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Hotels: Where to from here? - Views on News from Equitymaster
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  • Jun 13, 2007

    Hotels: Where to from here?

    The hospitality industry of the country is at a high growth pace. The demand is exceeding the industry's supply. With tourism industry showing excellent performance, in terms of foreign tourists arrival, hospitality industry, is poised to grow at a faster rate. During 2006, 4.4 m tourist visited the country. The figure is up 13% from that of 2005. This has led to high demand thereby increasing the occupancy rates to 71% and the room rates up 44% since 2001.

    Demand for hotel rooms is soaring as Indian economy is growing. Not only for business deals and conferences, but also as a tourist hub foreigners are flooding the country. The rise of low-fare airlines is also bringing domestic air travel within reach for more Indians leading to high domestic tourism. At the same time, this high growth is placing strain on the country's infrastructure, and in particular airports and hotels, where supply is overwhelmed by demand. India has only 110,000 hotel rooms, while China has 10 times more, and the United States 40 times more. The shortage of rooms led to higher room rates. Comparing rooms of similar quality, a room in Delhi cost US$ 187 on an average versus US$ 122 in Beijing, while a room in Mumbai was US$ 178, versus US$ 150 in Shanghai. According to Crisil, while demand grew by 11% in 2006, 15% growth in 2007 and continuation of this annual rate up until 2010 is expected.

    Movement of average room rates in star hotels in India
      2001-02 2002-03 2003-04 2004-05 2005-06
    Five star deluxe 4,668 4,335 4,686 5,606 7,099
    Five star 3,277 3,114 3,372 3,897 5,019
    Four star 2,368 2,246 2,580 3,088 3,799
    Three star 1,696 1,669 1,670 1,830 2,044
    Overall average 3,467 3,269 3,569 4,299 5,318
    Source HVS International

    While the demand for additional rooms in five years will be 1,40,000 to 1,50,000 rooms, the additional supply will be 60,000 to 70,000 rooms only. The undersupply of rooms has been a key driver of the Indian hotel market. According to market data from HVS International, the room supply grew by 4% in 2006 and is expected o grow by 7% from 2006 to 2007. The shortage is attracting some of the world's best-known names in hotels like Accor, Hilton, Wyndham and Pan Pacific to India. The government is also seriously considering promoting the hospitality industry. Measures like creation of land banks and freeing land supply, declaration of a conditional ten-year tax holiday for all tourism projects in the country are been planned by the government.

    Expected room supply by 2008 in top 10 key hotel markets in India
    City Luxury First class Mid market Budget Total
    Delhi/NCR 2,449 2,659 4,264 1,484 10,856
    Mumbai 2,866 2,697 2,485 1,270 9,318
    Kolkata 275 725 1,225 240 2,465
    Chennai 1,235 1,675 1,017 480 4,407
    Bangalore 2,503 1,300 2,883 1,108 7,794
    Hyderabad 1,885 2,549 1,579 1,395 7,408
    Pune 470 1,767 1,454 927 4,618
    Goa 325 1,147 675 485 2,632
    Kochi NA 400 335 330 1,065
    Jaipur 324 1,005 720 721 2,770
    Total new supply 12,332 15,924 16,637 8,440 53,333
    Source HVS International



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