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Hotel room rates to increase further: CRIS INFAC

EH Staff - Mumbai

Hotel room rates in India are likely to grow even beyond their current highs, as per a study released by CRIS INFAC, CRISIL's research arm. This is on account of demand outpacing supply over the next five years. Notwithstanding this general trend, however, there will emerge pockets of oversupply - like Hyderabad - which will see a softening of average room rates. Additionally, the credit profile of major players is not likely to change significantly as the positive effects on credit profile of improving margins will be counter balanced by debt funded capex plans.

Business travel key growth driver

Led by business travel, the demand for hotel rooms in the premium segment will grow at a compounded annual growth rate (CAGR) of nine per cent over the next five years, according to CRIS INFAC. Among business destinations, the highest growth in room demand in the next five years will be in north Mumbai, Chennai, Bangalore and Hyderabad. While, among leisure destinations, Goa will see the highest growth in room demand, CRIS INFAC says in its latest report analysing the long-term prospects of the hotel industry. According to Sudhir K Nair, head (Research) at CRIS INFAC, "Demand will outpace supply in the short to medium term, and average room rates (ARRs) will, therefore, grow faster than before. ARRs are expected to increase by 13 per cent to 14 per cent annually over the next two years."

He added that hotels are now reworking their strategies to consolidate and maximise their ARRs. "The increased thrust of the hotel industry on the Meetings, Incentives, Convention, Exhibitions (MICE) segment during off-season/weekends is a very clear pointer to this. Due to the spurt in tourist inflows and demand outstripping supply, occupancy rates are expected to reach 83 per cent by 2008-09, from the present levels of around 72 per cent," he said.

Supply scarcity and glut

According to the report, Delhi will continue to face a shortage of rooms over the medium term. In addition, no significant addition of fresh room capacity is expected in the national capital. As a result, says CRIS INFAC, ARRs will rise sharply in Delhi.

In sharp contrast to Delhi, Hyderabad will witness an excess supply, due to which occupancy rates will plummet to levels as low as 65 per cent by 2007-08, and ARRs will slump as a consequence, says the report. Among leisure destinations, CRIS INFAC believes that there will be a supply shortage in Goa and Jaipur (especially during the peak seasons), and this will be reflected in their respective ARRs.

CRIS INFAC says that though the industry's profitability will look up in the medium term, its credit profile will not improve due to the huge investments planned to augment room supply in various cities. Calculations suggest that the industry will be investing around Rs 20-23 billion over the next five years to add fresh capacities. Of this, Rs 12-15 billion is likely to be in the form of debt. Due to this, CRIS INFAC does not anticipate an improvement in credit profiles over the near to medium term.