Where's the industry headed: An overview

Speaker: Manav Thadani,
MD of HVS Hospitality Services India

HICSA 2008 started with an overview on the industry by Manav Thadani, MD of HVS India, who spoke about the current trends and future opportunities for the hotel industry across key markets in India. He presented HVS findings on each segment of the hotel market, as well as of major cities.

Giving an overview, he said, "The hospitality boom in India is led not only by the buoyancy in the Indian economy, but also by the supply-demand imbalance that currently exists in most cities. Our focus is extensively on the quantum and classification of new hotels being developed in major cities over the next five years. For each city we have presented the number of new hotels under various stages of development, their market orientation and suggested the active development ratio."

The services sector showed a healthy growth of 11.2 per cent in 2007 as compared to 9.8 per cent in 2006 benefiting from the availability of skilled labour. Trade, hotels, transport and communication continued to develop at an accelerated pace recording a growth of 13.0 per cent during 2007 as against 10.4 per cent in 2006.

He said that though India has been lagging behind the world in promoting exports through SEZs, it is slowly catching up owing to the considerable change in the government's outlook and policies towards SEZs. The SEZ Act 2005 along with the two amendments (August 2006 and March 2007) has led to certain regulations being done away with and the process of starting a business has been simplified by bringing in the single window clearance policy. The policy allows 100 per cent FDI in most manufacturing activities and the government is also looking at removing sectoral FDI caps in all sectors for units located in SEZs. Most of the SEZs in the country are presently located in the south followed by west, north, east and central India.

City-wise

Giving details of the survey results by HVS, Thadani said as before, we have examined the performance of ten major cities across India, wherever a reasonable sample is allowed. He said that ten years ago, the four metro cities of Mumbai, Delhi, Chennai and Kolkata were the top four market performers, respectively in terms of Revenue Per Available Room (RevPAR). But in the current survey, Mumbai has fallen to the third spot, Delhi retains its second spot, while Chennai and Kolkata are sixth and seventh, respectively.

He said that the recent developments accompanied with a positive outlook for the economy have resulted in accelerated growth in demand for hotel accommodation over the last two years. The continued demand-supply imbalance has led to exponential rate increases resulting in inflated room rates across key markets in the country. He said that the demand-supply gap has clearly benefited the existing hoteliers who have hiked their rates across market segments.

Due to the high rates, there has been emergence of an unregulated and unorganised hotel/guesthouse sector that is witnessing a boom in cities like Bangalore, Delhi and Pune. The rapid development of standalone hotels is resulting in a parallel supply of rooms in each of these markets, resulting in softening of occupancy performance.

Surging supply

Thadani said, "We have been tracking the development of new supply very closely. In 2005, the proposed new supply of branded and quality hotels for the ten markets covered by us was 22,400. This rose to 48,500 in 2006 and today has further grown to 77,500. In fact if we were to take all new supply there would be a total of 1,02,000 rooms entering the Indian hotel industry within the next five years. This year's report also shows the new expected supply for Pune and Chandigarh, in addition to the other markets. He said that HVS has been tracking new supply very closely each year, and we have come to the conclusion that there is a good deal of misinformation and speculation, where new supply is concerned.

He also said while determining new hotel supply, clearly Hyderabad has a growth rate of over 264 per cent. While a lot of supply is in the higher end, the rate issue is sensitive and necessity is huge in the budget segment. Similarly, Kolkata is witnessing growth in upper segment, with very less supply in the mid segment. Goa, at the moment, has a low supply. It has a growth rate of just 124 per cent. On the other hand, Pune has a huge growth rate of 775 per cent. "So while Pune may reflect that 8,072 rooms are under development, we at HVS believe that 77 per cent of this proposed supply will actually get developed by 2010," he quoted.

Citing about the massive shortage of rooms in Delhi, Thadani said that keeping in view the Commonwealth Games 2010, the supply is slow and the industry will not be able to meet the requirements in the stipulated time period.

Prospects

Thadani said that for investment purposes, Mumbai clearly remains a favourite destination, as the city continues to have a limited supply entering the market compared to our estimates on the demand side. "The city is the commercial capital of India and we expect demand to remain exceptionally strong across all segments in this market. While good locations could afford a luxury or a first class hotel we also see an opportunity to do large format mid-market or budget hotels in this city," he said.

The NCR, while expecting a lot of new supply due to the Commonwealth games in 2010, remains a good choice in many locations provided you enter the correct niche segment. Developers, however, need to be careful not to be swayed by the games alone but to see long term viability of hotel projects.

The potential F1 race being talked about for 2010 will also add to a long list of reasons for investors to consider this city. The new airport, two potential world-class convention centers, are certainly other sources of induced demand in this markets. "We also continue to consider that the mid-market and budget hotels have good potential across most parts of the country," he noted.

Another opportunity is in the leisure space. India is certainly ready for family destination resorts built to international standards. These could be done both near eastern and western coastlines or within short distances to major cities. It is important that these destinations be built to international standards and offer value for money to the families they target. These resorts coupled with good MICE business have the potential to create their own niche. A good example of potential development could also be to look at the hills for summer travel and also adventure sports (including winter sports). The advent of Condo hotels into India is also a good possibility with several hotel operators now willing to lend their name towards the same. "In fact, we believe that destination resorts and Condo hotels can be complementary to one another and therefore may also be developed side by side," Thadani said.

Alternatively, a budget hotel may be a better option as it may be more acceptable, save the additional FSI for perhaps increased retail/commercial space. "We anticipate that over the next five to six years India will become one of the world's fastest growing tourism markets and will be hard to ignore," he asserted.