Indian Hospitality - Future Trends

We have been tracking the performance of the Indian hospitality sector since 1995/96 and have been witness to the various trends and cycles the industry has experienced since then. 

Indian Hospitality Sector - Trends

As presented in the adjacent chart, the nationwide occupancy equated to 66.5% in 1995/96, but exhibited a downward trend over the next few years to 53.9% in 1999/00. The Indian hospitality sector benefited from the economic boom in the United States in 2000, attaining increases in both occupancy and average rate in that year. The US recession in 2001 soon spread to other parts of the world, including India, and had a significant impact on hotels in the country, resulting in decline in occupancy to its lowest level in the 15 years. The decline in occupancy was accompanied by a decline in average rate as hotels reduced rates in an attempt to remain competitive in a price-sensitive market and chose to focus on maximizing occupancies. These simultaneous declines in both occupancy and rate resulted in a steep decline in RevPAR in that year. The Indian hospitality sector, however, proved to be very resilient with occupancy rebounding by roundly 11.0% in 2002/03, and by over 13.0% the next year. Such a recovery was even more significant given the fact that international travel was affected by the global recession, the SARS outbreak, and the Iraq war. This downturn saw the domestic traveler step in to save Indian travel and hospitality and serve as the more stable, albeit lower rated, alternative to the international traveler. We note that while the nationwide occupancy increased in 2002/03, nationwide average rate continued to decline in that year as hotels continued to focus on improving occupancy levels at the cost of rates, especially as they modified strategies to target the rate-sensitive domestic market.

Cities like Bangalore, Mumbai, and Hyderabad saw the emergence of hundreds of guest houses to meet the demand for cost-effective accommodation. Other companies chose to lease out multiple apartments for use by their employees and stopped using expensive hotels. This trend is clearly quantified in above chart where nationwide average rate increased by a strong 13% in 2007/08 while occupancy dropped by 3.6%. The Indian hospitality sector entered its next cycle in 2008/09 when the global financial meltdown finally caught up with us in October 2008. The terror attacks in Mumbai raised fears about India as a safe destination and led to a decline in international travel, albeit for a short period. While rates dropped significantly in 2009/10, the strong increase in domestic demand actually led to an 8.0% increase in nationwide occupancy. Our industry has typically been so focused on the approximately 5.5 mn international travelers who visit India every year that we have never truly tapped into the 600 mn-strong domestic population that travels annually. We believe that the domestic market will continue to play a dominant role, not just within hospitality, but across all sectors, and will help further insulate the Indian economy from problems in other countries and make India less susceptible to global economic fluctuations.

As economic growth gathers momentum and companies increase spending on travel demand levels will continue to improve in 2010/11. The amount of new supply proposed within many markets remains an area of concern, especially as numerous projects that were proposed during the heady days see completion and open in the next one year. Our analysis of historical trends across the country shows that previous declines in occupancy levels were mainly the result of an increase in supply that outpaced the increase in demand, and not due to an actual decline in demand. Our analysis of proposed new supply across the country leads us to believe that there will be pressure on occupancy in some markets in the near future. In the long term, however, it is our opinion that the demand-supply gap in India is very real and that there is need for more hotels in most cities. Our analysis of proposed new supply across the country leads us to believe that there will be pressure on occupancy in some markets in the near future. In the long term, however, it is our opinion that the demand-supply gap in India is very real and that there is need for more hotels in most cities. 

The income capitalization approach analyzes a property's ability to generate financial returns as an investment. Valuation exercise begins with the estimation of a property's operating cash flow, and the result is utilized in a direct capitalization technique and/or a discounted cash flow analysis. The income capitalization approach is often selected as the preferred valuation method for operating properties because it most closely reflects the investment rationale of knowledgeable buyers. To arrive at valuations for the various cities, we used the projected occupancy and average rates for the various markets, taking into consideration demand trends, current supply, and projected future supply increases in each market. We then projected income and expenses, and Net Operating Income (NOI) for a typical 200 room luxury/first class hotel and a 200 room mid market hotel in each city based on the actual hotel operating data available with HVS. Capitalization rates were based upon the maturity of the defined market, anticipated performance trends, existing and proposed demand-supply dynamics and investor sentiments for the specified markets, and ranged from 8.5% to 11.0%. These market-specific valuation and capitalization parameters were then applied to the NOI derived for the hotels in each city to arrive at the valuations. These valuations have been presented in the following tables. 

 An analysis of these values indicates that most of these cities saw their lowest values between 2000 and 2002, and their highest values between 2006 and 2007, thus signifying the value/performance cycle that has been about six years long. A similar trend may be observed within the luxury/first class values. Going forward, we expect Goa to see the highest value increases during the next five years, at a CAGR of 15.4%, followed by Mumbai, Hyderabad and Delhi NCR. We do predict a small decline in hotel values in Delhi NCR in 2011 as market occupancy and rates drop from the loss of the Commonwealth demand that will be present in 2010, and due to the significant amount of supply expected in the market in 2011. Kolkata is the only city where we forecast values to decline over the next five years, given the perception that West Bengal is not a business-friendly destination and our belief that the projected supply increases will exceed future demand increases.

Within the luxury/first class space, as presented in Table, Agra again saw hotel values increase at a CAGR of 16.7% between 2000 and 2009, mainly a result of how low the value of a typical Agra luxury hotel was in 2000. Thus, while the value increased the fastest historically, in actual amounts, the value of a luxury room in Agra was one of the lowest when compared to that in other cities. Going forward, values in Hyderabad are expected to increase by a CAGR of 12.5% over the next five years; however, the projected value per room of Rs93.2 lakh for a luxury hotel in 2014/15 is still significantly lower than its peak of Rs131.6 lakh that was attained in 2005/06. Mumbai and Ahmedabad are expected to exhibit the greatest increases in values on a CAGR basis after Hyderabad over the next five years.