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Hotels: Looking beyond metros - Views on News from Equitymaster
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  • Jul 13, 2007

    Hotels: Looking beyond metros

    The GDP growth, expanding service sector, rising purchasing power, infrastructure development is no longer limited to the large metros. The smaller towns and cities are the new emerging centers of growth. Even the hotel majors are expanding to new regions beyond metros as these provide large opportunities. The trickle down effect has led to the growth of the Tier I and Tier II cities. As of March 31, 2007, the average demand for hotel rooms in smaller cities was 120% as compared to about 90% in bigger cities.

    Indian cities are customarily divided into three groups: Tier I, comprising of major urban centres like Delhi, Mumbai and Bangalore; Tier II, including such cities as Hyderabad, Kolkata and Pune; and Tier III, consisting of cities such as Ahmedabad, Gaziabad, Indore, Jaipur, Lucknow and Nagpur.

    India is no longer a city of metros with the growth having spread to newer regions. On the back of the service sector spreading its reach to smaller towns, clusters of manufacturing hubs emerging across the country and large SEZs being established across states, the demand for hotels in these regions have increased.

    Room Rates across cities
    City 2001 2002 2003 2004 2005 2006 % change
    Bangalore 3,602 3,735 4,300 4,801 7,880 11,000 25.0%
    Kolkatta 3,698 3,409 2,917 2,975 3,213 3,650 -0.3%
    Chennai 3,796 3,535 3,300 3,478 3,662 4,675 4.3%
    Delhi 4,526 4,338 4,089 4,185 5,200 7,050 9.3%
    Goa 2,914 2,676 3,000 3,293 3,764 5,000 11.4%
    Jaipur 2,902 2,949 2,850 2,922 3,604 4,400 8.7%
    Mumbai 5,555 4,932 4,184 4,274 4,955 6,450 3.0%
    Hyderabad 2,316 2,414 2,700 2,865 3,490 4,550 14.5%
    Source: HVS International

    Over the last 2 years, IT cities like Pune and Hyderabad, satellite towns of Faridabad, Gurgaon, Noida and Ghaziabad and tourist destinations like Jaipur and Goa are witnessing faster growth in room rates and occupancy then the metros.

    New Room Supply 2006 -2011
    Key cities Existing room supply 2006 2007 2008 2009 2010 2011
    Delhi/NCR 7,030 182 2,207 2,720 3,132 2,280 335
    Mumbai 7,402 - 996 860 2,827 3,840 825
    Kolkatta 1,354 75 - 210 1,380 525 275
    Chennai 2,075 - 710 460 1,942 650 645
    Bangalore 1,906 270 778 2,216 2,570 1,415 335
    Hyderabad 1,442 286 470 1,633 3,584 455 980
    Pune 510 100 565 1,221 2,347 220 165
    Goa 2,252 60 275 550 1,015 517 215
    Cochin 354 82 - 453 330 200 -
    Jaipur 1,298 41 469 720 975 400 165
    Total 25,623 1,096 6,470 11,043 20,102 10,502 3,940
    Source: HVS International

    Around 25,000 total rooms across different segment categories are present in Mumbai, Jaipur, NCR, Bangalore, and Pune among other cities. Around 50, 000 new rooms are expected to come up in these cities by the end of 2009. Each city will have different factors that will drive revenue growth for hotels. For instance, the Commonwealth games in Delhi, IT boom in Hyderabad and Pune would drive the demand for rooms going forward.

    Of the new rooms, while 53% will be added in the luxury and first class segment, 47% will come up in the mid market segment of which 16% will be budget hotels. Hotel majors have lined up expansion plans across segments to capitalise on the rising tourist inflow.

    While the demand for additional rooms in five years will be for 140,000 to 150,000 rooms, the additional supply will be 60,000 to 70,000 rooms only. This demand supply mismatch would lead to room rates remaining strong for the next two years. Also, higher growth is expected to be witnessed in new regions and new segments like budget hotels. Once the supply comes in, hotel majors expect the room rates to stabilise.



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