India’s hospitality sector is undergoing a significant transformation as hotel companies, previously committed to asset-light models, are increasingly favoring revenue-sharing leasing agreements. This evolution marks a strategic pivot, driven by the demand for higher returns, growth ambitions, and evolving investor expectations.
From Asset-Light to Revenue Share: A Strategic Evolution
Senior Director – Capital Markets & Investment Services- Hospitality, Colliers Inda
For years, Indian hotel operators relied on asset-light models, leveraging management contracts to expand without heavy capital investments. These contracts typically generated fees ranging from 5% to 10% of revenues. However, with the increasing need to generate higher revenues and show robust financial growth, companies are now shifting toward revenue-sharing leasing models.
Unlike fixed leases, revenue-sharing leases enable operators to benefit directly from topline revenues, often capturing around 20% of room revenue or a share split across rooms, F&B, and banquet revenues. This model allows operators to take on operating risks in exchange for significantly higher returns, ranging from 15% to 25%, depending on Average Room Rates (ARR) and occupancy levels.
Why Revenue-Sharing Makes Sense
The move toward revenue-sharing leasing is particularly appealing for publicly listed companies. Enhanced EBITDA figures resulting from these agreements directly impact market capitalization and boost investor confidence. For companies looking to demonstrate consistent growth, revenue-sharing leases offer a clear pathway to sustaining share price momentum and meeting shareholder expectations.
For unlisted companies, the revenue-sharing model is an effective tool to attract investors and achieve higher valuations. By showcasing strong EBITDA growth, operators can position themselves as attractive opportunities in India’s expanding hospitality market.
Key Advantages of Revenue-Sharing Leasing for Operators
- Higher Revenue Potential: Revenue-sharing leases offer significantly greater returns compared to management contracts or fixed leases.
- Alignment with Growth Goals: This model aligns financial success with operational performance, incentivizing higher occupancy and ARR.
- Market Appeal: Revenue-sharing leases boost financial metrics, enhancing investor confidence and market valuation.
- Operational Flexibility: Operators gain more control over operations while retaining the ability to scale efficiently.
Revenue-Sharing Models in India
The revenue-sharing leasing model has gained traction across different segments, particularly in midscale and upscale hotels. Key features of this approach include:
- Variable Lease: Operators share approximately 20% of topline room revenue. In some cases, revenue share is split across room, F&B, and banquet revenues, with higher percentages allocated to room revenues due to better margins.
- Hybrid Lease: A combination of revenue share with a minimum guarantee, typically set at 70% of the projected revenue share, offering a balanced approach to risk and reward.
A Win-Win for Stakeholders
Revenue-sharing leasing creates a mutually beneficial framework for hotel operators and property owners.
- For Operators: It ensures higher revenue potential, operational control, and alignment with growth ambitions.
- For Owners: It offers steady income, professional management, and property value appreciation while minimizing operational risks.
This collaborative model is particularly effective for operational properties, under-construction projects, and greenfield developments.
Why Now? The Driving Forces Behind the Shift
India’s hospitality market is on the verge of exponential growth, bolstered by a $4 trillion economy expected to double in size. With just 200,000 branded hotel rooms nationwide, there is significant potential for expansion.
Additionally, the robust IPO market and growing investor interest in the sector have made revenue-sharing leases more attractive. By aligning operational strategies with investor priorities, hotel companies are leveraging this model to secure sustainable growth and profitability.
The Road Ahead
As Indian hotel companies continue to embrace revenue-sharing leasing models, the hospitality landscape is set to evolve rapidly. This trend underscores a strategic shift toward higher revenue generation, investor-centric growth, and greater operational flexibility.
By adopting revenue-sharing leases, operators are not only transforming their business models but also reshaping the future of India’s hospitality sector, paving the way for sustained success and innovation.
For brands, securing lease terms such as Revenue Share or Minimum Guarantee is crucial. However, some tech-driven players who aggressively pursued leasing models were unable to fulfill their commitments during and after the COVID-19 pandemic. This failure led to the loss of these hotels to competitors.
Majorly brands have managed to survive, but only a handful of them were forced to close. Many of those that shut down had aggressively underwritten leases, making high Minimum Guarantees (MG) or Revenue Share models economically unviable, particularly during industry downturns.
