Lower room supply, increasing demand to push up hotel rates

A severe contraction in the supply of new rooms across major locations in the country will push up the average cost per room stay this year, as per a  study.

The pipeline of proposed new room supply at 114,466 rooms in FY08 – the highest in a decade, has contracted to just 49,380 rooms in FY18, CARE Ratings said in its report.

The contraction is a result of several real estate projects being plagued by restricted liquidity supply forcing owners to either junk them altogether or convert them into residential or commercial projects such as malls.

“The future supply landscape is ever-changing and subject to several external forces that may often delay project openings. It is noteworthy that the pipeline for proposed supply totalled 114,466 rooms back in FY08 – the highest in a decade, whereas in FY18 it contracted significantly to just 49,380 rooms,” CARE noted in the report.

Mumbai’s Kohinoor Square is one such property where the promoters had planned to house a luxury hotel alongside a residential complex. The project has been in doldrums following the default in loan repayment.

Separately, a 125-storey sea facing building in south Mumbai was to house the Park Hyatt brand. However, the deal had to be called off after it was found that there was no demand for a luxury hotel in that area.

The expected future inventory in 11 major markets (across categories – only branded) is lower at around 49,400 rooms for the next 5 years (FY18 to FY23). “Therefore, with increasing demand on the back of improvement in economic activities and lower room additions, we expect the major markets in the industry to sustain the average room rates (ARRs) going forward and grow at an average of 3.5-4.5 percent per annum,” said the report.

Occupancy and room rates are both expected to head north in the coming year due to lack of new supply. It takes between two to five years for a new hotel to be built (excluding the time required to get necessary permissions) depending on the hotel category.

“We expect the occupancy to inch up to an average of about 68-70 percent by the end of FY23 compared with 66.6 percent in FY18. Accordingly, the hotel industry is expected to see an increase in room revenue at the rate of about 10-12 percent CAGR over the 5 years,” as per the report.

In the first half of this financial year demand for hotel rooms increased by 3.6 percent in Mumbai and 7.6 percent in New Delhi. However, supply of new rooms increased by just 0.6 percent in Mumbai and 1.9 percent in New Delhi as per a report made by research firm STR Global.

The existing room supply grew by 7.5 percent in FY18 totalling 128,163 rooms. This includes the 8,944 new rooms that entered various markets during the year, as well an expansion of the existing properties.

Indian Hotels Company (IHCL), the Tata Sons-controlled hospitality major, said it signed 11 new properties this year in the Indian market under four brands, Taj, Seleqtions, Vivanta by Taj and Ginger. The company plans to increase portfolio by 30 percent in the next five years by 2022 with an average of 15 new signings every year.Occupancy rates for 5-star hotels witnessed the sharpest growth of about 240 basis points (bps) during FY18. This was followed by 3-star hotels that registered a growth of about 200 basis points and 4-star hotels that registered a growth of 180 basis points during FY18.