With the industry recovering from the downtrend and a steady increase in demand, the owners and developers are bullish about 2016. BY TEAM HOTELIER
The hospitality industry in 2015 has seen a continuation of growth from 2014, especially in the select service four-star segments. There has been a consistent growth in demand leading to influx of fresh inventory in major markets, which points at the industry being poised for further growth in 2016. As occupancies improve marginally over last year and the supply growth slows down significantly, with most of the announced projects having become operational, the developers are feeling bullish about the coming year.
“As occupancies improve, it will allow the hotels to take up the ARR to add to their bottom line. We are already seeing this shift happening in some markets like Pune, where both occupancies and average room rates have reflected an increase over last year,” says Naveen Jain, president, Duet India Hotels. Ankur Bhatia, executive director, Bird Group opines that initiatives by the government such as Electronic Travel Authorisation (ETA), will encourage foreign traveller coming in and “we are gearing up for a slightly better year”.
Talking about trends in the coming year, Zaid Sadiq, executive director – liasoning and hospitality, Prestige Group, feels that the addition of new keys and increase in competition for business has only led to a drop in rates, a trend that is likely to continue in the coming year. “These trends in the demand, supply and price dynamics have resulted in the rise of another player in the market – small, local stand-alone hotels and hotel chains, with room inventories of 200 and less, that are providing stiff competition to bigger names in the industry,” Sadiq feels.
With the next generation of traveller getting younger and more tech-savvy and practical when selecting travel options, the industry has realised the growing need for more hotels in the mid-range, four-star segment. Also, the growth of the Indian economy has not only boosted business prospects in major cities but also in tier -II and -III cities. Industry trends over the past couple of years have clearly identified that demand is slowly but steadily shifting from the soon to be saturated metros to these centres that have seen an increase in income levels and a shift in spending patterns from necessities to luxuries. This has led to an aggressive increase in hotel development activity as well as providing avenues for expansion of various hotel brands. The growth of independent micro-markets has boosted the existence of multiple hotels of different categories in cities like Pune, Bhopal, Nagpur and Kochi.
Jain feels that commercial zones will continue to remain attractive micro-markets for hotel investment. However, he sees an imminent opportunity in the leisure sector at destinations with excellent connectivity with tier-I cities and feels that one would see the next wave of development in these areas.
So how does one identify a potential hospitality development? While factors such as land cost, location- distance from key areas such as airport, tech-parks etc, and management fees are considered when identifying a potential hotel property, Sadiq feels that a key benchmark is the growth pattern of the city. “The potential hotel is likely to show better and faster returns if it is located in a city that has also seen fast paced growth in recent years,” he says. Citing the example of Delhi/Gurgaon and Bengaluru, he explains that the city growth can be delved into in detail by breaking the city down into micro-markets and analysing the occupancy and ADR trends of the micro-market in which the potential hotel is located as the target audience is likely to be in the same micro-market.
“Strategic location is very important,” says Bhatia, “In today’s scenario, MICE market is growing at a rapid pace with a strong domestic sector as well as booming outbound traffic. Today’s corporate traveller looks for a hotel with location close to the commercial hub as well as easy access to the leading shopping and entertainment hubs.”
Jain feels that though currently there are a lot of operational hotels in the market available for sale, their ask-price makes them financially unviable. “However, this is a good time to invest at the right valuation at a right location. Hotels are long term investments and need to be evaluated as such,” he adds.
Though the mood is positive, there are a number of challenges that the industry will continue to face in the coming months. Indian hospitality has been reeling under the pressure due to the enormous supply of hotel rooms that came in over the last few years. With the supply slowing down and the demand catching up, it will overtake supply growth and absorb some of the excess capacity, thus improving occupancies over next couple of years. This would allow hotels to focus on increasing their ARRs to boost the profitability. This influx point for occupancy is expected to come in the next couple of years with hotel ARRs continuing to grow over a sustained period of time.
Sadiq feels that with the tremendous influx of inventory in already saturated markets, competition between hotels “is only set to intensify further, eventually giving rise to price wars. ADRs and average cheques will fall due to multiple stay and dining options”. If the development trends are any indication, the larger and well established brands will continue to penetrate tier-II and -III cities, while smaller and lesser known operators will enter the market due to low management fees.
Another challenge that the industry needs to focus on is the availability of qualified and trained work force and controlling high energy (heat, power and lighting) costs with operators shifting focus on sustainability initiatives as an effective way to manage costs.
But, the Indian hospitality landscape is set for a positive change in the years ahead and we foresee a bourgeoning of hotels across the country. As one of the key industries driving the growth of the services sector and, thereby, the Indian economy, there will be a greater focus amongst the industry that will set it on the path of a much awaited growth trajectory.
