Report

Jones Lang LaSalle Hotels India Digest 2008: Part I

Express Hospitality presents excerpts of the report released recently

Aman-i-Khas, Ranthambore

The outlook for India's tourism and industry is upbeat. Key factors driving the tourism boom include India's sustained economic growth, strong foreign direct investment inflows, increased air networks, the availability of cheaper air travel, a strong domestic market and aggressive marketing campaigns. Challenges relating to inadequate tourism infrastructure still remain, but are not enough to dampen the bullish outlook for the Indian hotel market.

Encouraged by this optimistic tourism outlook, many developers, investors and international hotel management companies are jumping onto the India hotel bandwagon. A number of the Indian real estate players view hotels as a natural extension and synergy to their growth real estate portfolios. The major cities that are the hub of economic and real estate development in India are: Bangalore, Chennai, National Capital Region/Delhi (comprising the capital city Delhi and suburbs of Noida, Gurgaon, Faridabad, Ghaziabad and Greater Noida), Hyderabad, Kolkata, Mumbai and Pune.

India has become a favoured destination for global investors and multinational corporations ever since it opened its economy in the early nineties. Although sectors such as business processing, information technology, telecommunications, and manufacturing, have prospered in recent years, India's economy remains largely driven by the agricultural sector.

Despite this, India's economy has performed well with the contribution from the services and manufacturing sectors growing by 9.4 per cent in the fiscal year ending March 2007. Preliminary estimates by the government according to the Union Budget 2008-2009 show a growth rate of 8.5 per cent for the fiscal year ending March 2008. For the next financial year (FY), analysts expect real GDP to grow by 7.9 per cent.

While the Indian economy will be affected from moderation in global economic growth, any negative impact is expected to be minimal. Analysts also anticipate some slowing in growth rates which reflect an overheated economy such as that of China (PRC).

Tourism market overview

1. Key trends and demand drivers

• India, which ranks after China (PRC) as the world's second-most populous country, has experienced a tourism boom in recent years. Bolstered by a multi-faceted tourism product that ranges from 27 world heritage sites to religious relics, spa/mountain resorts and wildlife parks, India has much to offer leisure travellers.
• The growing Indian economy will spur business travel. The strong performance of the corporate sector and the growth in the economy has led to an unprecedented surge in business travel. GDP grew at a robust 9.4 per cent in 2006-2007 and is expected to grow by another 8.5 per cent in 2007-2008. Furthermore, the industrial and services sectors have recorded double-digit growth rates. These figures will undoubtedly continue to raise the level of business travel in the country.
• The liberalisation of the airline industry will promote increased travel by both international and domestic travellers, further fuelling growth in the hotel sector. Open skies policies and direct international flights to the US and Europe have increased the country's accessibility, raising international traveller flows. In addition, increased frequency of existing routes and the introduction of additional routes by low cost carriers (LCC) such as Indigo, Spice Air, Jet Lite and Go Air will enhance domestic travel flows.
• Recognising the importance of the tourism industry, the government has made large strides in marketing India internationally. Building on the success of the Incredible India campaign in previous years, the Ministry of Tourism has launched an integrated international media campaign to promote India as 'must-see' year-round destination, with a focus on both generic and niche areas. "Chasing the Monsoon" is the new theme for the west Asian market.

Royal Palms, Mumbai

"The government has also introduced initiatives to spur growth in the hospitality sector. Tax holidays for two, three and four-star hotels established in specified districts that have UNESCO World Heritage Sites and convention centres with large seating capacities in the National Capital Territory of Delhi and in the adjacent urban areas of Faridabad, Gurgaon, Ghaziabad or Gautam Budh Nagar, have been announced to foster development prior to the Commonwealth Games in 2010. In addition, there are proposals to improve the tourism infrastructure that will lead to increased travel. These proposals include constructing 33,000 kms of the National Highway in the Golden Quadrilateral, North-South and East-West Corridor areas, improving identified ports to facilitate cruise tourism and evaluating public-private partnerships to connect identified circuits and destinations by rail.

"Medical tourism will also result in additional demand for hotel rooms. This sector has gained momentum in the past few years, given the cost advantage and emergence of high quality healthcare services in India where a choice of airlines, hotels, transportation, food and sightseeing is offered along with medical treatment in the form of packages. The country's medical tourism industry is thriving, encouraged by the introduction of a medical visa. In addition, the Indian government has announced plans to promote medical tourism with an investment of Rs 260 billion for funding relevant infrastructure including affordable hospitals and budget hotels for patients and their relatives. Due to the lack of a 'single window' clearance system, foreign investors have faced problems investing in this sector, and the Indian government is looking at ways to improve the system.

2. International visitor arrivals

• India has set a tourism target of 10 million international tourist arrivals by 2010, the year of the Commonwealth Games in Delhi.
• Preliminary statistics from the Ministry of Tourism indicate that inbound tourist arrivals had already reached a 10-year high of approximately five million in 2007. This represents a 13 per cent growth over the previous year and the fourth consecutive year of positive growth in inbound foreign travellers. Compared with the 2.4 million international arrivals in 2002, the number of foreign visitors to India has increased by an impressive 86 per cent.
• In tandem with the increase in foreign arrivals, foreign exchange earnings soared by 34 per cent over 2006 values to Rs 480 billion in 2007.
• Leisure travel (96.6 per cent) remains the primary reason for travel to India, followed by business (2.8 per cent), according to statistics sourced from Ministry of Tourism. While the overall trend is expected to remain unchanged over the next few years, the proportion of business travellers could increase with the rise in foreign investments to India.

Comfort Inn The President, New Delhi

3. Major international source markets

• All major source markets recorded positive growth in 2006, with the UK and the US maintaining their positions as India's two largest foreign source markets, according to latest available statistics from the Ministry of Tourism.
• Nepal, Sri Lanka, Japan and Malaysia were the major source markets. Notably, the number of arrivals from Nepal showed the highest year-on-year increase among top Asian markets in 2006.
• While the UK and the US are expected to remain India's two largest foreign source markets, arrivals from Asia are expected to rise with the availability of more flights to India.
• In January 2007 India-based Jet Airways launched direct daily flights from Delhi and Kolkata to Bangkok. The same year also saw the airline serving the New Delhi - Toronto and Mumbai-Newark route via their European hub, Brussels.
• Reflecting strong travel demand for India, Singapore Airlines now operates six flights a week to Bangalore while Japan Airlines started daily flights between Tokyo and New Delhi in October 2007 to meet the business demand on that route. Other cities such as Kolkata, Hyderabad and Chennai are also served by direct international flights from major source markets.

4. Domestic tourism

• India's domestic tourism market is significant and growing. According to the Ministry of Tourism, the number of domestic travellers has increased steadily from 140 million in 1996 to 391 million in 2005 (latest available statistics), a year-on-year increase of seven per cent. The growth in domestic tourism is attributable to the increasingly affluent and growing population, strong economic indicators, expanded air networks and the liberalisation of services.
• Pending the release of official data, this growth is expected to have continued into 2006 with indicative statistics from the Ministry of Tourism suggesting that it might have crossed the 460-million mark.

Fortune Select Trinity, Bangalore

Hotel market overview

Existing supply

• Based on the facilities and services provided, the Ministry of Tourism approves and classifies hotels in India into eight categories, namely five-star deluxe, five-star, four-star, three-star, two-star, one-star, heritage and classification-awaited hotels.
• As at the end of 2006, India had an estimated 1,169 approved hotels accounting for 75,787 rooms. The majority of this supply was located in Delhi, Mumbai, Bengaluru, Chennai and Hyderabad.
• Historically, the high land prices in many of the key cities have resulted in hotels being developed in the upper tier categories, causing a scarcity of supply in the lower categories. In its recent budget, the government has provided tax incentives to develop one, two and three-star hotels in and around Delhi.

Marketing demand

• Aggressive growth in revenue per available room (RevPAR) has been recorded in the three key Indian cities of Delhi/NCR, Mumbai and Bengaluru over the past five financial years. In FY2006-2007, the five-star deluxe and five-star hotel segment in Delhi/NCR and Mumbai reported growth in average room rates (ADR) of about 40 per cent over the previous year, while Bengaluru reported almost 20 per cent ADR growth over the same period. In comparison, the occupancy growth has been less aggressive and in certain markets such as Bengaluru, occupancies have stagnated and even declined.
• Demand for rooms in India particularly in the key cities (e.g. Delhi/NCR, Mumbai and Bengaluru) is exceeding supply. This has fuelled the aggressive growth in room rates and prompted the entry of new players. To address the huge demand-supply imbalance, efforts will be directed towards building 150,000 hotel rooms in the next four years, in addition to the launch of a new 'Bed and Breakfast' scheme to meet the requirements.
• The proposed known additions to supply are expected to be rapidly absorbed as they come on line over the next two to three years. After that room rates are expected to adjust to more realistic levels. Markets such as Bengaluru - which generates one of the highest ADRs in India - are expected to experience a substantial rate correction by the end of the decade.

Additions to supply

• According to research, the six major markets have approximately 28,000 new rooms planned by 2011: Bengaluru, Hyderabad and Pune will be most significantly impacted as room supply is forecasted to increase almost 250 per cent by 2011; in Delhi/NCR, the majority of supply is being developed in Gurgaon and nearby Noida with almost 100 per cent rooms expected to be completed by 2011, while Mumbai and Chennai are expected to record growth rates of 35 per cent and 55 per cent respectively.
• Chennai has established itself as a preferred destination for the IT/ITeS (Information Technology/Information Technology enabled services) industry. The major brands expected to enter into the market in 2009 such as Hilton, Hyatt and JW Marriott will raise the standard of accommodation. Hyderabad has very few rooms compared with Delhi and Mumbai. Most hotels are now concentrated in the central business district (CBD) and upcoming markets of IT/ITeS. The Taj Group's hotels are expected to commence operations in 2008.
• It is difficult to get accurate information on future developments in India, including hotels. There is an unusually long approved process which delays projects and presents significant barriers to entry, particularly for foreigners. Land is very expensive everywhere and quality sites for hotels are even harder to locate. In some cases, part of this delay is caused by the amalgamation of land which is time-consuming as it entails purchasing land from different owners.

The investment market

• In November 2007 DLF announced its equal partnership with Aman Resorts to enter into definitive agreements to acquire a controlling interest in the group. The entire transaction, when completed, is estimated to be valued at Rs 16 billion, with an assumed debt of approximately Rs six billion. In addition to expanding its resort locations, Aman Resorts is developing projects in key gateway cities around the world, the first of which is scheduled to open in New Delhi in 2008.
• US hospitality major Carlson is taking a 25 per cent stake in a new venture with the United Group to introduce the Regent Hospitality brand in India. The joint venture will develop a luxury hotel property located at Greater Noida with an estimated investment of Rs 4.5 billion.
• Domestic mid to economy-segment group Lemon Tree Hotels has announced that Kotak Mahindra Realty Fund has invested Rs 320 million in the company. In a related development, Kotak Mahindra Realty Fund is investing about Rs 20 million in Red Fox Hotels which proposes to open limited-service economy hotels in the price range of Rs 800-2,000 per night.
• Credit Suisse, one of the world's top investment banks, launched its domestic brokerage operations in India earlier this year and recently obtained its Indian merchant banking licence. Credit Suisse's real estate fund will acquire 10-15 per cent in a hotel chain in a structured deal. This is Credit Suisse's second investment in the real estate sector, the first being its acquisition of 75 per cent of a Rs 3 billion Info Tech park and five-star hotel project from Pune-based developer, Vascon Engineers.
• The Orchid Group of Hotels is planning to invest over Rs 10 billion to set up seven five-star properties in key centres across the country as it mulls an international foray with properties in China (PRC) and South Africa. It is also planning to add nearly 2,000 rooms at seven locations across the country. The company has entered into management contracts for 10 hotels set to open across the country over the next two years.
• Milan-based Domina Hotel Group announced in November 2007 that it would develop 25 hotels through a joint venture and invest Rs 24 billion. In India, its first hotel is already under construction and will be marketed under the new brand Vedic Domina Hotels & Resorts. Another four are expected to be built within five years.
• It was announced in December 2007 that Kamat Hotels had bought a 60 per cent stake in Concept Hospitality for Rs 127 per share. The key hotels Concept will manage include Seasons in Pune, Wall Street in Jaipur and Manor Floatel in Delhi. All of these now fall under the management of Kamat Hotels. A total of 650 rooms will be under the listed Kamat Hotels entity which currently operates about 600 rooms.
• Kotak India Real Estate Fund has just acquired an approximate 11.11 per cent stake in the Mumbai-based The Price Group of Hotels at a cost of Rs 450 million. The group, which currently operates four five-star hotels, has announced a Rs 3.50 billion expansion and renovation plan which includes setting up five-star hotels in Mumbai, Goa, Bengaluru and Hyderabad in addition to a resort hotel and spa in Alibaug. The management envisages an overall inventory of 1,150 rooms in key cities by end 2009.
• Dubai Ventures, the private equity arm of Dubai Investment Group, has bought a five per cent stake in Delhi-based Bharat Hotels for Rs 1.6 billion - the deal values the company at Rs 32 billion. The hospitality chain plans to raise up to Rs 10 billion for the expansion of six properties under construction and has recently announced an international foray through a joint venture with the Dubai-based Nakheel Group - Grand Fort Dubai is set to open in 2009. Other hotels that are under construction and scheduled to open over the next two years including The Grand Jaipur, The Grand Resort Bekal, The Grand Ahmedabad, The Grand Chandigarh and The Grand Noida.
• DB Realty, a domestic real estate fund, is investing about Rs 3.2 billion in a 320-room five-star property in Goa. Hyatt International will manage and market the property. The project is likely to be completed by the second quarter of 2009.
• Financial services giant Morgan Stanley is close to picking up a 15-20 per cent stake in the Institute of Human Health Research Hospitality, owners of the Ananda and Ista brands of spas and hotels, for Rs 1.4 to 1.6 billion. Morgan Stanley will have a seat on the board of the hospitality company which is in the process of expanding its footprint in Delhi, Hyderabad, Pune and Ahmedabad. It plans to have nine properties under the Ista brand over the next three years.
• Oberoi Hotels is fast expanding in India, Abu Dhabi, the Maldives, Cambodia and Dubai, partly through management contracts and also through investing about Rs five billion of its own funds. The Group has hired Kotak Mahindra to help raise Rs four billion via debt and new equity.
• India's Parsvnath Developers has signed an agreement with conglomerate ITC's Fortune Park Hotels to manage 50 hotels comprising 4,100 rooms for Parsvnath Hotels, a subsidiary of Parsvnath. Parsvnath Hotels is expected to invest approximately Rs 25.4 billion to develop and own 50 hotels in India which will comprised 20 five-star hotels, 20 four-star hotels and 10 three-star and budget hotels between 2011 and 2013. The hotels will fall under the brands of Fortune Select, which are likely to have at least 100 rooms each; Fortune Park, which is expected to have 75 or more rooms, and other brands such as Fortune Inn and Fortune Faith, which are likely to have at least 50 rooms. Faith, which is likely to have at least 50 rooms. Parsvnath plans to eventually develop 75 to 100 hotels across India, especially in the second and third-tier cities, as well as in other major centres.
• Choice Hotels India (CHI) has announced a Rs 7.6 billion franchise and management plan to partner with various investors to develop 20 new hotels with approximately 2,000 guestrooms in India's major, tier-one and tier-two cities by 2010. CHI is also planning to introduce India's first all-suite hotel, Clarion Ludhiana, in Ludhiana, Punjab by the end of 2008. The 120-suite Clarion Ludhiana Hotel aims to target non-resident Indians (NRIs). In addition, CHI has also linked up with Royal Indian Raj International Corporation which is expected to invest approximately Rs 160 billion from 2008 to 2012 to develop15,000 budget guestrooms across India under CHI's hotel brand such as Clarion, Comfort Inn, Quality Inn and Sleep Inn.
• India's real estate fund, Yatra Capital, has entered into a joint venture with Atlas Hospitality Company (AHPL), a subsidiary of Ruia Group, to develop a luxury hotel and serviced apartments in Pune. Yatra is expected to hold a 20 per cent stake in the Rs 286.4 billion venture, which also marks its entry into India's hospitality industry. Scheduled to be completed in late 2009, the 26,900 square metre project is likely to comprise 319 hotel rooms and 96 serviced apartments. The project is expected to cater to business travellers in the area.
• Rakeen India Operations Company (Rakindo) has announced the signing of a Memorandum of Understanding (MoU) with Lotus Hotel Investment Fund (Lotus) to develop business hotels in Asia, particularly in India. According to the MoU, a joint venture company will be formed to invest in three-star and four-star hotels in Asia, with six major cities in South India being the initial focus.
• Real estate developer, Royal Palms India (RPI), has announced its plans to invest Rs 15.3 billion in the next three years to develop a 8 million square feet development in suburban Goregaon. The development is expected to comprise three-star to five-star hotels, IT offices, residences, villas and a retail mall.
• ITC has announced that through its subsidiary, Fortune Park Hotels, plans are underway to add 100 hotels in rural India to leverage the growing corporate demand as well as reach out to approximately 792 million (72 per cent of the 1.1 billion population) people living in the rural areas. Fortune Park Hotels is expected to expand hotels and inns with as few as 200 rooms each in the smaller towns of India by 2012, adding 3,000 rooms under its brand.
• Indian real estate developer DLF will open a Four Seasons Hotels in Gurgaon at a cost of Rs 5.9 billion. Part of DLF's ambition to become India's largest hotel group, the 250-room hotel will be developed on a 10-acre site at DLF Golf Link and is expected to open before the Commonwealth Games in 2010. The developer has also secured links with Hilton Hotels to construct over 25,000 hotel rooms on 40 parcels of land in 71 cities in the country by 2010. The cities include Delhi, Mumbai, Chennai, Kolkata, Bengaluru, Hyderabad, Pune, Chhattisgarh, Amritsar and Ludhiana.