Hotel demand growing twice the rate of supply in India, says report

Branded hotel chains India set to see 50% growth, according to PwC
Hotel demand growing twice the rate of supply in India, says report
The Indian hotel industry body and several leading players in the domestic hospitality and realty sector, however, are not so hopeful of such a huge expansion in the sector in such a short period.
By James Mathew
Wed 21 Nov 2018 12:54 PM

Indian hospitality sector is expected to witness an exponential growth over the next three years, with the branded hotel chains set to see a 50 percent growth in their capacities by 2022, on the back of rising demand hugely outstripping current supply, a recent PwC report has said.

“The supply in Indian hospitality sector is growing at 8 percent year-on-year. However, demand is growing at almost twice this rate,” the report said, adding that this is leading to more and more international chains and brands of existing chains being launched in India.

According to the PwC report, Marriott, which currently operates 104 hotels in India, is expected to add another 50 hotels to its portfolio, while Radisson, which currently has a total of 76 hotels across various cities in India, is expected to add another 85 hotels by 2022.

“Looking at the current spike in demand in the hospitality sector in India, we see potential for a major expansion in the sector, led by the branded chains,” Manpreet Singh Ahuja, Partner, PwC India, told Arabian Business.

"While the existing branded chains are expected to undertake efforts to double their size by 2022 through various modes, we also expect more international hospitality chains entering the Indian market during this period."

Manpreet Singh said according to their latest study, branded hotel chains account for only 17 to 20 percent of the estimated $28 billion Indian hospitality market.

“The share of the branded chains in India is expected to go up to 50 percent by 2022 from the existing level,” he said.

Bottlenecks

The Indian hotel industry body and several leading players in the domestic hospitality and realty sector, however, are not so hopeful of such a huge expansion in the sector in such a short period.

“While there has been a healthy uptick in demand in the hospitality sector in the last over one to one-and-half year period, there are several bottlenecks which adversely affect expansion plans in the sector,” Jaison Chacko, Assistant Secretary General of FHRAI (Federation of Hotels & Restaurants Associations of India), told Arabian Business.

The bottlenecks are mainly related to high cost of capital for funding of green-field and brown-field expansions, as also abnormally high levels of taxes on room tariffs of branded hotel chains.

“Our association has been demanding for classifying hotels and resorts involving capital expenditure of Rs 20 crore ($28 million) and above (excluding land cost) under the RBI list for infrastructure lending, and also allowing hospitality projects to raise tax-free bonds to raise funds for meeting their expansion plans,” Jaison said.

Major expansion

With the rising popularity of online aggregators such as OYO, Treebo and Fab Hotels, the mid-market segment of Indian hospitality sector has been witnessing a major expansion in the recent period, accounting for 47 percent of all branded rooms in the country, according to the PwC report.

After establishing in the Indian market, OYO has recently ventured into overseas markets such as the UAE and China to spread its operations in these markets.

“The supply is significantly less than the demand in the Indian hospitality sector currently, which means there is ample scope for a huge expansion in the industry. However, the ground level situations such as high land costs, increasing competition from mid-size players and exorbitant taxes on tariffs at upper end hotels are not helping the industry, especially the branded chains to undertake major expansions,” Param Kannampilly, CMD of Mumbai-based Concept Hospitality Ltd, told Arabian Business.

Kannampilly said new players and investors would be reluctant to enter the sector when they see many of the existing players, leading players such as Hotel Leelaventures and Jaypee Hotels among them, have been in dire straits financially, unable to service their mounting debts.

“The viable way for new and existing players to undertake expansion in hospitality sector would be to enter into collaborations with property developers. Developers with land can construct hotels and other hospitality projects, which can be run efficiently by branded international or domestic chains,” Santosh Kumar, Vice Chairman, Anarock Property Consultants, told Arabian Business.

Irrespective of the location or the land cost, investors’ value a hotel or a hospitality project at 10 -12 X of their EBIT (Earnings before interest and taxes). Therefore, it will be difficult for branded chains to own and operate hotels, especially in major cities where real estate prices are very high, Kumar said.

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