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Hotels: Yet another strong year… - Views on News from Equitymaster
 
 
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  • Jan 10, 2008

    Hotels: Yet another strong year…

    The hospitality industry witnessed another year of strong performance in 2007 and in this article, we shall examine the factors that contributed to this growth and some of the challenges that this sector faces.

    Inflows continue: India continued to witness cheering trends in the tourism sector in 2007. Upto October 2007, 3.9 m tourists visited the country, registering a growth of 12.7% YoY. Foreign exchange earnings (in dollar terms) touched US$ 9.2 bn (till October 2007), a growth of 17.7% YoY.

    Government efforts: The Indian hospitality sector aspires to become the forerunner of India's economic growth with support from the government. The Ministry of Tourism actively followed the National Tourism Policy formulated in 2002 by the government to build up tourism in the country in an organised manner and make it the main engine of economic growth. Marketing campaigns created by India's tourism ministry - titled Swagat, Visit India, Explore India, and now Incredible India, were extensively used to promote Indian tourism. In the Budget 2007, five-year tax holidays for new star-category hotels and convention halls coming up in the National Capital Region by 2010 were announced. Further, a conditional 10-year tax holiday for all tourism projects in the country is being planned. The Ministry has sanctioned 225 projects and utilised Rs.4.6 bn for upgradation of infrastructure facilities at important tourist destinations. Even public-private partnership is being planned to develop infrastructure projects.

    High rates, low occupancy: Exorbitant room tariffs took a toll on occupancy rates in five-star hotels. With room rates ruling at around Rs 13,000-17,000 per night, occupancy levels in most metro markets except Mumbai witnessed a dip. While room rates in Delhi, Bangalore, Chennai and Hyderabad witnessed a 20% to 25% jump, occupancy levels dipped in the range of 4% to 11%. With the weakening of dollar against the rupee, hoteliers feel there is more value for money earned in rupees and hence have decided to price their services in rupees. Hotel rooms in India's leading cities today are among the most expensive in the world, as demand has grown rapidly but supply is lagging behind. The continuation of the high rates could hamper demand in the long term.

    The Indian hotel market continues to suffer from limited supply. There are an estimated 105,000 hotel rooms in India - a number comparable to that of Manhattan. Considering that the expansion plans of hotels are already in process and are also in the planning stage, the tourism authorities expect an addition of 80,000 rooms by 2009. That could still meet just over half the projected demand; leave alone the growth potential during this period.

    As a result of the high room rates in branded hotels, unregulated, unorganised hotels and guesthouses segments have emerged. Stringent land policies, soaring property prices and other legal formalities are some of the factors discouraging the real estate industry from bringing more hotels required for the tourist arrivals. Further there is also shortage of land and the problem of high rentals. Hence the companies are venturing in to new business models. The companies are also building budget hotels and are tying up with real estate developers. Some companies have even signed joint ventures with Indian railways. Service apartments are also the latest trend witnessed especially in centres with IT and ITeS business.

    Going forward…
    The importance of the tourism and hospitality industry for the Indian economy is apparent. As per WTTC, Indian tourism demand will grow at 8.8% from 2004-13, which would place the country as the third-most rapidly growing market in the world, after Montenegro and China. However with tourist arrivals of 4 m as compared to China's 45 m, Singapore's 7.5 m and Spain's 55 m, the number is very small amidst a huge supply crunch. In the long term, for the growth of the industry to be sustained, issues like poor infrastructure, high levels of taxation need to be solved. Land development, less of paper and legal work, faster execution is needed to meet the growing demand. Adding rooms at a faster pace would also stabilise the room rates and not have a negative effect on potential demand in the future.

     

     

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