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No Room For Hospitality

Even as holidayers dump India every year for other South-East Asian nations owing to its sky-high hotel tariffs, the government struggles to deal with the problem that has gripped the hospitality sector

ALL BOOKED: Travellers queue up for a room at a Gurgaon hotel
A group of 27 tourists from the UK was planning to visit Mumbai during October. However, the $250 (Rs 11,000) room rate at a five-star hotel was a dampener and the group chose to go to Malaysia instead. Similarly, another group of 30 tourists, which wanted to holiday in India in November, chose Thailand. The reason was the same: high rents of hotel rooms. Each group, says Karl Dantas, managing director of Bombay Travels, their booking agent, needed between 10 and 15 rooms in four to five star hotels. So they cancelled their trip to India.

Instances such as these go on to prove that India's hospitality industry has fallen short of expectations. India's economic boom has sent travellers flocking to the country. The problem, however, is that they have no place to stay as growth in hotels hasn't kept up. Foreign tourist arrivals in India is growing at a compound annual growth rate (CAGR) of 10 per cent, whereas hotel capacity is growing at half of that.

Foreign tourist arrivals are growing at a rate of 10%, but hotel capacity growing at 5%.

Tourism ministry has okayed 1,15,000 hotel rooms. While shortfall is 1.5 lakh rooms..

Ten lakh global tourists are skipping India every year for want of facilities.

The demand-supply mismatch is pushing up average room rate by 20-25% annually.

Entrepreneurs believe land laws and lending norms are the biggest hurdles in expansion.

Because of high demand and short supply, hotel rentals are very high in India. Every year several foreign tourists give India the go-by because of sky-high rates and opt for South-East Asian destinations. Many international tour operators too are beginning to strike India off the holiday list. "So far, the opportunity lost is a million tourists a year," says Arjun Sharma, managing director, Le Passage to India, an online travel agency. Worse, Indians too find it cheaper to head overseas for short holidays. Says Challa Venkateswara Prasad, president, Travel Agents Association of India: "Every year about 70,000 of the 5,00,000 odd Indians travelling to Sri Lanka, Thailand, Singapore, Malaysia and other South Asian nations do so as they find a holiday within India more expensive."

Bangalore in many ways symbolises the crunch. Business travellers to the city either stay in Chennai or Hyderabad and fly in and out to Bangalore for there is no room available for love or for Rs 9,000 per night. Indeed, room rates in the city have been growing at a CAGR of 14.9 per cent annually. A 2005 study by London-based travel management company Business Travel International (BTI) had rated Bangalore the third most expensive city after Moscow and Paris. The study reported that Bangalore hotels cost an average £147.83 (Rs 12,565) per night, next only to Moscow and Paris that were pegged at £157.65 (Rs 13,770). Sometimes, the city's hotel rents were higher than that of London or Paris or New York.

"Tourism worldwide has grown on budget hotels. We need to open more of those."

"Our room rates are not high compared to the rest of the world. Look at Dubai."

"The government has to specify the price of the rooms while auctioning the land."

"Because of demand-supply not matching up, you have 3-4 stars charging ridiculous rates."
It is a problem that the government too is struggling to overcome. Tourism Minister Ambika Soni has announced that the country faces a shortage of 1.5 lakh hotel rooms. That's roughly 272 Ashok (Delhi) or 445 Oberoi (Mumbai) sized hotels. But only 300-odd hotels are under process currently. This will add around 75,000 rooms in the next couple of years. However, according to HVS International, a consultancy dedicated to the hospitality sector, not more than 75 per cent of this will actually come up. This year, around 34 lakh foreign tourists are expected to come into India. Of these, 16 lakh will be (multiple visitor, home staying) NRIs. The remaining 18 lakh will be the ones who put up in hotels for an average 17 days.

So far, the Ministry of Tourism (MoT) has approved 1,15,000 hotel rooms around the country, which is even less than the number of rooms in New York or Las Vegas. Add to this, another 40,000 non-classified rooms. Now sample this. Eighteen lakh tourists will require 3.06 crore room nights per year. The number of available room nights is 5.66 crore. Which means only 2.6 crore room nights in a year (30,000 daily) are available across the country for the seven crore annual domestic travellers. Assuming that an average domestic traveller stays out for two nights, 14 crore room nights are required. But less than 40 per cent is available.

However, for some this shortage is welcome. Explains Anil Goel, senior vice-president (finance), Indian Hotels (Taj Hotels): "I see this as an opportunity. The way the economy is growing, the industry needs more and more rooms. Ten years ago, people didn't want to invest in hotel rooms in India." If you take the last two years, room rates have been going up by 20-25 per cent. But it happened on a low base. The rates will continue to rise, but won't be as high, he adds.

Says Nakul Anand, divisional chief executive-hotels, ITC: "Demand has not been consistent. Last year was a good year. But four-five years ago, if we had as many rooms, we would have gone broke. This has happened right now, and supply in this business takes four-five years." Simply, India has to catch up with its own fame fast.

"India has become the flavour for business travellers," says Karan Anand of Cox & Kings India. "They are paying top dollars for substandard supply. This has skewed leisure supply." HVS estimates that the average occupancy of a hotel in India is 70.8 per cent today, which can go as high as 83.1 per cent in cities like Hyderabad and 76.4 per cent in Kolkata. And these are only last year's figures. This year, it is expected to be higher.

Consequently, this is pushing up the average room rent, which has gone up from Rs 2,999 in 2004 to Rs 3,765 in 2005. Take Delhi for instance. A room that costs Rs 7,000 in March shoots up to Rs 10,000 in December. But more than the rate, it is the perceived value of the room, which is irking travellers. "I have tour operators coming to me and saying the room that you're charging $300 (Rs 13,000) for is not worth more than $150 (Rs 6,500). You're fleecing us," says Deep Kalra, CEO, Asks Manav Thadani, managing director and partner, HVS International India, "Is there any city where you are willing to pay four times the airfare for hotel stay?"

The problem is in many ways a historic legacy. For years, the travel industry has been talking about increasing the capacity not just in the high end but also in the budget category. However, the economics of hotel business has defied strategic thinking. "The price of a hotel is always the function of land," says Patu Keswani, managing director, Lemon Tree Hotels. In fact, Keswani's hotel is a case in point. What started as a budget hotel is now a three-star hotel and he is also introducing another brand Redfox in the budget segment.

The reason for this is the land auction system. The recent twin plots auctioned in Delhi's Jasola area were sold for a whopping Rs 388 crore. And they were purchased by the Emaar MGF Group, which is planning hotels there. As per industry standards, the land cost (per room) should not be more than 10-15 per cent of the total room cost. Therefore, for a hotel to sell its room for Rs 2,000, its room cost should not exceed Rs 20 lakh. "Hotel owners will need to get creative with how they want to raise money," says Sharma.

The other factor is that investments in real estate are mostly through debt and risk weightage to lending in real estate or hotels is much higher. Indian banks lend only for eight to 10 years while globally banks lend hotels for up to 30 years. Land itself is not fully exploitable as the floor space index (FSI) levels are low. An FSI of 2 means the total floor area of a hotel is twice (2 times) the gross area of the plot on which it is built. Delhi has an FSI of 1.75 whereas Lahore has an FSI of 12.

However, not all seem to have been deterred by ground realities and policy hiccups. Take the Emaar MGF Group, for instance. In March, the real estate developer tied up with hotel chain Accor to set up a chain of budget hotels in India. They plan to set up 100 budget hotels (10,000 rooms in all) at an investment of $300 million (Rs 1,340 crore). Says Shravan Gupta, executive vice-chairman and managing director, Emaar MGF: "The largest opportunities in India are for those offering good quality products/services at prices that are affordable to the mass market. We plan to do precisely this." The group also wants to foray into the mid-market and luxury segments later.

Private equity too has entered the business in a big way. These players are planning to invest over $10 billion (Rs 44,660 crore) in real estate, of which a large chunk is in hotels. Private equity players such as Warburg Pincus, which invested in Lemon Tree some time ago and India Hospitality Corp, a UK-based firm, have set up a $100-million (Rs 447 crore) fund for India. The government is working on ideas too. Says Amitabh Kant, joint-secretary, MoT, "We have suggested that state governments should allot sites for budget hotels and allow them to be taken up by the private sector on a long-term lease." Treat budget hotels and conventions as infrastructure.

Industry experts feel that Incredible India may have worked well for the country, but its disconnect with the infrastructure-airports, accommodation, taxation, visas etc-is having quite the reverse effect. India is yet the flavour of the season but as Thadani says, "How long, is a big question." Unless the government and business work together to come up with a winning formula.

-with Aditi Pai, Amarnath K. Menon, Stephen David


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