Lehman Brothers filed for Chapter 11 Bankruptcy in the USA on September 15, 2008. The most audacious and horrifying terrorist attacks in the history of India took place in Mumbai on November 26, 2008. Not only did they jolt the country at large, these attacks hit the hotel sector with all their might by attacking two iconic hotels in the country’s financial capital. 2008/09 is one of only two years in the last 18 (the other being 2001/02) where the actual demand for room- nights (RPDs) declined over their previous year. Clearly, this cycle started on a poor note.
Additionally, the euphoria of 2005 to 2008 had led to various hotel projects being announced across the length and breadth of our nation and supply began to exert pressure on markets across India starting 2009/10. In fact, new branded supply has grown at an average of 17% from 2008/09 to 2013/14.The previous momentum of year on year growth in room-night demand did not diminish though as it grew at an average of over 16% for the same period. However, this came at the cost of average rates declining at a CAGR of 6% during this cycle. Occupancies also went back to the late fifties and we expect 2013/14 to close with a nationwide occupancy of about 57%.The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes was negative. What this means is that increase in branded hotel inventory had a negative impact on nationwide occupancies and average rates on a compounded basis during this six year period, in spite an absolute demand growth (occupied roomnights per day) of 16% CAGR.
Overall, this has been another down-cycle.projects during the upcycles.)
Based on the various reasons discussed above, we have assumed the nationwide supply to grow further by only 5, 6 and 7% in 17/18, 18/19 and 19/20 respectively. Resultantly, we expect branded supply to grow at CAGR 9% over the next six years. Demand, however, has continued to grow in the double digits for the past decade and in fact grew on an average of 13.8% year on year inn the two previous cycles (twelve year average). We are of the view hat demand will continue to grow at a similar pace over the next six years and have assumed an average of 13.5% growth in room-night demand (RPDs) for this period. We also believe that as branded supply continues to get absorbed and demand continues to grow in the double digits over the next six years, while ARRs may not see the 15% to 20% growths as were witnessed in the previous up-cycle, but they will likely grow by at least 10% CAGR over the next six years, most of it in the latter half of the cycle. The country stands on the brink of elections and our view is that while the prospective outcome is open to debate; it would not be entirely absurd to assume that the Narendra-Modi led NDA alliance stands a fair chance of securing the mandate. It is also our view thatwhile changes in policy may take
2014/15 to 2019/20: What’s next?
So what does the next cycle hold in store for our sector, and is it even fair to assume that the next cycle is around the corner? While there are a few known parameters that can be quantified, there are also some key learnings from the previous cycles
that one can draw from in making assumptions for the future. The base of existing branded supply has grown from about 18,000 rooms in 1996 to about 108,000 rooms in 2013/14. HVS has collated data that forecasts a 13% growth of branded supply in 2014/15, a 10% growth in 15/16 and a 6% growth in 16/17. A bulk of what was planned during the middle of the past decade has thus either already entered the markets or is close to opening in the next 12 to 18 months. Developers and lenders are both wary of the sector, thanks to the hangover effect of the last few years. NPAs and CDRs are the new TLAs (Three Letter Acronyms) in town. (As an additional note, we would like to highlight that lenders – public and private sector alike – need to also read this article and understand the cyclical nature of this business. Rather than fearing this sector,
they should pay heed to the fact that they need to continue lending during the downcycles and be careful in avoiding situations where borrowers may end up over-leveraging their time to get implemented, changes in perception happen fairly quickly. The hotel sector may well be one of the first to get impacted when things go sour, but it is also typically one of the first to enjoy the benefits of change in investor and/or consumer sentiment. A stable government
n the centre would likely mean an improvement in our medium to long term real GDP growth rates. While the next twelve to eighteen months will continue to see the last leg of supply pressure, we are of the view that India’s hotel sector will soon be welcoming it’s next up-cycle! The key take away here is that the correlation between supply growth and both ARR as well as occupancychanges will likely be positive. This coupled with the overall sentiment that we believe will change for the better, means that any increase in branded hotel inventory will have a positive impact on nationwide occupancies and average rates on a compounded basis during the next six years. The next up-cycle is no more than 12 to 18 months away. In conclusion, we agree that there is no one ‘India market’ and the various cities and micro-markets therein may well have different outcomes over the next few years. We also agree that the numbers will ndeed speak for themselves in the months and year ahead. However, as the data being discussed looks at India holistically, we believe that the story behind these numbers is indicative of a strong and much awaited rebound for the hotel sector. HI Year 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 CAGR
HVS has collated data that forecasts a 13% growth of branded supply in 2014/15, a 10% growth in 15/16 and a 6% growth in 16/17
2008/09 to 2013/14: The DownCycle
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DownCycle
Lehman Brothers filed for Chapter 11 Bankruptcy in the USA on September 15, 2008. The most audacious and horrifying terrorist attacks in the history of India took place in Mumbai on November 26, 2008. Not only did they jolt the country at large, these attacks hit the hotel sector with all their might by attacking two iconic hotels in the country’s financial capital. 2008/09 is one of only two years in the last 18 (the other being 2001/02) where the actual demand for room- nights (RPDs) declined over their previous year. Clearly, this cycle started on a poor note.
Additionally, the euphoria of 2005 to 2008 had led to various hotel projects being announced across the length and breadth of our nation and supply began to exert pressure on markets across India starting 2009/10. In fact, new branded supply has grown at an average of 17% from 2008/09 to 2013/14.The previous momentum of year on year growth in room-night demand did not diminish though as it grew at an average of over 16% for the same period. However, this came at the cost of average rates declining at a CAGR of 6% during this cycle. Occupancies also went back to the late fifties and we expect 2013/14 to close with a nationwide occupancy of about 57%.The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes was negative. What this means is that increase in branded hotel inventory had a negative impact on nationwide occupancies and average rates on a compounded basis during this six year period, in spite an absolute demand growth (occupied roomnights per day) of 16% CAGR.
Overall, this has been another down-cycle.projects during the upcycles.)
Based on the various reasons discussed above, we have assumed the nationwide supply to grow further by only 5, 6 and 7% in 17/18, 18/19 and 19/20 respectively. Resultantly, we expect branded supply to grow at CAGR 9% over the next six years. Demand, however, has continued to grow in the double digits for the past decade and in fact grew on an average of 13.8% year on year inn the two previous cycles (twelve year average). We are of the view hat demand will continue to grow at a similar pace over the next six years and have assumed an average of 13.5% growth in room-night demand (RPDs) for this period. We also believe that as branded supply continues to get absorbed and demand continues to grow in the double digits over the next six years, while ARRs may not see the 15% to 20% growths as were witnessed in the previous up-cycle, but they will likely grow by at least 10% CAGR over the next six years, most of it in the latter half of the cycle. The country stands on the brink of elections and our view is that while the prospective outcome is open to debate; it would not be entirely absurd to assume that the Narendra-Modi led NDA alliance stands a fair chance of securing the mandate. It is also our view thatwhile changes in policy may take
2014/15 to 2019/20: What’s next?
So what does the next cycle hold in store for our sector, and is it even fair to assume that the next cycle is around the corner? While there are a few known parameters that can be quantified, there are also some key learnings from the previous cycles
that one can draw from in making assumptions for the future. The base of existing branded supply has grown from about 18,000 rooms in 1996 to about 108,000 rooms in 2013/14. HVS has collated data that forecasts a 13% growth of branded supply in 2014/15, a 10% growth in 15/16 and a 6% growth in 16/17. A bulk of what was planned during the middle of the past decade has thus either already entered the markets or is close to opening in the next 12 to 18 months. Developers and lenders are both wary of the sector, thanks to the hangover effect of the last few years. NPAs and CDRs are the new TLAs (Three Letter Acronyms) in town. (As an additional note, we would like to highlight that lenders – public and private sector alike – need to also read this article and understand the cyclical nature of this business. Rather than fearing this sector,
they should pay heed to the fact that they need to continue lending during the downcycles and be careful in avoiding situations where borrowers may end up over-leveraging their time to get implemented, changes in perception happen fairly quickly. The hotel sector may well be one of the first to get impacted when things go sour, but it is also typically one of the first to enjoy the benefits of change in investor and/or consumer sentiment. A stable government
n the centre would likely mean an improvement in our medium to long term real GDP growth rates. While the next twelve to eighteen months will continue to see the last leg of supply pressure, we are of the view that India’s hotel sector will soon be welcoming it’s next up-cycle! The key take away here is that the correlation between supply growth and both ARR as well as occupancychanges will likely be positive. This coupled with the overall sentiment that we believe will change for the better, means that any increase in branded hotel inventory will have a positive impact on nationwide occupancies and average rates on a compounded basis during the next six years. The next up-cycle is no more than 12 to 18 months away. In conclusion, we agree that there is no one ‘India market’ and the various cities and micro-markets therein may well have different outcomes over the next few years. We also agree that the numbers will ndeed speak for themselves in the months and year ahead. However, as the data being discussed looks at India holistically, we believe that the story behind these numbers is indicative of a strong and much awaited rebound for the hotel sector. HI Year 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 CAGR
HVS has collated data that forecasts a 13% growth of branded supply in 2014/15, a 10% growth in 15/16 and a 6% growth in 16/17
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