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India is projected to emerge as the top destination in the Indian Ocean region by 2020, but faces a huge shortage of hotel rooms. Can budget hotels fill the gap?

Tianjin, an industrial city some 120 km south east of Beijing, has more hotel rooms than the Indian metros of Mumbai and New Delhi. The average number of rooms per branded hotel in Singapore is almost three times the comparable number in India (100). The world's largest hotel, the Venetian/Palazzo in Las Vegas, US, has 8,108 rooms. India's largest, Renaissance Mumbai Hotel & Lakeside Chalet of the Marriott Group, has just 758 rooms.

In short, the bad news: India has just around 1,25,000 hotel rooms across various categories (luxury, first-class, midscale and budget). Count out 60 per cent of this number (as that is the share of unbranded hotels), and you've got to agree with Patu Keswani, Chairman and MD, Lemon Tree Hotels.

"India is terribly short in meeting the demand for travel accommodation. For a country of our size and potential, it is astonishing to see the ratio of hotel rooms to the population. We have approximately one room per 10,000 people whereas the US has around 1.6 rooms per 100 people," says Keswani, who is making a mark in the midscale and budget segment with his young brand.

Delhi (NCR)8,62516,560192%53%
Other Cities17,77736,353204%58%
All India48,47594,115194%60%
Source: HVS Hospitality Services

So, are hotel chains sitting idle? No. One in four hotel projects planned in the Asia Pacific region is in India, ranked second only behind China in the region's hotel "pipeline". But industry watchers don't expect all the promised rooms to come up. Manav Thadani, MD, HVS India, a hospitality and leisure consultancy firm, blames the credit crunch. "While most hotel brands are likely to continue with their committed projects, real estate developers have deferred large project plans," he says. Worse, even if all the 94,115 branded rooms planned come up by 2013-14 as scheduled, it will not be enough.

Now cut to the good news: foreign tourist arrivals (FTAs) during January-February 2010 were up nearly 13 per cent over the same period of the previous year, to 10.9 lakh. The Madrid-based World Tourism Organisation sees India as the fastestgrowing tourist market in the Indian Ocean region in the period up to 2020. Add to this the domestic tourist base (estimated at 563 million visits) and no wonder the tourism ministry estimates a shortage of 1.5 lakh hotel rooms with two-thirds of this required just in the budget category (Rs 1,000-2,500 per night).

Budget, a New Premium...
Traditionally, Indian hotel chains have focussed on the premium segment (five-star and five-star deluxe), and the industry is dominated by a handful of big names like Indian Hotels Co. of the Tatas, ITC and EIH Ltd. Sanjay Sethi, MD & CEO, Berggruen Hotels, backed by an eponymous private capital group in New York, says this happened because of high land prices and the glamour of owning a five-star hotel. "The majority of hoteliers didn't even look at the mid-market segment. In the last 4-5 years, the industry has increasingly felt the need to create a complete range of budget to mid-scale hotels," says Sethi, who is building the Keys Hotel economy brand in India.

According to Rajiv Sahni, Partner (Head of Real Estate & Hospitality), Ernst & Young, the budget segment has traditionally been associated with unorganised, low-priced and nonstandard services. "Now, it is poised for the next level of growth with the entry of international hotels with their midmarket brands and diversification of traditional Indian hoteliers into the mid-market segment," says Sahni.

He expects the category to report a compounded annual growth rate (CAGR) of 25 per cent against the luxury segment's 8-10 per cent CAGR over three years. This is attracting not just foreign brands like Accor, Mariott, Hilton, Choice, Holiday Inn and Best Western but also domestic majors such as Indian Hotels, ITC and Sarovar Hotels and newcomers IHHR, Berggruen and Royal Orchid.

Some already have a headstart. Sarovar Hotels, which runs 42 hotels under different brands in the premium, mid-market and budget segments, is adding 27 hotels by 2012— two-thirds in the mid-market and economy range. Berggruen currently runs 460 rooms spread over five hotels from Ludhiana to Thiruvananthapuram and aims to add 25 hotels in the next three years for a total room count of 3,000. Lemon Tree Hotels currently operates 1,227 rooms across its eponymous midscale brand and the Red Fox budget category brand. It will be adding 2,265 rooms by 2013. Roots Corp. (a unit of Indian Hotels), which runs Ginger Hotels, is planning to add 2,500 budget hotel rooms by the next year at key locations such as trading towns and tourist spots.

Local and foreign brands crowd the mid-scale & budget segment.
Ibis Hotels2,9092012
Sarovar Hotels*3,0142012
Keys Hotels3,0002013
Lemon Tree Hotels^3,4922013
Ginger Hotels4,5412011
Peppermint Hotels1,5002013
Fortune Hotels5,077n.a.
*Includes Sarovar Portico, Park Inn and Hometel brands, ^Includes Red Fox Hotels. Source: BT Research

ITC-Welcom group's mid-price segment brand Fortune Hotels has 34 operational hotels at present (2,635 rooms) and 24 signed properties (2,442 rooms) which are at various stages of development. International hotel chain InterContinental Hotels Group (IHG) has also chalked out plans to open 23 new mid-market Holiday Inn hotels in the next few years, which account for over half of its development pipeline in the country.

Unlike that in the premium segment, opportunities here exist across a wide range from budget and smart basics category (two- and three-star classification) to less-frills-high-facility hotels (four and basic five-star). The attraction, however, is towards the budget and mid-market segment, says Berggruen's Sethi, because it promises a higher internal rate of return than the luxury segment.

In addition, breakeven periods are shorter and expenses lower. ypically, it costs around Rs 15-25 lakh to build an economy room whereas the cost of luxury room can be upwards of Rs 1 crore, excluding the land cost. While an economy room sells at around Rs 1,500-4,000 a night depending upon the location, a five-star deluxe room typically costs over Rs 10,000.

"The faster pick-up of the midmarket segment is a result of huge pent-up demand in this segment. Till last year, we had 57-58 per cent occupancy rates in our 217-room Ibis Hotel in Gurgaon. However, from January this year, the occupancy rates have gone up above 70 per cent," says Uttam Dave, Head of Development for Accor Hotels, which runs the Ibis mid-market brand— indicating a return to the average occupancy rates in the peak years of fiscal 2007 and 2008.

One reason for this rise in occupancy is the thrifty traveller. Prabhat Pani, CEO & MD, Roots Corp., claims that over 80 per cent of his clients are business travellers who are looking for affordable accommodation near or within the prime business districts. "These people appreciate our ‘value for money' rates and often stay at our hotels even during their leisure travelling," Pani says.

Ginger Hotels provide facilities that defy market expectations of an economy product, including a work area, a 20-inch LCD television with satellite channels, a minifridge and a coffee maker. Other guest facilities at Ginger Hotels include an automatic check-in kiosk, a multi-cuisine restaurant, 24x7 coffee outlet, meeting room, gym, cyber cafe, digital safe-deposit boxes, and Wi-Fi in the public areas and individual rooms. All for Rs 1,000-2,400 a night.

...But Big Bang Elusive
Back to the problem: not enough rooms. Will all these names be able to plug the gap? Not unless the government, at all levels, sorts out policy glitches dogging the industry for decades. These problems range from scarcity of land and archaic land use laws, when land is found, to extensive licencing.

Amitabh Kant, a former joint secretary for tourism, attributes the shortage of hotels to the land scarcity created by the government. Kant, the man behind the "Incredible India" campaign, says: "Indian land laws are outdated and need to be modified to address the real problem faced by the hotel industry." In a city such as Delhi, the so-called floor area ratio is limited at 2.25 compared to New York's above 20. In other words, a hotelier can construct only 98,000 sq.ft (equivalent to 2.25 acres) of floor space on a plot of 1 acre. In New York, the hotel's space could be almost 10 times more. Result: Land accounts for up to half of the total hotel cost in India versus some 12-15 per cent abroad.

Such high costs, agrees Jan Smits, Regional MD, IHG Asia Australasia, "often discourages an investor to put in money in new hotels. The land prices are rising compared to the occupancy levels and this is creating a mismatch". In fact, land is a common problem for big/luxury hotels and the budget ones.

Nakul Anand, Divisional Chief Executive, ITC's Hotels Division, recommends some fixes. Earmark land plots for hotels, give the hotels industry infrastructure status for tax benefits, and create a single window for government clearances for hotel projects. Hotels need up to 110 clearances and licences from government and local agencies to set up shop.

But even if all these were fixed, the hotels business still would have to deal with a bunch of operational challenges. For the midmarket and budget brands, inflationary trends in food supplies are hurting the profitability of restaurants and bars. One response among the mid-market and budget chains is cutting down on the number of outlets. "Although the F&B business is profitable, their margins (40-50 per cent) are much lower than guest-room margins (85-90 per cent). In some cases, where the F&B component is lower, the margins can go up to 65 per cent," says Ajay Bakaya, Executive Director, Sarovar Hotels & Resorts, referring to the food and beverages business.

At the upper end of the industry, experts such as Thadani of HVS India predict, it may take 18-24 months to get back to the fiscal 2008 peak levels in the hotels business. A 10 per cent jump in the number of hotel rooms from projects started in the 2004-2007 years in anticipation that good times would continue resulted in a glut in the industry (demand in fiscal 2009 grew only 8 per cent). Supply continues to come into the market and events such as the 26/11 terror attacks in Mumbai make for an unfriendly business climate.

While hotels in Delhi and a couple of other metros see a recovery, those in many other cities are still nowhere near Revpar (short for revenue per available room, a metric hotels measure their fortunes by) numbers of fiscal 2008, and it may take up to two years for the market to absorb the new capacity. Still, the worst is clearly behind the industry.