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Hotel sector: Where to?

Oct 5, 2007

With the macro prospects still strong, increased business-tourist travel continues to propel hotel room demand. Business traffic in major metros has grown in line with increased economic activity. Foreign tourist arrivals for the months of July 07 and August 07 grew by 15% YoY. 3.12 m foreign tourists arrived from Jan 07 to Aug 07. Hike in room rates:
During the quarter, major players have planned to shift to a single rupee tariff rate from a dual tariff structure. Strengthening of the rupee against the dollar has made a significant dent in the revenues of hotel chains across India. For instance, when the US dollar was ruling at around Rs 45, a US$ 200 rent would fetch Rs 9,000. Now, with dollar at around Rs 40, the same would bring in only Rs 8,000. Therefore, hotel majors are planning to introduce rupee pricing from October onwards, the time when most hotels change their tariffs. The move towards a single-currency pricing is to shield the players from a fluctuating dollar. All the major companies are planning to increase room rates by 15% to 25% across most locations. While the revision in Mumbai and Delhi could be up to 25%, in places like Goa and Kerala it could be as much as 30%. October sees the onset of foreign leisure travelers and hence the hike at leisure destinations is more than the metros to capture the benefits of higher tourist inflow.

Dip in occupancy:
Though the room rates are rising, the occupancies of branded hotels (three to five star) in metros are showing a downward trend. Room rates in metros like Mumbai, Delhi, Bangalore, and Chennai have jumped three-fold in the last three years and this has probably led to some pressure on occupancies. Hotel industry overall saw a 12-month average growth of 30% in 2006-07, whereas, occupancy growth, which had been 2.6% in the previous year, showed a marginal growth of 0.7% in 2006-07. New capacity to the tune of 30% came up in Bangalore, while in Hyderabad, the capacity increased by 50%. Bangalore has been the biggest loser with its occupancy rate lagging behind at 65% compared with 79% a year ago. Thus, along with higher rates, the addition in inventory led to lower occupancies. Also in Delhi, occupancies have dipped by 6% to 7% in the first five months of this fiscal (April to August) compared to the corresponding period last year.

PlaceCurrent roomsExpected (3 to 5 years)
NCR/Delhi8,000 19,400
Bangalore2,414 12,882
Hyderabad1,442 8,700
Pune 510 8,000
Mumbai7,400 11,600
Chennai2,440 6,300
Kolkata1,350 3,700
Goa2,252 2,632
Source : HVS International Research
Realty blues:
According to the department of tourism, foreign arrivals in India increased 20% between 2005 and 2007. Besides, about 300 m domestic tourists travel to various destinations annually and that number is expected to grow by 10% to 15% over the next few years.

The hotel industry has 110,000 rooms and a shortfall of 150,000 has been estimated. The industry has failed to keep pace with the exponential economic growth and therefore, a substantial demand-supply gap exists. Not surprising then that room rates are steep and room availability is low across cities with the situation getting worse in the peak season. The hotel industry will further get a fillip with the 2010 Commonwealth Games to be hosted in Delhi. The government has given approval to about 300 hotel projects. However, the fear is that only 75% of the demand will be met by projects that are on the anvil. Site, location, accessibility, visibility and proximity are critical factors for development of hotels. However, availability of quality sites is the biggest challenge.

Apart from the location problem, the hotel industry is also facing problems like non-availability of trained or skilled people, rising manpower and operational costs, maintaining global services standards and lack of efficient contractors.

Going forward:
The continued demand-supply imbalance has led to exponential rate increases, resulting in inflated room rates across key markets in the country, some of which currently rank among the most expensive hotel markets in the world. However, occupancy rates are declining. The government is taking measures to increase supply. Location availability though, would continue to be a problem.

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