Brookfield Asset Management's venture into The Leela Palaces, Hotels and Resorts, in 2019 was more than just a gamble on real estate; it was a strategic investment in a luxury brand with potential for significant operational turnaround, says Brookfield's Managing Partner Ankur Gupta.
In an exclusive conversation with CNBC-TV18, Gupta pointed out that over the past five years, this belief has manifested in substantial expansion—from eight hotels to fifteen, with plans for almost twenty properties across India.
This growth isn't just in numbers; Brookfield has also enhanced the luxury experience at Leela, placing it among the top three global hotel brands for four of the last five years, despite unforeseen challenges like the COVID-19 pandemic.
These are the edited excerpts of the interview.
Q. Tell us about your plans for The Leela
A: In 2019, when we recapitalised the Leela business, it was a play on two themes. One is that the hotel sector had been on a decade-long downward cycle, such that new supply had completely evaporated. Urbanisation trends in India had continued at the same time. More office space was being taken up, cities had become denser, and business activity had doubled over the course of that decade. So while it looked like a bet, it was a very conscious value investment for us. We believed in the brand. So it wasn't just a real estate play, it was a play on turning around an operating business.
In the last five years, the business has grown from eight hotels to 15 hotels and we have a pipeline, which gives us a site for almost 20 properties across the country. We have kept up the luxury quotient and even enhanced it in the last five years. Over the last five years, in four years, we have been ranked in the top three brands across the world. So I would say that across the board, the Leela investments has turned out pretty well for us in terms of the hindsight 2020.
We didn't model in two years of COVID. But again, when you buy good businesses and you want to make them great, you have to take some years of volatility in your stride. Now, what's next for Leela? Keep running a good business. that's the motto for us. And when recapitalisation happens in those businesses, the business calls for it and then momentum of growth and access to more partners, in this case, could be public market partners, takes it even further.
Q: How soon can we expect partners in the public market, as far as the Leela story is concerned?
A: Look, if I am allowed to talk about it I would say the business is at that point where the growth that we are seeing will ensure that some amount of activity will happen sooner than later.
Q: 2024 or 2025?
A: I would always say that it's better to do things today than to wait for tomorrow.
Q: Okay so 2024 then; that gives us clarity. Linking this to the themes that you listed out in terms of service departments and also the luxury side of the India story, which has been booming, especially post-COVID. What's the play that you see Leela doing on both these ends? Is that going to be your vehicle to address both these opportunities?
A: I would say rental housing is a space that covers a large spectrum. A median age of India is 28. As I said, India has a lot of terminal growth in front of us, many decades, which may not be true for many other large economies. A typical kid would leave home at 18. That starts the journey of student accommodation, then hostels, service departments, typical multi-family rental space. At 38 is when a typical Indian would take a mortgage. So you are looking at a very wide spectrum of housing needs in a manner that's affordable. An affordable doesn't always mean headline rent. It means the overall package that comes across.
So on the housing side, Leela certainly targets the service apartment, high and luxury rental side. We are coming up with a fantastic project in Mumbai next to the airport, which will be a serviced apartment managed by Leela. And I think that will be a prototype for us to do more. But overall in the housing space, I am very bullish that an economy like India, a young country like India, has a lot of legs for us to be investing significant capital in the housing space here.
On the question of the brand, globally, hospitality has created fantastic brands coming from different regions and then becoming worldwide names. Mandarin came from the Far East. Jumeirah came from Middle East and from the West, we had Four Seasons. I think it's time that India creates its own luxury brand that's recognised world over. So that's something that we have been trying to do.
Q: So that's the aspiration?
A: The aspiration has always been there.
Q: And taking it global?
A: Yes. I would say that we have taken early steps towards it in a more methodical manner. Brookfield is a global investor. We invest in 30 countries. Our LPs come from all across the world. So today, the recognition of Leela with the investor community is very high. In the last five years, we have told that story to most of our partners across the world. So the recognition for Leela has always been high, both from users of Leela that have come and visited and stayed at Leela and experienced this luxury, but also in the investor community. And hopefully, the next chapter creates more vibrancy around it.
Q: You are talking about growth, and you are talking about opportunities as well. I think one of the things that the market is excited about or enthused by is the possibility of you actually upping your guidance as far as new leasing is concerned, because you seem to be on track or, in fact, have done better than what was expected at this point in time. What's the expectation?
A: So we have always expected that commercial real estate coming out of the COVID pandemic had hit a rock bottom sometime last year. And the demand side continues to be very strong. People were waiting around at the gates saying, is this the right time? Are people back to work? India never really saw that complete, you know, work from home culture. Yes, there was a period of time, rightly so, when the government mandated that we should all work from home. And that helped control the effect, the bad effect of the pandemic.
I think India, urbanisation is a big trend in the country. In fact, I have gone on and said that we need more suburbanisation because our cities are getting a little bit too concentrated. But as far as the REIT is concerned today, the leasing has been, we have achieved 40% of our next 18-month guidance. And I would say that we should beat that guidance now.
Two parts are important. We don't only manage for occupancy, manage for overall return, which is we have to keep making sure that our headroom rental growth that we have is also achieved because that creates outsized returns for our investors and to our own capital. So, I would assume that these assets that we have used to run at 95-97% occupancy and today we are in the mid 80s. So there is a 10% headroom to grow in terms of occupancy levels and a 17-20% headroom to grow on rentals.
In an exclusive conversation with CNBC-TV18, Gupta pointed out that over the past five years, this belief has manifested in substantial expansion—from eight hotels to fifteen, with plans for almost twenty properties across India.
This growth isn't just in numbers; Brookfield has also enhanced the luxury experience at Leela, placing it among the top three global hotel brands for four of the last five years, despite unforeseen challenges like the COVID-19 pandemic.
These are the edited excerpts of the interview.
Q. Tell us about your plans for The Leela
A: In 2019, when we recapitalised the Leela business, it was a play on two themes. One is that the hotel sector had been on a decade-long downward cycle, such that new supply had completely evaporated. Urbanisation trends in India had continued at the same time. More office space was being taken up, cities had become denser, and business activity had doubled over the course of that decade. So while it looked like a bet, it was a very conscious value investment for us. We believed in the brand. So it wasn't just a real estate play, it was a play on turning around an operating business.
In the last five years, the business has grown from eight hotels to 15 hotels and we have a pipeline, which gives us a site for almost 20 properties across the country. We have kept up the luxury quotient and even enhanced it in the last five years. Over the last five years, in four years, we have been ranked in the top three brands across the world. So I would say that across the board, the Leela investments has turned out pretty well for us in terms of the hindsight 2020.
We didn't model in two years of COVID. But again, when you buy good businesses and you want to make them great, you have to take some years of volatility in your stride. Now, what's next for Leela? Keep running a good business. that's the motto for us. And when recapitalisation happens in those businesses, the business calls for it and then momentum of growth and access to more partners, in this case, could be public market partners, takes it even further.
Q: How soon can we expect partners in the public market, as far as the Leela story is concerned?
A: Look, if I am allowed to talk about it I would say the business is at that point where the growth that we are seeing will ensure that some amount of activity will happen sooner than later.
Q: 2024 or 2025?
A: I would always say that it's better to do things today than to wait for tomorrow.
Q: Okay so 2024 then; that gives us clarity. Linking this to the themes that you listed out in terms of service departments and also the luxury side of the India story, which has been booming, especially post-COVID. What's the play that you see Leela doing on both these ends? Is that going to be your vehicle to address both these opportunities?
A: I would say rental housing is a space that covers a large spectrum. A median age of India is 28. As I said, India has a lot of terminal growth in front of us, many decades, which may not be true for many other large economies. A typical kid would leave home at 18. That starts the journey of student accommodation, then hostels, service departments, typical multi-family rental space. At 38 is when a typical Indian would take a mortgage. So you are looking at a very wide spectrum of housing needs in a manner that's affordable. An affordable doesn't always mean headline rent. It means the overall package that comes across.
So on the housing side, Leela certainly targets the service apartment, high and luxury rental side. We are coming up with a fantastic project in Mumbai next to the airport, which will be a serviced apartment managed by Leela. And I think that will be a prototype for us to do more. But overall in the housing space, I am very bullish that an economy like India, a young country like India, has a lot of legs for us to be investing significant capital in the housing space here.
On the question of the brand, globally, hospitality has created fantastic brands coming from different regions and then becoming worldwide names. Mandarin came from the Far East. Jumeirah came from Middle East and from the West, we had Four Seasons. I think it's time that India creates its own luxury brand that's recognised world over. So that's something that we have been trying to do.
Q: So that's the aspiration?
A: The aspiration has always been there.
Q: And taking it global?
A: Yes. I would say that we have taken early steps towards it in a more methodical manner. Brookfield is a global investor. We invest in 30 countries. Our LPs come from all across the world. So today, the recognition of Leela with the investor community is very high. In the last five years, we have told that story to most of our partners across the world. So the recognition for Leela has always been high, both from users of Leela that have come and visited and stayed at Leela and experienced this luxury, but also in the investor community. And hopefully, the next chapter creates more vibrancy around it.
Q: You are talking about growth, and you are talking about opportunities as well. I think one of the things that the market is excited about or enthused by is the possibility of you actually upping your guidance as far as new leasing is concerned, because you seem to be on track or, in fact, have done better than what was expected at this point in time. What's the expectation?
A: So we have always expected that commercial real estate coming out of the COVID pandemic had hit a rock bottom sometime last year. And the demand side continues to be very strong. People were waiting around at the gates saying, is this the right time? Are people back to work? India never really saw that complete, you know, work from home culture. Yes, there was a period of time, rightly so, when the government mandated that we should all work from home. And that helped control the effect, the bad effect of the pandemic.
I think India, urbanisation is a big trend in the country. In fact, I have gone on and said that we need more suburbanisation because our cities are getting a little bit too concentrated. But as far as the REIT is concerned today, the leasing has been, we have achieved 40% of our next 18-month guidance. And I would say that we should beat that guidance now.
Two parts are important. We don't only manage for occupancy, manage for overall return, which is we have to keep making sure that our headroom rental growth that we have is also achieved because that creates outsized returns for our investors and to our own capital. So, I would assume that these assets that we have used to run at 95-97% occupancy and today we are in the mid 80s. So there is a 10% headroom to grow in terms of occupancy levels and a 17-20% headroom to grow on rentals.
(Edited by : Swapnil Deshpande)
First Published: May 24, 2024 4:05 PM IST
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