As we head into the new financial year, the verdict is pretty much that some of the more established markets are now over saturated, and the focus is on developing tertiary markets and hitherto unexplored leisure destinations. Punam Mohandas speaks to a section of hoteliers for their views.
India is indisputably one of the most preferred travel destinations for international visitors, both leisure and business.
The hospitality sector alone is expected to see investments to the tune of over US$11 billion in the next two-to-three years; by 2011, it is estimated that 40 international brands will have presence in the country.
Approximately 55,000 new rooms are anticipated to become operational by 2013 across the markets of Ahmedabad, Bengaluru, Chennai, Chandigarh, Goa, Hyderabad, Indore, Jaipur, Kolkata, Mangalore, Mumbai, Mysore, Nasik, New Delhi/NCR and Pune.
However, due to the recession, the consolidated performance of these cities indicate an AOR of 71% and ARR of approximately Rs6,800 in 2007, which declined to 66% and Rs6,700 respectively in 2008, with a stabilised AOR of 66% and a further decline in ARR to Rs6,600 respectively in 2009.
Some of these cities are already facing a saturation crunch, with supply outweighing demand. According to LN Sharma, director and chief executive officer, Golden Jubilee Hotels Ltd who is building the Trident and Oberoi hotels in Hyderabad, NCR no longer holds potential for the next few years at least.
“There will be an oversupply situation in NCR, except Delhi the main capital region, where business is likely to improve in the next five years,” he said. Preferring Bengaluru over Hyderabad, Sharma added that no other location for IT business is as successful as Bengaluru, despite its infrastructure bottlenecks.
Having said that, it is also an undeniable fact that India lags way behind other global cities when it comes to room supply. “On an all-India basis, we have less than 85,000 branded hotel rooms compared to 120,000 rooms in New York City alone,” agrees Priyakant Amin, director, Convention Hotels India (CHI), who is building five hotels under the Holiday Inn, Hyatt Place and Hilton Garden brands, in southern locations such as Goa, Bengaluru, Coimbatore and Mysore.
Starwood, which saw aggressive development in the last year, has its focus firmly on introducing luxury brands such as the W and St Regis into the cities of New Delhi, Mumbai and Bengaluru. “Our strategy is basically to penetrate into the primary markets where the brands are not represented yet,” says Nikhil Manchharam, vice president, acquisitions and development, Starwood Asia Pacific Hotels and Resorts.
Says Sanjay Sethi, managing director and CEO, Berggruen Hotels: “I think Kolkata, Hyderabad and Ahmedabad, still have scope for additional inventory in the branded budget/mid segment space. The current analysis includes Keys inventory coming into Bengaluru, Hyderabad and Pune. Therefore, we are looking at opportunities in Kolkata and Ahmedabad.
Markets are tougher and will remain to be so for a couple of years. Hotel companies will need to find innovative methods to remain competitive; the ability to be price competitive will be the differentiator between successful hotels and those that are not.”
Offering a counter view to the above, Harsh Varma, regional vice president India, Dusit Bird Hotels, thinks that the cities of Bengaluru, Kolkata, Hyderabad, Pune and Ahmedabad are not so hot, although he hopes Pune will bounce back, as Mumbai is unable to keep up with the next round of industrial development and Maharashtra will not allow itself to lose out.
“I think the cities of Mumbai, New Delhi/NCR, Goa, Chennai and Mangalore, are still sizzling, but please do keep in mind that this is mostly due to low supply factors rather than increasing demand factors,” he clarifies.
Uttam Dave, head of development, Accor Hotels – India, Bangladesh, Nepal, Sri Lanka and president & CEO, InterGlobe Hotels ( Accor JV), also says that his group is always open to opportunities in Mumbai and NCR and that, in fact, they do have hotels under development under different brands in these cities.
In his view, Pune now has too much supply, while Hyderabad and Bengaluru still offer selective opportunities in select precincts.
Varma says that rather than see the situation from a five-star deluxe perspective, one ought to look at it from a mid-size, mid-priced three-to-four star hotel angle. “There is a huge market for this in India and it lies undeveloped. I do believe herein lies the success of brands such as Sarovar and ITC,” he adds.
Veer Vijay Singh, COO Premium Hotels, The Indian Hotels Company Limited, agrees with this viewpoint. “It’s a chicken-and-egg syndrome; will the guests come first, or the hotels,” he says ruefully. “In my experience, it is the new cities where the need still exists to have more rooms, the Grade I and Grade II cities where inventories are increasing,” he says.
Starwood is also looking at emerging Tier II cities such as Coimbatore. Further, Manchharam thinks that Gujarat has potential that is untapped, although Vadodara and Ahmedabad are more saturated, whereas access is the issue to an area like Bhuj.
The Royal Orchid Group is looking to invest in the cities of Hyderabad (Gachibowli area), Jaipur (Tonk Road area), and Mumbai (Powai area). “For most cities, one must look at micro-markets,” declares Keshav Baljee, president and co-promoter, Royal Orchid Hotels.
“For instance, while the micro-markets of Electronic City and Whitefield in Bengaluru are saturated with far too many hotels, the central part of the city has space for three-four star hotels, although with the high land prices, these won’t be too viable. In Pune, soon the entire city will be over-supplied, while in Hyderabad, one will have to wait and watch to see if the IT office space that is lying vacant will be absorbed, else, we are likely to see some over-supply.”
According to Baljee, Mumbai certainly holds immense promise but then again, it is broken down into 13-14 micro-markets, with south Mumbai likely to be under-supplied for the future. NCR is a different story altogether – while New Delhi (central and south) are likely to be under-supplied, Gurgaon especially is hugely over-supplied.
Chennai is seeing a huge amount of construction activity (with one of India’s largest hotels coming up as well) and certain pockets like OMR are definitely going to be over-supplied in the future, he adds.
Vijay Thacker, director, Horwath HTL, offers a balanced viewpoint when he says he is averse to saying ‘don’t look at a particular city’, as one never knows what opportunities one may miss out on.
“All cities and towns are evolving. Yes, Pune, Hyderabad and Ahmedabad are seeing over supply but, if I got a good deal and special location, I’d still go for it. Bengaluru is seemingly saturated, but you get still get inviting deals,” he says.
With two operational hotels in Mumbai and Ahmedabad, DB Hospitality which had announced a Rs5,500 crore investment plan to build five Hyatt properties in Mumbai, Goa, Pune, Mundra, Rajasthan and New Delhi by 2014, says different areas and states grow and expand at different rates.
These create hotspots which can be isolated by regions, areas, cities, towns and even street addresses. “Competition as often written about is to be expected and accepted, and therefore our fundamental philosophy has been to develop in all markets where we see returns.
Certain markets have seen questionable activity with companies investing heavily with unrealistic feasibility, such as Bengaluru and Hyderabad. Other markets such as Pune may have temporary over-supply in the short term, but in the midterm, with demand continuing to outpace national levels, will absorb the new bedroom stocks,” says Julian Groom, chief operating officer and executive director, DB Hospitality.
Rajeev Menon, area vice president, India, Malaysia, Maldives & Pakistan, Marriott International, says he is cautious about making broad statements regarding over supply in India, as the growth in the hotel business hinges upon infrastructure, especially in the secondary and tertiary markets.
“In the short-term certain markets have an over supply situation, however, in the long term, there’s no reason for concern. In my opinion, India needs considerable more room supply. Delhi and Mumbai are the key metros in my world, followed by Bengaluru, Chennai, Hyderabad and Kolkata,” says Menon.
For the future, it is highly likely that hotel development – not including inventory already poised to hit the market – will be based on innovative models, which developers feel will provide faster cash-back options.
Branded residences and sale-and-lease-back are two such concepts that are foreseen to offer competition to the existing models.
India’s relatively low number of purpose-built convention centres and entertainment precincts also provide an identified market gap, and these models are likely to prove viable options when combined with a hotel development.
Amin says a matrix often followed in gateway cities like New York is office space to room ratio where every 1,000-square feet of office space creates demand enough for one room. “When we apply this matrix in India nearly every city including Tier I and Tier II cities come out as being under supplied over the long term,” he adds.
Amin goes on to say that the issue in India is not over saturation, but rather, expectation of alternate investment return, which is not wrong, as an alternate development like a residential, mall or office space could yield a better up-front return than a hotel.
“Like everyone else, we try very hard to balance the short-and-long-term returns. Hence, most of our developments are focused on mixed-use developments where in addition to the hotel – which is a long term potential – we also have some commercial or residential space which can be sold to leverage the projects,” says Amin.
The developers we spoke to feel that many cities in India still offer tremendous growth potential. For instance, Sharma says he would like to go to any Tier II cities of Gujarat, capitals of newly formed states, and state capitals of North East states.
His personal hot spots are Jaipur, Udaipur, Jodhpur and a wildlife location, all in Rajasthan, although he believes Kerala has better potential simply because it offers lifestyle tourism, while Rajasthan mainly has heritage. Interestingly, he says he would prefer going to coastal Maharashtra, such as near Ganpati Phule, rather than Goa.
“Coastal Maharashtra has good quality beaches, natural environment and proposed airport which will encourage quality development there. Further, there is no land available in Goa for beach resorts,” he adds.
Amin opines that resort destinations are something that have just not kept up to either pricing power or demand in India.
“This may be due to a number of factors including cheaper travel costs to international places like Singapore and Malaysia. I would rather assume that we may have saturation in resort destinations as compared to any Tier I or Tier II cities.”
Varma concurs that there is too much stress on corporate and foreign tourist travel, and this mindset has to change as pressures to find solutions for domestic tourism destination grow.
“Supply is horribly insufficient. Indians are travelling out as there is no development of holiday destinations as yet like one sees in Malaysia, Thailand, Indonesia, Australia, and so on. As the airline network enlarges, the pressure to improve this element in places such as Shimla, Ooty, Coonoor, and suchlike will intensify, and I see the development of mid-range hotels in these locations,” says Varma.
Singh says that there are nine new hotels coming up in his brand in this financial year, including one in Kashmir. According to him, India will now be looking at tertiary or resort cities such as Coorg and Bekal; people are now considering destinations which will be unique as tourist spots. “Kerala still has areas which can be further developed – Bekal has huge opportunities,” states Singh.
Manchharam thinks Himachal Pradesh holds great potential, as also markets like Guwahati. Starwood is also considering Lonavla and Mahableshwar for its upper-upscale brand like Le Meridien. “We’re trying to establish domestic markets; a lot of this will be backed by domestic tourists travelling across India, which hasn’t been there before. Rajasthan is one market that could see leisure business as a good driver; Udaipur has great potential. Kerala too has a lot of potential for the resort end of the market,” he says.
Developers still feel most of the cities in India have potential to grow. For Amin, industrial hubs like Chhattisgarh are a promising place for mid-scale hotels. “There are a lot of industrial towns and Port/SEZ townships that hold a lot of promise for mid-scale brands that can be undertaken with low development costs, designed to cater for a captive market and having a first-mover advantage,” he says.
Groom feels that larger cities such as Mumbai and New Delhi, although with significant construction scheduled, still have a substantial room demand for strategically located hotels.
“Markets that were once second and third cities still have opportunities that offer good returns, but this cannot show through previous track record as in many ways they are still considered virgin territories to international operators,” he states.
(with inputs by Syed Ameen Kader).
Ahmedabad
The market achieved an AOR of 73% and ARR of approximately Rs5,400 in 2007 which declined to 60% and Rs5,000 respectively in 2008, and further declined to 59% and Rs4,100 respectively in 2009. Market mix includes 76% business, 12% MICE, and 12% leisure and other demand.
Sanjay Sethi: Space for branded budget hotels.
Keshav Baljee: Very competitive in the three-and-four star category.
Uttam Dave: Hot. We are looking for a site.
Harsh Varma: Cold.
Veer Vijay Singh: not very well aware about the city.
Raj Menon: Strong demand from this market.
Nikhil Manchharam: Saturated.
Vijay Thacker: Go with caution. Lots of new properties, and demand generators have not kept up to the same speed.
Bengaluru
Essentially, business travellers account for 80% of demand, while the MICE and leisure segments account for five per cent and three per cent respectively. The market achieved an AOR of 67% and ARR of approximately Rs8,500 in 2007 which has experienced decline at an AOR of 62% in 2009 with an ARRof Rs 6,600.
Sanjay Sethi: Pretty crowded.
Uttam Dave: Selective opportunities still available in select precincts.
Harsh Varma: Cold.
Keshav Baljee: I believe every chain, whether international or domestic, has planned at least one hotel here. So this city is certainly saturated.
Veer Vijay Singh: Over saturated.
Vijay Thacker: Proceed with caution; very important city in the long term, over supplied in the short term.
Chandigarh
The current room inventory amounts to approximately 1,780 rooms comprising of budget to upscale products. The market achieved an AOR of 68% and ARR of approximately Rs2,315 in 2007, which has experienced minimal growth at an AOR of 69% and ARR of Rs2,675 in 2009.
Sanjay Sethi: Space for good branded budget hotels.
Keshav Baljee: Strong market for F&B but weaker for rooms. Quite a few hotels under development in the suburbs.
Uttam Dave: Moderate; we are looking for a site.
Harsh Varma: Hot.
Veer Vijay Singh: Over saturated at the moment; lots of hotels coming up.
Raj Menon: Relatively positive demand.
Vijay Thacker: If one has mid-market plans, then yes.
Chennai
The market achieved an AOR of 73% and ARR of approximately Rs4,500 in 2007 which declined to 65% and Rs5,600 respectively in 2008, and 65% and Rs5,800 respectively in 2009. Market mix includes 60% business, 15% MICE, and 25% leisure and other demand.
Sanjay Sethi: Needs more hotels to meet current and future demand
Keshav Baljee: We believe Chennai is heading the same way as Bengaluru and Pune.
Uttam Dave: Downtown, very hot. We are looking for more sites.
Harsh Varma: Hot.
Veer Vijay Singh: Over saturated.
Nikhil Manchharam: Under estimated market.
Vijay Thacker: Caution; 3-4,000 rooms coming up there.
GOA
The market has been historically seasonal, and has been achieving more or less 75% occupancy over the years. Market wide ARR in 2007 was Rs4,850 increasing to Rs5,090 in 2008, and Rs5,120 in 2009. The market mix is 38% international leisure, 39% domestic leisure, 6% MICE and six per cent other demand.
Sanjay Sethi: Good quality four-star hotels are still rare in this market
Keshav Baljee: holds potential, but cannot take very large hotels.
Uttam Dave: We are looking for sites.
Harsh Varma: Hot.
Veer Vijay Singh: Can do with some more hotels; the north doesn’t have land available, but they can come up in the south.
Raj Menon: It remains relatively stable; it’s India’s only beach playground.
Vijay Thacker: Always a good market if you get a good site.
Hyderabad
About 85% of the demand is corporate in nature, of which around 10% is the extended stay segment. MICE accounts for roughly 12%. The Hyderabad hotel market achieved an ARR of Rs4,460 in 2007. Contrary to the decline in AOR, the ARR showed an increase to Rs4,790 in 2008 but registered a decline in 2009 to Rs4,300.
Sanjay Sethi: definite need for branded budget hotels in central Hyderabad.
Keshav Baljee: With the Telangana issue rearing its head, we believe some of the IT office space may be diverted into other cities which does not bode well for Hyderabad. However, the infrastructure, the existing stock of top-quality IT buildings and great airport, make this a city for the future.
Uttam Dave: Selective opportunities still available in select precincts.
Harsh Varma: Cold.
Veer Vijay Singh: will have a huge number of hotels; over saturated.
Raj Menon: Short-to-medium-term is over supplied for sure.
Nikhil Manchharam: Borderline saturation.
Vijay Thacker: Can’t say anything at this point; I don’t know what the politics will do to that city.
Indore
The market achieved an AOR of 62% and ARR of approximately Rs 1,910 in 2007 which increased to 63% and Rs 2,300 respectively in 2008, and further increased to 70% and Rs2,490 respectively in 2009. The market mix includes 70% business, 15% MICE, and 15% leisure and other demand
Sanjay Sethi: No views
Keshav Baljee: Too little business, too many hotels.
Uttam Dave: Good opportunity but rates too low and competition too high; does not allow business models to work.
Harsh Varma: Unsure.
Raj Menon: Don’t know enough about the city to comment.
Vijay Thacker: Mid-priced or thereabouts is okay.
