A shift in the balance between hotel demand and supply, favoring demand, fuels some optimism for the future of India's hotel industry.
NEW DELHI—Both the broader Indian economy and the country’s hotel industry had an eventful 2017.
After demonetization—the switch to cashless, electronic transactions—a goods and service tax (GST) was introduced in a bid to realign the disparate tax structure and ensure greater compliance.
Because of or despite changes in economic policies, the tourism sector in India is thriving.
“GST is good for the hotels,” said Abhijeet Umathe, former associate director of hospitality and leisure at Knight Frank India, who is now heading startup Eco Lodge Hotels. “Hotels were paying a host of taxes for which they were getting no input credit. Now that will change. It will also bring transparency into the system of pricing as the prices will be uniform and will not vary from state to state.”
Vikramjit Singh, president of Lemon Tree Hotels, added that “with a consistently growing middle class and increasing disposable income, the tourism and hospitality sector is witnessing a healthy growth and accounts for approximately 7.5% of the country’s GDP.”
That’s due in large part to efforts by the Indian government to promote tourism, said Alok Chakravarty, director of sales and marketing for New Delhi-based Shangri-La Hotels & Resorts.
“In the recent years, the Indian government has taken several steps to boost travel and tourism, which has benefited the hotel industry in the country. Also, the entry of multinationals and Indian hotel chains expanding internationally only reinforces the segment’s untapped business potential,” Chakravarty said.
This has resulted in performance numbers that India’s hotel industry can celebrate.
After several years of hotel supply outpacing demand in India, the industry is seeing a reversal.
“Industry performance has improved over the last two years after a number of years of supply development running at 4%,” said Matthew Burke, regional manager for the Pacific region at STR, parent company of Hotel News Now.
He said Indian hoteliers have multiple reasons to be excited about key metrics.
“In (October) 2017 year-to-date performance, demand surpassed supply growth, and average daily rate growth has begun to turn positive,” he said. “The growth witnessed at the country level is not restricted to a few cities, with all STR-tracked markets reporting (revenue per available room) growth in 2017 (as of October). ... The current occupancy level of 64% for the year to October is at a decade high.”
That mirrors what’s Umathe has seen at the property level.
“Occupancies are definitely picking up,” he said. “The supply position had tapered down. We are in a position where the demand is more than the expected supply which will come in the next two to three years.”
But that’s not necessarily driving rate in all markets.
“The positive news across the country is benefiting all markets,” Burke said. “But the highest occupancy market tracked by STR is at 73%, meaning there is still plenty of upside in demand before hoteliers can become bullish on rate performance.”
There is no single standout market in terms of growth. The two largest markets, Mumbai and Delhi, reported 6% and 1.5% RevPAR growth in October 2017 year-to-date performance, according to STR data. For all of India, RevPAR growth was 7.4% to $55.77 (3,543 Indian rupees).
ADR for the same time period, meanwhile, grew 4.8% countrywide to $86.82 (5,516 rupees), STR data shows. Gujarat reported the largest increase in ADR, 11.4% to $59.94 (3,808 rupees).
“Hotels should get the pricing power, but the big question is, will they hike the prices?” Umathe said. “My hunch is that the top players will try to push their ADR by 10% to 15%, if they can. On the other hand, small hotels and hotel chains will not have the guts to push up their prices.”
Optimism for future growth
Burke was emphatic: “Primarily the driver of performance has been the simple equation of demand exceeding supply, creating a more positive trading environment to growth in occupancy and in turn a re-emergence of confidence by operators in their pricing.”
Still, demand is likely to spur more development, which could shift the balance with supply.
Chakravarty said developers will be attracted to second- and third-tier cities, which are “desirable destinations as they present opportunity for growth and development and allow businesses to expand and provide employment.”
He added: “The operational cost isn’t as expensive and is a great opportunity for those investors who would like to earn rental returns from their investment. Due to religious tourism, all international hotel brands are exploring tier two and tier three cities.”
Also, the midpriced segment in “most cities/metros including Delhi, Gurugram, Hyderabad and Bangalore are seeing an increase in demand for rooms,” Singh said.
His company, Lemon Tree, intends “to explore increasing our portfolio to include more leisure and resort properties,” he added.
“We are in the process of opening new hotels in Sohna Road (Gurugram), Banjara Hills (Hyderabad), Lucknow, Srinagar and Siliguri,” Singh said. “There, hotels should be operational by the end of financial year 2017-18. Our geographical spread across India and presence in key micromarkets enables us to cater more effectively to our corporate clients and business travellers. As of now, we also have a development pipeline of close to 2,500 rooms.”
Overall, sources agreed, there is reason to be optimistic about the future of the India hotel industry.
“Connecting unparalleled expansion prospects and unlimited business potential, this industry is certainly on the foyer towards being a key player in the nation’s changing face,” Chakravarty said.