The city has registered a stiff decline in its ARR due to a considerable increase in inventory supply, coupled with the effects of an economic slowdown, says Syed Ameen Kader
The party seems to be over for Bengaluru. The city, which started to outperform all other destinations from 2004-05 and went on to quote the highest ARR in 2006-07, has lost its number one position now and is seeing a decline in occupancy and rates. Bangalore witnessed the steepest decline in ARRs, falling by 38% (y-o-y) to Rs8,500 in September 2009.
Although the story is repeated for almost all the other cities at the moment, Bengaluru is the hardest hit among them, with the increase in room supply and ongoing recession which has badly affected the city’s main demand generator – the IT sector – as the main blame factor.
With an exorbitant room inventory to be added in the near future, the city is heading towards an over-supply situation. “Approximately 10,000 new rooms at various stages of development are proposed in the city over the next five-to-seven years. While Bengaluru is likely to facilitate considerable demand as experienced historically, the key question is whether the demand will be sufficient for this considerable increase in room inventory,” says Akshay Kulkarni, director, South Asia, Cushman & Wakefield Hospitality.
The only respite is to be drawn from the fact that more than half of these planned hotels are not under active construction at the moment. Foreseeing the oversupply situation in the market, many of these hotel developers have either deferred or slowed down their works. “Whatever new developments have taken place are primarily in the Whitefield area, not many hotels have come up in the Central Business District (CBD) area where we are located. So we are not much affected but yes, the demand has fallen in the Bengaluru market,” said Nikhil Kapur, general manager, Ista Bengaluru.
The city will add over 4,000 rooms in the next one year; of which 50% are expected to be in the upscale category, 39% in mid scale, and the remaining 11% luxury. The current demand-and-supply scenario has led to a degree of uncertainty on how the market will perform over the next five years.
Jaideep Khanna, director, sales and marketing, Premier Inn India, said: “The boom years have gone, and, just like the highest ARR, Bengaluru is perhaps seeing the sharpest slump too. In times to come, supply will exceed demand even after the economic normalcy, and that will maintain the ongoing price correction and stability.”
He said that Bengaluru lacked four-star and mid-market hotels, not the luxury end. However, not everyone agrees with him as Bengaluru, with a high land cost, offers a tough challenge for developing mid-market hotels, for which payback periods are much longer. “The higher ARR associated with the luxury segment facilitates a better coverage for higher development cost compared to the ARR achieved by the budget or mid market hotels, particularly in a market which is anticipated to see a further decline in ARR and occupancies,” adds Kulkarni.
His point of view is validated by Anand Rao, general manager for the newly launched 292-room ITC property, The Royal Gardenia, who feels the city offers opportunities for the luxury segment, as there hasn’t been any new addition to that segment since the Leela opened in 2001. However, he agrees the city has seen correction in ARR and it is currently way below the rate that was being quoted a couple of years ago.
Phrases such as ‘right pricing’ have emerged and hotels are indulging in cut-throat price cutting to stay afloat. “We have managed to hold our rates and have not gone down too much, but there are a few five-star hotels who are quoting four-star rates, and that has worsened the situation,” said Vijay Gollarahalli, general manager, Le Meridien, Bengaluru.
The condition does not seem set to improve very soon, with a majority of city players feeling things might start looking positive only by third or fourth quarter of next year. “The Bengaluru market is likely to experience positive ARR growth from 2011-2013, when the market is likely to have bottomed out with a slow climb on higher demand growth compared to supply growth”, says Kulkarni.
Gollarahalli also thinks the lull period will continue through 2010 and things will improve only by 2011.
