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Cover Story
India: Riding High On High ROI
The Indian hotel industry is becoming increasingly hard to
ignore. Express Hospitality gives an exclusive preview of the ‘Hotels
in India - Trends and Opportunities’ report by HVS International,
India.
 Over
the last two years the hospitality industry has witnessed active interest. The
overall room count has increased, reflecting the opening of new hotels with
large inventories. (See Table 1)
Following a growth of 8.5 per cent in 2003-04, the Indian
economy performed well during 2004-05, with GDP growing at 6.9 per cent - the
highest achieved since Independence. Domestic political stability and a benign
world economic environment have provided a backdrop conducive to development.
Another positive feature has been the continued maintenance of relative stability
of prices and control on inflation despite a rising world fuel price regime.
| Table 1 |
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Even the services sector has maintained a steady growth pattern
since 1996-97, except for a decline in 2000-01 and its share in the overall
economy has increased. This sector is presently the largest contributor of room
nights for hotels in India, and its continued growth has greatly influenced
the current boom in demand, particularly in the National Capital Region (comprising
Delhi, Gurgaon, Noida and other surrounding areas), as well as in Bangalore,
Hyderabad, Pune, Chennai and Mumbai.
Demand For Accommodation
The year 2004 has been the best year till date for inbound
travel, with foreign visitor arrivals reaching a record 3.40 million, resulting
in international tourism receipts of US$ 4.8 billion. The continued focus on
liberalising the Indian aviation sector has provided a further impetus to travel.
A rise in disposable income has fuelled domestic tourism growth as well.
As a result, demand for quality accommodation from all market
segments, especially the commercial and extended-stay markets, continued to
be higher than the supply. This led to an acute demand-supply imbalance in certain
cities like Bangalore, Mumbai and Delhi (NCR). This imbalance enabled hotels
in these cities to charge higher tariffs. Table 2 reflects room occupancy by
hotel classification for the period 1995-96 to 2004-05. Table 3 presents average
rate performance in rupees for the same period.
| Table 2 |
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Five-star deluxe hotels witnessed the largest increase in
occupancy (8.8 per cent), followed by five-star hotels (7.3 per cent). (Table
4) Growth for the four-star and three-star categories was 5.7 per cent and 2.7
per cent, respectively. Occupancy levels have shown a smaller increase this
year (compared to 2003-04), as markets now have a higher base against which
to benchmark their growth. In terms of RevPAR (Rooms Revenue per Available Room),
all star categories experienced healthy growth in 2004/05. Five-star hotels
experienced the maximum in rupee terms (33.3 per cent) followed by four-star
hotels (32.9 per cent) and five-star deluxe hotels (29.7 per cent). The three-star
segment witnessed the least improvement (15.5 per cent).
| Table 3 |
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Hotel Supply
In the past year, much has been talked about the insufficient inventory of quality
accommodation across India. The recent boom witnessed many hotel markets in
India and expectations of strong room night demand have brought a renewed interest
among real estate developers in hotel projects. In the last one year, several
new hotels have been announced in high-growth markets such as Bangalore, Hyderabad
and Gurgaon. Market surveys by HVS at these locations have identified 65 hotel
projects, under various stages of development, that will together provide an
additional inventory of about 13,500 rooms.
The cumulative addition to supply for Mumbai, Chennai and
Kolkata is likely to be 35 hotels with an inventory of 8,000 rooms. The lack
of seasonality also improves these cities' overall potential and HVS estimates
that the planned supply will be readily absorbed, taking into account projections
of double-digit annual demand growth over a three to five year horizon. In Mumbai,
for example, while new hotels have commenced operations in the last three to
four years, strong demand conditions have has ensured consistent marketwide
growth, both in terms of average rate and occupancy. According to HVS estimates,
the combined inventory in branded business and luxury hotels across the 10 cities
stands at 22,400 rooms and this supply is expected to increase by 85 to 90 per
cent in the next five years.
| Table 4 |
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An encouraging development in 2004-05 has been the number
of hotel projects announced in secondary cities such as Pune, Jaipur, Agra and
Ahmedabad. Unlike metro cities, the secondary markets will grow from a much
smaller base. Thus, supply additions are not likely to impact market occupancies,
owing to large levels of unaccommodated demand that would be absorbed by the
planned supply. A classic example is that of Goa, where the total room inventory
in the branded hotel segment literally doubled between 2002 and 2003.
The biggest challenge, given the present supply scenario, will the availability
to quality sites for hotel projects. Site location, accessibility, visibility
and proximity to key demand areas are critical factors for long terms feasibility
of hotels and lack of good sites would have a negative impact on the supply
front. The real estate market, too, has seen its best times in the last two
years, and existing land prices across most cities are somewhat prohibitive,
especially for standalone property developers.
The hotel industry trends seemed to have witnessed a complete cycle. With projections
of strong demand with limited addition to supply expected, most cities are likely
to maintain high occupancies and witness average rate growth in the range of
25 to 30 per cent annually, for the next three years.
Opportunities
Hotels positioned between budget and mid-market levels and having an international
brand affiliation continue to provide the most attractive opportunities across
most secondary markets. Over the last 12-18 months high growth markets such
as Bangalore, Hyderabad and Gurgaon have seen aggressive hotel development activity.
A wise strategy for them would be to observe the progress of developing projects
as well as demand trends before investing.
The four main metros and Goa continue to present the best opportunity for luxury
hotel development. While these markets have the largest room inventory much
commercial development is taking place. A keen observer of the hotel market
would agree that India has been guilty of following a herd mentality when it
comes to hotel locations. Almost all development strategies are directed towards
projects in the main city centre of high growth markets. Over the next three
to five years, the biggest surge in demand is expected to come from commercial
zones that are being developed in metro suburbs and secondary markets. This
provides a unique opportunity for hotels.
Key tourist destinations, such as Jaipur and other cities of historical importance
in Rajasthan, Himachal Pradesh, Goa and Kerala will witness integrated tourism
projects. Moreover, the developments and expansions planned in the IT and ITeS
and BPO segments remain encouraging. This category of customer ensures a relatively
strong base of demand due to a comparatively higher average length of stay.
In India, as in other markets across the world, large additions to room supply
in hotels calls for investments worth millions of dollars. Availability of finance
for funding hotel projects has, traditionally, been an important area of concern.
However, promising demand conditions and the industry's strong growth potential
has radically changed the way most financial institutions, banks and foreign
investment funds look at India today. In the last six months, HVS International
has had the opportunity to interact with the representatives of at least twelve
foreign investment funds, and we believe that finance is no longer a big issue
for a viable project in a good location. Hotel management companies and international
brands are also open to considering equity participation in projects, opening
new opportunities for the industry.
The outlook for the hospitality market in India is optimistic and will continue
to remain so, in our opinion. The economy's buoyancy, initiatives to improve
infrastructure, growth in the aviation and real estate sectors and easing of
restrictions on foreign investment and, perhaps, most importantly, efforts to
make peace with neighbouring Pakistan - will fuel demand for hotels across star
categories in the majority of markets. India's hotel industry is increasingly
being viewed as investment-worthy, both within the country and outside, and
several international chains are keen to establish or enhance their presence
here. HVS expects that over the next three to five years, India will emerge
as one of the world's fastest growing tourism markets.
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