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Despite a record drop in demand, investments in hotels are at all-time high

Welcome to my parlour
The polished marble lobbies and the smiling faces of front office staff hide a deep pain that afflicts India’s hospitality industry.

A huge number of hotels have come up in the past four years or so despite one of the most expensive per-room real estate in Asia. A crowd of foreign hotel brands has entered India in the hope of new business outside their traditional markets.

When there are so many players and a big increase in the number of rooms, there is bound to be stiff competition. Every hotel operator feels the pinch, and even the biggest Indian chains like Taj, Oberoi, ITC and Leela are not immune.

“Demand is yet to reach pre-recession levels. The big difference the industry is experiencing this year is pressure on yields,” says Nakul Anand, executive director of ITC. Anand is also the president of the Hotel Association of India and chairman of the CII national committee on tourism. So he should know. One other reason he mentions is that long-haul holiday travel has seen a drop as leading economies continue to be in a bad shape.

It’s showing up on the average occupancy rates (ORs) of premium hotels. This year it will be 56 per cent; last year it was 64 per cent.

Over the next two years 14,500 more rooms will be in the market. But the extra demand is expected to be for only 4,200 rooms. There’s no way the industry can prevent a precipitate fall in per-room revenue, warns Crisil in a recent report.

The Oberoi chain has seen a drop in foreign visitors, and P R S Oberoi, chairman of EIH, blames it on the state of the global economy. But domestic travel is increasing, he says. This is balancing the demand. He admits there is pressure on room tariffs in the industry and does not see a revival in the near future.”

Last year India saw one of the strongest surges in hotel demand in the world. Yet, room demand rose by only 12 per cent when room supplies increased by 15 per cent, according to data with hospitality consultancy HVS.

The intensifying competition may be a good sign – a sign of maturity, says Douglas Martell, vice-president of South West Asia operations of InterContinental Hotels. It certainly has seen a boom in leisure travel in India, he adds.

That’s a piece of good news that will come in handy for newcomers like Sofitel of France. It has picked India and China for expansion, as its sales in the European and US markets have slowed.

Sofitel recently opened its first hotel in Mumbai’s Bandra Kurla Complex and plans to have 10 hotels more in India in seven years. Christophe Caron, Sofitel vice-president for South East Asia and India explains: people are travelling more for leisure or business in India, China, Thailand and Indonesia. The idea is to tap this growth.

For long the hotel industry has sought and been denied infrastructure status. It now hopes FDI in retail and aviation will add to business travel and thus its revenues.

According to HVS, between January and August foreign tourist arrivals rose by 6.2 per cent. In the same period last year the growth was 10 per cent.

Rajeev Kaul, president of Leela Palaces Hotels and Resorts, too blames the situation on the significant increase in room supplies last year in the face unchanged room rates. This, together with low occupancy rates, puts a strain on the cash flows of most hotel chains. So much so that IHC had to see a loss. Leela had to go in for a restructuring of Rs 4,300 crore debt owed to 17 banks.

Leela has seven properties already running and will add another (in Chennai) in a couple of months.

The pain will remain in the short-term, but experts say there’s nothing to worry about in the long-term. Average room rates dropped by 3.9 per cent last year. This brought down the revenue per available room by 6.3 per cent, according to Cushman & Wakefield.

Despite the glum state, hotel building goes on unabated. The Pride chain of West India talks about invest Rs 1,000 crore by 2015, says S P Jain, managing director. The chain now runs 12 hotels with over 1,100 rooms.

A rapidly widening industry has given birth to a new problem. With just so much talent poaching is rampant and salaries have gone sky high. It appears the hospitality institutes can’t produce enough graduates every year.

Last year 12,782 branded rooms was added to the then existing 84,313 rooms. The new supply was 30 per cent more than in the year before.

Mumbai (including Navi Mumbai) is the home to the highest number of branded rooms, followed by Delhi (excluding Gurgaon, Noida and Greater Noida) and Bangalore. Noida had the fewest branded rooms (527). Bangalore saw the biggest increase in the number of branded rooms, followed by Delhi.

Anil Madhok, managing director of Sarovar Hotels, agrees that room rates have been static but things are looking up. In the past couple of months demand has picked up “slightly.”

Sarovar manages and franchises 60 hotels in 40 cities here and abroad. Its brands are Sarovar Premiere, Sarovar Portico, Hometel, Park Plaza and Park Inn – all three stars to five stars. It too wants more – another 20 hotels within three years.

Though most chains say they want to add more rooms or hotels, the frenetic construction of hotels has slowed a bit. The next five years may see the addition of only 54,000 rooms, says Kaushik Vardharajan, managing director of HVS.

This will take the total supply to supply to about 138,000 rooms by 2016-17.

In the face of high inflation and higher costs, hotels have tried to raise room rates but in vain. Room tariffs remain mostly flat, and have, in fact, dropped in some locations. Maybe demand will pick up next year, says Jain. Only then an increase in room rates can be expected.

Marginal drops have marked average room rates everywhere except Goa, India’s main leisure destination. Goa rates were up 8.9 per cent last year. Cushman & Wakefield says Pune suffered the worst: an 11.3 per cent drop. Delhi also saw a drop of 3.9 per cent but still managed to wangle the highest average rate of Rs 8,293.

However, the rate trends reflect the changing mix of new hotels. Pride is in the mid-market segment; it claims it has seen better growth than others in the segment.

For long India has been associated with luxury and upscale hotels. In 2010 the plans for luxury and upscale hotels accounted for half the new supply of rooms expected in five years’ time.

Last year the proportion dropped to 45 per cent, indicating the expanding mid-market and budget segment. This year this is further down at 43.7 per cent.

“In our opinion, the trend bodes well for the industry,” says Vardharajan. He reasons that as lodging options at all price points expand, this will encourage more Indians to travel within the country, raising room demand.

Most travelling foreigners seek budget accommodation with decent amenities. “These are still not available in India,” rues Caron. This is why chains like the Tata-owned Ginger see a lot of action in the value-for-money space.

Across the country the hotel density is not uniform. East suffers from a shortage of good hotels. Swissôtel’s India debut, therefore, took place in Kolkata. Marco Saxer, general manager of Swissôtel Kolkata, says the city is seeing rapid economic growth. “We will see an influx of both business and leisure travellers after the new airport terminal is completed early next year,” he adds. This will help the entry of more global brands in the city.

Among all regions, the national capital region (NCR) has the highest number of 22,931 rooms in the organised sector. It is followed by Mumbai (18,500), Bangalore (16,000) and Hyderabad (9,900).

The share of luxury rooms is the biggest in NCR and Mumbai. Bangalore, Chennai and Hyderabad have more mid-scale rooms than luxury rooms. Rooms in Kolkata are mostly either budget or luxury – the mid-segment is very small.

In the first half of this year NCR added the most rooms (up 7 per cent); Hyderabad came next (6 per cent); and then came Chennai (3 per cent), according to Cushman & Wakefield. The consultancy also sees occupancy rates inching up in the second half.

As per the 2012 Travel & Tourism Competitiveness report, India ranked 12th in the Asia Pacific Region and scored pathetically in the 68th rank globally.

HVS expects several mergers and acquisitions, leading to consolidation of the industry. “The consolidation phase will play itself out over the next 12-24 months. Investments made by institutions in 2006-2008 in hotel companies are also approaching the end of their investment horizon and will lead to some transaction activity over the next 12 months,” said Vardharajan.

As can only be expected, the hotel industry depends much on tourist movements. Growth in foreign tourist arrivals continues – though at a slower pace. Tourism is now more driven by domestic travel as a costly dollar makes foreign trips more expensive.

Tourism ministry data put foreign arrivals in the first half at 3.2 million. According to airport data, Delhi airport saw 12.7 million foreign arrivals and 5.5 million domestic arrivals. This totted up to 18.2 million, the most at any Indian airport. Mumbai followed with 15.1 million air arrivals. Way behind were Chennai (7.6 million), Bangalore (7.2 million), Kolkata (4.5 million) and Hyderabad (3.3 million).

In 2011 foreign tourist arrivals were only 6.29 million, just 8.9 per cent more than in 2010. Of the number 15.97 per cent came from the US, 12.57 per cent from the UK and 6.34 per cent from Bangladesh.

Between 2005 and last year foreign arrivals grew by 60 per cent, but India moved up only five places from rank 43 to 38 during this period, said the HVS report. India had only a 0.64 per cent share in international tourist arrivals anywhere.

Overall, travel and tourism contributed Rs 5,65,100 crore to India’s GDP (6.4 per cent) last year. HVS forecasts this will rise to 7.3 per cent this year, and expand annually by 7.8 per cent until 2022.

Hotels can bank on domestic travellers. Domestic travel grew by 13.8 per cent in 2011, topping 850 million. According to World Travel & Tourism Council, domestic travel spending contributed 82.2 per cent of the direct travel and tourism GDP in 2011; foreigners travelling to India generated 17.8 per cent.

Medical tourism also brings a spinoff for hotels, besides directly adding revenue to hospitals. In most cases families bringing in their sick and ailing for treatment in India stay in hotels. When the current year ends, Indian medical tourism industry will have attracted 1.1 million patients from across the world. In terms of location Delhi, Chennai, Bangalore and Mumbai cater to the maximum number of health tourists. These cities are fast emerging as medical tourism hubs, according to HVS. The consultancy estimated India has 2 per cent of the global medical tourism market.

Indian forms of medicines also attract foreigners seeking treatment. Then there are India’s spas, many of which have earned worldwide fame. Unlike medical tourism, spa tourism benefits the hotel industry directly. In 2011 over 2,300 Indian spas generated revenue of $400 million.

Outlook

Much hope is pinned on the government’s eagerness to get foreign direct investment in more sectors. This will generate more travel by foreigners, boosting demand for rooms. With West Asia and northern Africa still unsettled, Egypt, Syria, Lebanon and Jordan, which were a big draw for western and Russian tourists, are no longer seen as safe destinations. In this context India will be seen as an alternative destination.

The problem is hot spots like Goa simply do not have enough capacity to absorb such numbers of tourists. These tour operators function on scale: in one season they can bring in a few million tourists.

All this boils down to one requirement: real modern tourism infrastructure. Is India up to it? Not by a long shot.

(With inputs from Ritwik Mukherjee in Kolkata)

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