Riding on the back of economic growth due to recovery in the global conditions, resulting in higher movement in the meetings, incentives, conferences and exhibitions (MICE) segment, and the consistently growing middle class having increasingly disposable incomes and a fondness for travel, the hotel industry is expected to post a robust growth of 7%-9% in FY18-19, according to a report by CARE Ratings. Another factor named by the report as a driving force for growth is India’s attractiveness as a medical tourism destination.
“The Indian hospitality industry has emerged as one of the key industries driving the growth of the services sector and, thereby, the Indian economy,” says the report.
At the close of 2018, the country saw macroeconomic stability owing to a decline in inflation, and current account deficit (CAD). The Union budget had identified some major pillars that will support economic growth for the country that includes tax reforms, fiscal discipline, investment in infrastructure, ease of doing business, agriculture and farmer welfare, rural sector, social sector, education and job creation. This is said to have translated into an overall pick up in economic activities, thereby having a positive impact on the demand for hotels in the country.
According to India Brand Equity Foundation (IBEF), the tourism and hospitality sector’s direct contribution to GDP surged by 23.6% in 2017, raising the share of the industry (direct & indirect) to Rs5.9 trillion ($91.3 billion). “Also, tourism in India accounts for 9.4% of the GDP and is the 3rd largest foreign exchange earner for the country and ranked 7th in terms of tourism total contribution to GDP in 2017,” says the CARE report.
“The expected future inventory in 11 major markets across categories (only branded) is low at around 49,380 rooms for the next five years (FY18-23).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% per annum. Also, we expect the occupancy to inch up to an average of about 68-70% by the end of FY23 compared with 66.6% in FY18,” says the report.
The existing room supply for the country grew by 7.5% in FY17-18 totalling to 128,163 rooms (as of 31 March 2018) according to the report. This considers the 8,944 new rooms that entered various markets during the year, as well an expansion of the existing properties.
Kolkata saw the highest increase in supply (20.7%) in FY17-18, adding to the relatively small base of hotels, followed by Chennai (10.5%) and Ahmedabad (8.9%).
Among the 11 selected cities, Mumbai's hotel market achieved the highest occupancy recorded over the past few years amongst all major markets across the country and also recorded the second highest average room rate (Rs7,740), further consolidating its position as the best performing hotel market in terms of RevPAR too.
Accordingly, the hotels industry is expected to see an increase in room revenue at the rate of about 10%-12% CAGR over the next five years.
The report names complex regulatory environment and inadequate tourism infrastructure among the challenges facing the industry.
Goods and services tax (GST) has been implemented from 1 July 2017, with the aim of replacing the indirect taxes on all goods and services. Initially, room tariff above Rs5,000 was to attract the higher tax rate of 28%, which has been revised now and only tariff above Rs7,500 would fall in the highest tax slab under the GST regime.
“Accordingly, we at CARE Ratings believe that the effective tax rate would not have any major impact on the average room rates (ARRs) and occupancy rates (ORs) of the hotels, given that GST players would be able to avail the input tax credit for both goods and services,” the report says.
Alternatives to the premium hotel segment have been listed by the report to include time-sharing as a form of vacation ownership of property, wherein units may be on a partial ownership, lease or a ‘right to use’ basis where the sharer has no claim to the ownership of the property. The other option mentioned is the service apartments, which are fully furnished apartments available for short-term or long-term stay, providing all the luxuries of a premium hotel such as room service, laundry service, fitness centre, etc, and have larger rooms and more space at a far more competitive rate.
Customers of the hotel industry are classified by the report under the heads of business traveller, leisure traveller and airlines cabin crew, each displaying varied demand dynamics. The report also highlights the cyclical nature of the industry, pointing out that during positive cycles the industry witnesses periods of sustained growth and sees healthy average room rates (ARRs) and occupancy rates (ORs) which fall in the lean seasons.
Elaborating on the pattern of revenue generation, the report notes: “While the macro-economic factors affect the business destinations (RevPARs – revenue per available room, growth is sensitive to the macro-economic indicator such as the nominal GDP), the leisure destinations show a greater sensitivity to non-economic factors such as terror attacks, health related travel warning, etc. (decline in FTA in 2008-09 was largely on account of the Mumbai terror attacks on November 26, 2008 and the swine flu linked travel advisories). Consequently, the average RevPARs of 12 major cities had registered a decline of about 13.9% in 2008-09 and 9.7% in 2009-10. While in 2010-11, with higher growth in nominal GDP and an increase in FTAs post-recession, these 12 major cities recorded an average increase of about 2.6% in RevPARs. Similarly, due to increased domestic and international trade activities and various initiatives taken by the government post 2015-16, the number of foreign travellers in the country has increased. This has been reflecting in the overall RevPARs in India that registered a CAGR growth of about 5% between 2014-15 and 2017-18.”