debt
to equity ratio, EPS growth, sales growth,
ROE, profitability and EBITDA growth.
• Investors base an average of 30% of their IPO
investment decisions on the non-financial
factors especially quality of management,
corporate strategy and execution, brand
strength and corporate governance.
• SME should be able to articulate an
effective equity story backed up by a
strong track record of growth which
sets you apart from your competitors
while maximizing value for owners.
Evaluate various Capital raising options:
• Consider a multi-track approach and the
expandingnumberofcapitalraisingstrategies
includingastrategicsaletoatradeorfinancial
buyer, joint venture, private placement and
compare all the options to arrive at the best
decisions to maximize the value and wealth.
Address investors current concerns:
Recognize the need for enhanced corporate
governance especially recruiting qualified team
members, improved internal controls and
systemsandformingaqualifiedauditcommittee.
Fine tune your internal business operations-
especially working capital management,
regulatory risk and rationalizing the
business and financial structure.
Ensure timely and accurate financial
information is available. Appropriate systems
and controls are in place with all the financial
and management information readily
available on monthly and quarterly basis.

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By the very nature, REITs are beneficial to both the investors and the
hotel and real estate industry as a whole, in many different ways. REITs
will provide new and swift sources of finances to the cash-starved Indian
Hotel and property developers, who have been suffering from one of the
highest interest rates of Asia. Hotel REITs will help investors channelize
their investments into India’s realty and hotel sector through a regulated
mechanism and create hotel and real estate companies that continually
delivers maximum value and wealth to all its stakeholders.
The SME listing window of opportunity is available to medium sized hotel
companies seeking to raise capital for growth and expansion. Advance
preparation & planning are critical. Lack of preparation and proper
planning can jeopardize an SME IPO. SME Listing and bringing IPO is a
long process and involves enormous amount of work and planning like
building an equity story, strong financial results, timely and accurate
financial and accounting information, strong internal controls, qualified
management team, corporate governance and investor’s relations.
If you want your hotel enterprise to initiate the several benefits of
REITs and/or SME public listing and explore the various financial growth
strategies to transform to a public listed company, start getting ready by
getting in touch with us for a strategy alignment assessment for growth.
Conclusion

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Brief Profile of Author:
Mr. Rajan Bhatia, FCA is an experienced Chartered Accountant and alumnus of
prestigious Shri Ram College of Commerce, Delhi University and IIM-C with over 20+
years of experience across several industry sectors such as Hotels and Hospitality,
healthcare, private equity and financial services. After having worked with The Oberoi
Group of Hotels for over 7 years till 2011, Rajan founded and started his financial
and business consulting firm in 2012, Global CFO, providing most innovative and
growth oriented services like virtual CFO services, funds raising, SME public listing,
IPO advisory, FDI investments, investment banking, M&A, corporate finance and
India entry services to foreign companies seeking to enter and expand in India. Rajan
Bhatia and Company, Chartered Accountants, ( www.globalcfo.in) is a leading certified
accounting, financial and management consulting firm. Rajan Bhatia is a business
author, corporate trainer, business advisor, management consultant and mentor
to several global SMEs and is associated and regularly invited to speak and train at
various industry bodies and associations like CII, ASSOCHAM, NASSCOM, AIMA, FICCI,
TIE, United Kingdom India Business Council, Indo French chamber of commerce, Indo
US Chamber of Commerce, Institute of Chartered Accountants of India, Toastmasters
International, USA and World Association of small and medium enterprises.
About Rajan Bhatia & Company, Chartered Accountants.
www.globalcfo.in
Rajan Bhatia & Company is a certified Chartered Accountants and one of the India’s
leading most trusted financial services firm registered with most trusted and respected
TheInstituteofCharteredAccountantsofIndia.OurmissionistotransformSMEstolarge
public listed MNCs by providing the most trusted, specialized, innovative and highest
levels of services to our esteemed clients. We are the trusted service network member
of United Kingdom India Business Council, UKIBC to provide India entry services to UK
SMEs.WearetheesteemedmemberofseveralrespectedindustrybodieslikeNASSCOM,
CII and provided services to several SME and MNC organizations. Global CFO is the
managementconsultancyservicesdivisionofRajanBhatia&Co.,CharteredAccountants.
Aleadingcertified accounting,auditing,financial&managementconsultingservicesfirm.
About Us

Email :
rajan@globalcfo.in
info@globalcfo.in
bhatiarajan4@gmail.com
Skype:
rajan.bhatia12
Call Us:
T : +91 98110 05666
T : +91 95820 26836.
Website:
www.globalcfo.in
www.rajanbhatia.com
India | UK | USA | Canada | Dubai
Esteemed Members of UKIBC,
NASSCOM, CII, ICAI, IFCCI, TIE.
Disclaimer
The information contained herein is of general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor
to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be
accurate in future. No one should act on such information without appropriate professional advice .
RAJAN BHATIA
& COMPANY
CHARTERED ACCOUNTANTS

REITs -Impact on Hotel Industry Report.

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