HOTELS IN INDIA TRENDS & OPPORTUNITIES

2006 Edition This edition has been published by the New Delhi office of HVS International. www.hvsinternational.com

Introduction
The New Delhi office of HVS International celebrates its 10 th year of operations in the Indian sub-continent. This has also allowed us to witness a full cycle for the hotel sector in the country. The last three years have been particularly exciting with the industry performing exceptionally well. More interestingly, it has taken us approximately 11 years to reach or exceed the previous occupancy highs seen in the midnineties. This publication assesses current trends and presents future opportunities for the hotel industry in India. As always, apart from conducting specific research for this publication, we have included macro data provided by the Department of Tourism. The publication briefly discusses the tourism industry in India in the context of the present economic scenario and presents
Table1: Number of Respondents

the results of our survey on the performance of mostly branded hotels, analysed by each segment of the hotel market, as well as by major cities. In the current edition, we have chosen to share detailed information about the type of new hotel supply entering the major cities. For each city we have presented the new supply, its market orientation and even suggested the number of hotels under construction or active development. As in previous editions of this report, we have, once again, presented our assessment of industry trends and development opportunities; this is included as part of the Future Trends section. Detailed analysis of new hotel supply has allowed us to predict the kind of manpower requirements the country needs to just match up to

the expected growth. We continue to maintain that human resources will be the biggest challenge facing the industry as we move forward. In this context please do give Hotels without Hoteliers! included in this report a read. In addition to this document, we publish The Indian Hotel Industry Survey on an annual basis , in association with the Federation of Hotel & Restaurant Associations of India (FHRAI). This publication, the only one of its kind in India, provides detailed financial and operating information on the hotel industry, analysed by star category, across all major cities in the Also in this issue : country. The HOTELS next edition WITHOUT ( 2 0 0 5 / 0 6 ) HOTELIERS! will be available by the end of the year. This is the tenth edition of HVS Internationals Hotels in India Trends and Opportunities publication, providing us with a unique opportunity to understand industry dynamics through eleven years of performance trends representing periods of peaks and valleys. This year, a record 252 hotels, having a total room count of 33,501 rooms, participated in our survey. Table 1 illustrates survey participation for the years 1999/ 2000 to 2005/06.
Hotels in India - Trends & Opportunities 2001 1

HVS International

The Indian Economy - An Overview

The Indian economy grew at a robust rate of 8.4% during 2005/ 06 against the 7.5% rise seen in 2004/05. A recovering agriculture sector and sustained growth in the industrial and services sector contributed to the increase. The Services sector has maintained a steady growth pattern since 1996/97. The share of Services in the overall economy has increased greatly over the past few decades, from 37.6% of GDP in 1983/84 to 51.7% in 2004/05. Independent sources estimate the share of the services sector in the overall economy for 2005/06 to be around 60.0%. This sector is presently also the largest contributor of room nights for hotels in India, and its continued growth has greatly influenced the current boom in demand, particularly in the National Capital Region (comprising Delhi, Gurgaon, NOIDA and some other surrounding areas), as well as in Bangalore, Chennai, Mumbai, Hyderabad, Kolkata and Pune. Recent trends indicate that the services sector is going to fuel growth in many more secondary cities across the country. The share of Agriculture in the overall economy has declined steadily over the past decades. While agriculture and allied activities are the main source of livelihood for 58% of Indias population, the share of this sector in the overall economy has decreased gradually, from 36.6% of GDP in 1983/84 to under 20.0% of GDP in 2005/06 as per independent sources. Real growth in the Industrial sector was higher at 8.7% during
2 Hotels in India - Trends & Opportunities 2001

2005/06 against the 8.6% increase seen during 2004/05. Despite the manufacturing sector growing at an impressive pace, the industrial sector failed to record a higher increase as growth slumped in the mining & quarrying sector. Growth in these sectors decelerated to 0.9% against the 5.8% rise observed during 2004/05. Manufacturing recorded its best performance so far by growing at 9.0% during 2005/06, in addition to the strong increase of 8.1% seen during 2004/05. The construction sector continued to expand at a fast pace by growing at 12.1% during 2005/06 in addition to the 12.5% rise seen during the previous year. The share of industry in the overall economy has remained stable over the past few decades from 25.8% of GDP in 1983/84 to 26.8% in 2004/05. The Services sector continued to drive growth in overall GDP in 2005/06, rising by 10.0% in addition to the 9.9% increase witnessed during the previous year. Of the services sector, trade, hotels, transport and communications continued to grow at an accelerated pace. According to revised estimates, it expanded by 11.5% during 2005/06 against the 10.6% growth recorded during the previous year. Performance of the financing, insurance, real estate & business services sector remained at 9.7% during 2005/ 06. Community, social and personal services witnessed a slowdown, growing by 7.8% during 2005/06 as compared with the robust increase of 9.2% observed during 2004/05. Our estimates indicate that Indias GDP growth over the next few years would continue to be driven

by services and international trade. Within Services, the key sectors that would spearhead growth are aviation, retail and commercial real estate, ITeS, telecom, hotels, insurance, and financial services. This growth in Services is expected to further increase demand for hotel rooms of all categories across the country. With more than half of its fiveyear term still to run, the Indian National Congress-led coalition government will have to tread a fine line between its reform ambitions and policy compromises with its political allies. The government will try to distribute the benefits of economic growth more widely, and Indias economic boom will continue. Real GDP growth is forecast to slow down from 8.5% in fiscal year 2005/06 (April-March) to 7.5% in 2006/07 and 7.4% in 2007/08. Inflation has been kept under control considering the high international oil prices. As of midSeptember 2006, inflation stands at 4.7%. The rupee, has depreciated against the dollar on account of the huge oil imports at higher prices. This has, however, had a positive impact on Indias exports. The creation of Special Economic Zones (SEZs) across the country is expected to provide an impetus to exports from the domestic market, especially from the IT and ITeS sectors. The empowered group of ministers (EGoM) has recently cleared the regulations for setting up multi-product, product-specific and specialised SEZs, which would encompass, among others, clusters such as
HVS International

info-tech, gems jewellery and biotechnology. Approximately 400,000 acres of land is expected to be converted into 100-150 SEZs across the country. Table 2 reflects key statistics for the Indian tourism industry.

among the worlds must-see countries, up from number nine in 2003) has helped boost its image as a leisure destination. The Incredible India campaign has also been a huge success. Domestic travel, both business and leisure, has benefited from a strong performance of the corporate sector in India, and the overall sense of optimism with regard to the economy. The increase in international flights, seat capacity and frequency into the country and the decision to allow private airlines like Jet Airways and Air Sahara to fly overseas has had a positive impact on tourist and business arrivals into India, by way of providing additional seats to key destinations. Increase in charter flights into India and new airlines providing additional seats for domestic travel are expected to have a significant impact on affordable air travel within the country. Domestic demand for hotels in India is much higher than demand from foreigners and much of the domestic demand is not leisure-related but tends to be business demand. However, with liberalisation and an overall improving economy, an

Trends & Developments in Tourism

The year 2005 has been recorded as the best year till date, with foreign visitor arrivals reaching a record 3.92 million, resulting in international tourism receipts of US$5.7 billion. The strong performance in tourist arrivals in 2005 is attributable to fundamental reasons such as a strong sense of business and investment confidence in India: inspired by Indias strong GDP performance, strengthening of ties with the developed world and the opening of sectors of the economy to private sector/ foreign investment. Significantly, the bulk of international arrivals into India, both in 2004 and 2005, have been business travellers. Furthermore, Indias growing recognition as an exciting place to visit (The Readers Travel Awards 2006, conducted by Cond Nast Traveller has recently placed India at number four

increasing number of Indians have started taking annual holidays, both within the country and overseas. Many states within India such as Goa, Rajasthan and Kerala have started focusing their marketing efforts at the Indian leisure traveller after realising the potential of this segment. The increase in hotel rooms in the country and the growth of quality and value-for-money mid-market, budget and economy hotels are expected to significantly impact travel within India, positively. As roads and other infrastructure develop, the requirement for these hotels in secondary and tertiary cities is expected to increase significantly. A number of international brands across all hotel segments are planning to or have recently entered the Indian market and domestic hotel chains are embarking on strong expansion and development plans across all hotel segments. The number of domestic and international passengers has increased fifteen-fold to 73.34 million in 2005/06 since 1970. Domestic air passenger traffic grew by 16.8% in 2005/06

Table2: Key Economic Indicators and Tourism Statistics

HVS International

Hotels in India - Trends & Opportunities 2001

compared to 2004/05. International passenger traffic observed a growth of 16.9% in the same period. Private airlines accounted for 77.0% of the total domestic traffic. The policy initiatives announced by the UPA government, including the Open Skies Policy, permission for domestic airlines to commence international flights, start-up of various low-cost carriers, and fleet expansion by domestic players have had a marked impact upon airline traffic. A significant new development is the growth of lowcost carriers. With the upsurge in the tourism industry, more foreign carriers are seeking to start services to, or increase their existing operations in India, and this would include various secondary cities as well. The outlook for the tourism industry is strongly encouraging, at least in the medium term. This positive outlook is supported by an expected increase in government investment and improved exchange rate trends. Travel agents and industry experts expect a good season this year, considering a stable political and economic climate worldwide. Domestic travel is also like to witness strong growth and, according to HVS, will be the real driving force for this industry over the next decade or so. This segment will be helped by the growing wealth base of Indias population, increase in hotel room capacity and discounted fare options, as air travel to many parts of the country is still relatively expensive.

respondent branded hotels into their respective classifications according to star grading. As before, we have examined the performance of ten major cities across India, wherever a reasonable sample allowed. While most of the data provided to us is in Indian Rupees, we have presented survey results in US Dollars as well. For the third year in a row most markets across categories witnessed an increase both in terms of occupancy and average rate. However, the occupancy growths were a lot more tepid than in the past few years and the five-star category actually saw occupancies decline marginally. Average rates, on the other hand, saw exceptionally strong increases over the previous year. The demand-supply imbalance in certain cities like Delhi, Hyderabad and Jaipur enabled hotels in these cities to charge higher tariffs across all market segments. As a result, the industry saw a 12-month growth of 23.7% in average rate (in 2005/ 06), as opposed to a growth of 20.7% the previous year. Occupancy growth, which had been a robust 7.1% the previous year, showed a marginal growth of 2.6% (in 2005/06). Table 3 reflects room occupancy by hotel classification for the period 1995/ 96 to 2005/06. Table 4 presents average rate performance in Rupees for the same period while Table 5 reflects average rate results in US Dollars. Average rates in 2005/06 witnessed a sharp increase across all market segments. This is partially attributable to the strong demand: All-India occupancy touched the 70.8% mark for the

first time. Many cities were completely sold out on a number of weekday nights, resulting in hotels taking their rates up sharply. The largest increases were seen in the luxury segment followed by the mid-market and budget segments. The highest annual growth in average rate, in Rupee terms, was witnessed in the five-star (28.8%) and five-star deluxe (26.6%) categories followed by the fourstar category (23.0%). The average rate for three-star properties showed a lower increase (11.7%). It may also be noted that, over a ten-year period, the compounded average rate growth in Rupee terms has been the strongest in the four-star category followed by five-star and five-star deluxe hotels. Our market research indicates that hotels across all categories have witnessed an improved foreign-domestic guest ratio. Therefore, despite a stronger Rupee, the growth in average rate in US Dollar terms has been higher across all categories. Average occupancy witnessed an across-the-board growth, for the fourth consecutive year. Not surprisingly the three-star (budget) segment witnessed the highest growth at 8.3%. This was followed by the five-star deluxe category at 4.3% and four-star at 0.7%. The five-star category, however, showed a marginal decline in occupancy (-1.1%). Overall, occupancy levels have shown a smaller increase this year (compared to 2004/05), as markets now have a higher base against which to benchmark their growth. The emergence of relatively new feeder markets and
HVS International

Survey Results
The HVS International survey has been computed by dividing the
4 Hotels in India - Trends & Opportunities 2001

consistent demand from niche markets, such as the extendedstay segment and the growing airline industry, have resulted in a higher level of base demand that ensures a minimum level of occupancy. This demand has been extremely advantageous, as it enabled hotels to indulge in proactive yield management, rate contracting and micro segment planning.

In terms of RevPAR (Rooms Revenue per Available Room), all star categories experienced healthy growth in 2005/06. Five-star deluxe hotels experienced the maximum growth in Rupee terms (32.1%) followed by five-star hotels (27.3%) and four-star hotels (23.9%). The three-star segment witnessed the least improvement (21.0%). In US Dollar terms the five-star deluxe segment showed the highest increase (33.3%), followed by the

five-star (28.5%) and four-star (25.0%) segments. Table 6 presents RevPAR performance in Rupees for the period 1995/96 to 2005/06 and Table 7 presents the same in US Dollars. In terms of city analysis in 2005/ 06, Goa and Kolkata together saw the highest occupancy growth (10.7%); this was followed by Chennai (7.4%) and Hyderabad (5.6%). HVS will like to highlight

Table3: Key Operating Characteristics by Hotel Classification Occupancy

Table4: Key Operating Characteristics by Hotel Classification Average Rate (Indian Rupees)

Table5: Key Operating Characteristics by Hotel Classification Average Rate (US Dollars)

HVS International

Hotels in India - Trends & Opportunities 2001

Table6: Key Operating Characteristics by Hotel Classification RevPAR (Indian Rupees)

Table7: Key Operating Characteristics by Hotel Classification RevPAR (US Dollars)

that the previous year (2004/05) had much higher 12-month growth (over its preceding year) indicating a stabilising of occupancy levels across most major cities in India. In fact in 2005/06, three cities have seen occupancy levels actually decline; these are Bangalore (-2.2%), Agra (-1.9%) and Jaipur (-0.7%). Hyderabad (83.1%) and Delhi (81.7%) had remarkable citywide occupancies, unmatched in nearly ten years. It was only for a brief two years in the mid-1990s that cities like Mumbai and Chennai had seen such high occupancies. Although Bangalore registered a marginal decline in occupancy from the previous year, it still managed to achieve an impressive 79.6%. Chennai, Kolkata and Mumbai achieved 78.3%, 76.4% and 75.3% occupancy res6 Hotels in India - Trends & Opportunities 2001

pectively. HVS believes that an acute shortage of rooms will prevail in these five-six major markets, at least for the next four years, which will result in huge levels of un-accommodated demand, a phenomenon that is currently being catered to by stand-alone hotels and a fastgrowing unorganised serviced apartments segment. We also believe that the aforementioned cities have limited scope for further growth in occupancy in the immediate future, because of the weekend period, which remains relatively weak. Also, the existing rates in markets such as Bangalore and Hyderabad (the city has seen average rates virtually explode in the first half of 2006) are compelling a large section of corporate travellers to make adjustments in terms of their hotel preferences.

In terms of average rate (Rupee terms), Hyderabad replaced Bangalore as the fastest growing average rate market, witnessing a rate growth of 36.7% in 2005/06. This is an important achievement for Hyderabad, considering that ten years ago (in 1995/96), the city was the weakest in terms of average rate. In our view, Hyderabad will continue to retain its position as one of the countrys leading rate markets over the next few years. Delhi (32.5%) saw the secondhighest growth in ARR followed, somewhat unexpectedly, by Jaipur (30.5%) and then Mumbai (24.7%) and Bangalore (24.0%). Agra, Kolkata, Chennai and Goa also saw robust growth rates: in the range of 17.0% to 21.0%. In last years edition of this report, HVS had predicted that average rates would go up by 20-25% for
HVS International

three years. The overall rate increase across all segments was 23.7%. In view of the continued shortage in room supply across the various cities studied, we consider that most hotels, particularly those in the four-star and five-star segments will maximize yields in the medium term. Prices will continue to go up, for perhaps another three years at least in most markets and even 4-5 years in some others. The planned addition to supply across most cities will start a rate rationalisation process and rates are likely to flatten, not in early 2007 as earlier suggested by HVS but perhaps in late 2008. Over an 11-year period the maximum rate growth has been in Bangalore and Hyderabad, confirming their status as IT city giants. Bangalore and Hyderabad have had a staggering compounded growth rate of 14.9% and 13.1%, respectively. Comparatively Mumbai (the market rate leader in the mid1990s) has seen the slowest

growth during the same period (1.6%). However, with the impending shortage of rooms in Mumbai over the next few years we can expect this to correct itself. In terms of RevPAR growth in 2005/06 Bangalore, the rate leader in 2004/05 was relegated to seventh position with a RevPAR growth of 21.2%, an indication of what happens when hotel rates reach abnormally high levels. Hyderabad (44.3%), followed by Delhi (36.8%) and Kolkata (32.5%) were the RevPAR leaders in 2005/06. Interestingly, the two leisure markets of Goa and Jaipur did very well with RevPAR growths of 29.6% and 29.5%, respectively. Ahmedabad, in fact, had the slowest growth amongst all the cities; a mere 5.2%. In the short term, RevPAR performance in primary markets that include the four metros, Bangalore and Hyderabad is likely to be a function of rate improvements in each individual market. Due to the limited

availability of rooms, these markets will witness higher average rate growth. RevPAR performance in secondary destinations, both commercial and leisure, will depend upon demand growth from key markets and occupancy improvement is likely to be the most important driver. Secondary markets, typically, have substantially higher rate sensitivity, resulting in longer rate maturity periods. Table 8 illustrates hotel occupancy for ten key cities in India, between 1995/96 and 2005/06. Tables 9 and 10 show average rates for each of these hotel markets, expressed in Rupees and US Dollars, respectively. Tables 11 and 12 present the corresponding RevPAR data for each city.

Hotel Supply
Last year when we wrote this report, the number of hotel rooms in the supply pipeline across the

Table8: Key Operating Characteristics by Major City Occupancy

HVS International

Hotels in India - Trends & Opportunities 2001

Table9: Key Operating Characteristics by Major City Average Rate (Indian Rupees)

Table10: Key Operating Characteristics by Major City Average Rate (US Dollars)

Table11: Key Operating Characteristics by Major City RevPAR (Indian Rupees)

Hotels in India - Trends & Opportunities 2001

HVS International

Table12: Key Operating Characteristics by Major City RevPAR (US Dollars)

ten cities was 22,400. This year the potential new room supply has touched 48,500 new rooms. HVS has been tracking new supply very closely each year, and we have come to realize that there is a good deal of misinformation, and speculation, where new supply is concerned. We consider it important to identify and inform our readers about the actual new supply expected to enter the main hotel markets, and also indicate how the new supply would be

allocated between the different segments. In Table 13, we present the existing and proposed quality supply entering each of the ten markets covered in this report. The table has the anticipated growth over the next five years and also shares a probability factor (active supply) to reflect those hotels, which are either under construction or hotels that HVS is confident will open before December 2008. Following this

table we have presented our views on the key cities. Here, we must mention that HVS has not tracked the occupancy and average rates for Pune. However, this city alone has at least 25 hotels under development and approximately 4,600 rooms will enter this market in the next five years. Predictably, the biggest growth in proposed supply is being witnessed in the two IT cities of Hyderabad (513.7%) and Bangalore (408.9%). This high

Table13: Distribution of Existing and Proposed Branded Hotels by Major City

HVS International

Hotels in India - Trends & Opportunities 2001

growth can easily be attributed to the existing low base of quality hotel supply in each of these cities. However, when we look at actual rooms expected in these markets, the traditional markets of the National Capital Region and Mumbai are still way ahead. Delhi (NCR) also has the largest active development in progress, at 74%. Most of this development is in Gurgaon and neighbouring Noida and amounts to 47 new hotels in the NCR with 10,800 rooms; much of this is owing to the Commonwealth Games to be held in the NCR in 2010. In fact there appears to be a paradox in Delhi. On one side various groups are saying there is a shortage of rooms and new hotels should be developed. The DDA (Delhi Development Authority) is auctioning hotel sites, which would be considered at best mediocre sites. Due to the hype in proposed hotel shortage a few recent auctions have gone at prices which just do not justify hotels to be financially viable. There have been recent instances in the NCR, Kolkata and Haryana where new hotel developers have made financial bids that will make it practically impossible for these hotels to make any money due to the high price of land. The state governments in these areas are suggesting they are doing a great job of providing hotel sites but we question their intentions. After all if you are paying top dollar for land then it automatically makes it impossible for the budget hotels to come up on these sites. So much for the Aam Admi plank (common man) the politicians talk about. These state governments will be better off relaxing the FSI norms for hotels, which are at abysmally low levels (average 2.0 FSI) when compared
10 Hotels in India - Trends & Opportunities 2001

to other international destinations. The two state governments of Rajasthan and Andhra Pradesh have addressed this issue and made some new provisions. While doing so they should make parking norms tougher to address the issue of cars overflowing into the streets. Mumbai has traditionally been a very good market for hotels. Our research into the city indicates that demand grows by approximately 1,000 room nights per day every year. We believe the proposed new supply - which would equal about 36% of the existing 9,000-odd rooms - will not be inadequate to meet the citys requirements and we think the market is ripe for more supply, especially keeping in mind that the city will shortly have an upgraded airport and also a new convention centre. Bangalore has been on the radar of quite a few developers mainly due to the spectacular performance of the city over the past 2-3 years. However, we must realise that the performance is due to the historical low supply of quality hotels. Once the supply demand equilibrium is reached (around 2009/10), HVS predicts that there will be sharp rate correction in the Bangalore market. Therefore, having the right location, operator or a unique USP for the market is of utmost importance. Hyderabad is a relative newcomer and is fast becoming an important hotel market. It enjoys the highest occupancies amongst the major cities and has seen huge rate improvements in the current year. The new HICC (Hyderabad International Convention Centre) managed by Accor and owned by Emaar has

made the city an important MICE destination in southern India. This is helping Hyderabad induce a fair number of room nights and should serve as a good example as to what convention centres can do, in terms of influencing market demand. With the new airport at Shamshabad and huge developments on the IT front we expect Hyderabad to remain a fantastic opportunity for growth. Despite the 513.7% growth in new supply and 57% convertibility we remain very bullish on this market and feel strongly that Hyderabad will remain undersupplied for some time to come. Another market we are extremely confident of is Chennai, which historically has performed very steadily. While Chennai expects a 212.4% increase in its room supply only 36% of this is likely to be developed in the next few years, and this therefore offers good opportunities for investors to look at. Chennai enjoys the advantage of strong growth in the IT/ITES sector coupled with good demand from the automobile sector, which has a strong manufacturing base in the city. Our favorite leisure destination remains Goa. We have over the last few years shared with everyone that this resort destination offers great opportunities for investors to make investments. We believe that Goa hotel supply will rise by 116.9% over the next five years but a very low percentage (18%) may actually get developed. Apart from being very popular with Europeans, Goa is now increasingly sought-after by domestic tourists as well as the growing MICE segment.
HVS International

Jaipur is another market that is witnessing a lot of supply action. Jaipur as a leisure market has done relatively well. We believe Jaipur has the potential of converting itself into a more allround destination, owing to proximity to the NCR, its positioning in the Golden Triangle (Delhi- Jaipur-Agra) and also because the city is the entry point to many other places of interest in Rajasthan. Jaipur has recently started seeing IT/ITES coming in and this is giving the commercial segment additional room nights. If the city were now to add a convention centre it would see MICE demand grow extensively. At present 213.4% of new supply is expected, however only 42% of this can be confirmed. Kolkata has done relatively well in the recent past. However, with 182.1% potential supply and 62% probability of this supply entering the market shortly we are a bit worried about the citys potential as an attractive investment destination for those not already actively involved in the market. Our worry stems from the fact that recent site auctions have been at exorbitant prices, which are forcing new owners to tie up luxury and first class properties only. Over the past eight years Kolkata has remained a US$70 US$90 market which would make it difficult for all these new luxury players to successfully penetrate the market to make good financial sense. Going forward, the biggest challenge, given the present supply scenario, will be the availability of quality sites for hotel projects. Site location, accessibility, visibility and proximity to key demand areas are critical factors for long term feasibility of hotels and lack of
HVS International

good sites would have a negative impact on the supply front. The real estate market, too, has seen its best times in the last two to three years, and existing land prices across most cities are somewhat prohibitive, especially for standalone property developers.

many FIT travellers today prefer to make just day trips. Hyderabad, in this respect, is fast becoming another Bangalore and it seems pointless for the city to have an international convention centre when rooms with reasonable rates are not available. The industry will also have an acute shortage of manpower in the foreseeable future and payroll costs will shoot up, directly impacting hotels bottom lines. While this scenario will certainly prevail in South Asia, the problem of inadequate trained manpower persists internationally as well. We expect to see certain new developments, both in India and elsewhere: Many more hotels will need to rely heavily on technology and somehow reduce the employee to room ratio. Secondly, outsourcing of services will increase dramatically in the next few years. Currently only a few services - mostly security, landscaping, some maintenance, and potentially some housekeeping activities - are being outsourced. In the future one could have potentially all activities related to reservation and MIS reports, accounting, payroll & HR functions outsourced at the global level. Table 14 presents key operating statistics for five-star deluxe and five-star hotels in key cities, for the period April to August 2006. Comparisons with the corresponding period last year have also been presented, to illustrate the extent of change. Performance trends for the first five months of 2006 are encouraging. All the markets have registered strong growth and are continuing to show
Hotels in India - Trends & Opportunities 2001 11

Future Trends

With most cities showing impressive demand for hotel rooms, we believe that operators will try and optimise demand and put in place proactive rate management strategies. This year we expect many hotels to increase their annual rates (typically done in October before the peak season). With demand projected to remain strong for the next twothree years and with hardly any new supply entering the various markets, we expect the rates to continue to go up annually by 2025%. There is not much potential for increase in occupancy, as mentioned before, as most cities are driven by commercial demand, with occupancies already in the high 70s or low 80s. Due to low weekend traffic these markets cannot improve their occupancies much further. We would like to point out some emerging trends that are likely to have a long-term impact on the hotel industry in India. Firstly, India is in danger of becoming an expensive hotel market. One can imagine luxury hotels of international standards charging US$200 to US$300. However, there are many mid-market and first class hotels with huge room tariffs, at least in some markets, and products that are just not up to international standards. Bangalore is a classic case: the city has turned away much of its MICE and airline demand and

marginal increase in occupancy with the exception of New Delhi and Hyderabad. Goa once again was the occupancy growth leader with a growth of 8.0%. This follows a huge growth the previous year of 32.7%. Average rate performance has been exceptionally strong in each of the cities with growth ranging between 23.2% for Goa to 49.0% for Hyderabad. The two IT cities of Bangalore and Hyderabad saw the maximum supply come in and therefore the occupancies in these cities remained flat (Hyderabad) or Bangalore (marginally up by 3.4%). In terms of RevPAR the market, in the first five months of 2006, has grown by 48.6% for Hyderabad and 43.5% for Mumbai. Interestingly, the slowest growth in terms of RevPAR is the Bangalore market at 30.7%. In most cities there is hardly any new supply entering the market in 2006 and even 2007 appears to be slow in terms of new supply. Therefore, we believe that there will be further rate increases in the current year and also into next year. The NCR is likely to witness the maximum development of hotels in the next few years. The Commonwealth Games to be hosted in New Delhi in 2010 is

likely to induce strong demand and greatly assist in the absorption of additional supply in the market. Developers, however, need to be careful not to be swayed by the Games alone but to see the long-term viability of hotel projects. The new airport and the surrounding areas are certainly another source of induced demand in the markets. In fact Hyderabad, Bangalore and Mumbai will greatly gain from the development of the new airports. A buoyant economy, robust corporate results and a booming stock market are strong indicators for surging domestic leisure demand. Foreign tourist arrivals have grown by approximately 15.0% in first eight months of 2006. The period from October to February is considered the peak season across most leisure destinations and demand is likely to further improve during this period. Continued demand growth from the domestic as well as the foreign travel circuits will lead to higher occupancies and rates across all key leisure destinations. We also strongly believe that for the next five years, secondary markets will benefit the most, with improved air connectivity to other cities and the development of national

highway infrastructure. With limited room inventory base and very little supply addition, existing hotels in these markets will gain the most.

Opportunities

We continue to believe that the mid-market and budget hotels have good potential across the country. However, it is becoming increasingly important to have a brand or a unique USP to survive any future potential excess supply or, for that matter, an unforeseen downturn. Over the past 24 months high growth markets such as Bangalore and Gurgaon have seen a lot of hotel development activity, however not all of it has materialised into actual construction of hotels. Therefore, a wise strategy for these and other cities would be to observe the progress of projects under development, as well as demand trends, before an investment decision is taken. Equally important would be the segment an investor chooses to enter. Just because there happens to be a site which is available for a luxury hotel does not mean that it would be the best investment decision for that particular site. Our research in India has indicated that there is a strong positive correlation between hotel

Table 14: Supply and Demand Analysis: April - August 2006 vs. April - August 2005

12

Hotels in India - Trends & Opportunities 2001

HVS International

demand and commercial development, especially in areas where IT/ITeS is growing. We are yet to see the true impact of demand for room nights that new airport terminals can generate in a particular market. New airport projects surely provide some exciting opportunities for hotel development. The growing number of domestic budget airlines and improved frequency will further enhance demand from the transient and airline market segments. Globally hotels located around airports tend to do well and we believe a similar trend will be seen in India. Over the past two years, the biggest surge in demand has been from newly developed commercial zones. These include areas such as Whitefield in Bangalore, Navi Mumbai, Manesar near Gurgaon, HITEC and the Gachibowli commercial zone in Hyderabad, Rajarhat and Salt Lake City in Kolkata, Kharadi and Kalyani Nagar in Pune, and the AhmedabadGhandinagar highway. Several developers are planning hotels at these locations as they see good opportunity here. The creation of special economic zones across the country is expected to provide an impetus to exports from the domestic market, especially from the IT and ITeS sectors. Approximately 400,000 acres of land is expected to be converted into 100-150 SEZs across the country. We at HVS believe that each of the major SEZs will have the capacity to absorb multiple hotels (in its complex) and the smaller ones will be able to absorb at least one hotel, particularly in the midmarket and budget space.
HVS International

The government is also working on a plan to set up special economic and investment regions in six states across the country. These regions, possibly of the size of 200-250 km, will have worldclass infrastructure set up by the concerned states and the central government. The concept is based on such regions in China, the USA and the Netherlands and is being discussed at the interministerial level before it is finalised. These regions will contain many special economic zones, industrial parks, projects and factories and essentially link all of these into one massive industrial investment region. These investment regions are most likely to be located at Haldia in West Bengal, Vizag in Andhra Pradesh, Dahej in Gujarat, Ratnagiri in Maharashtra, Mangalore in Karnataka and the Kundli-Panipat belt in Haryana. Apart from this, HVS considers that certain new niche areas of growth could provide good opportunity. For example Manali is being considered for the development of Indias first Ski Village of international standards. This will help in stimulating and inducing much new domestic and international demand. Manali, which historically has been a weak seasonal market, can become a robust year-round leisure market providing economic and employment boom in the region. The advent of Condo hotels into India is also a good possibility with several hotel operators now willing to lend their name towards the same. Mixed-use development projects that include a hotel, retail and

commercial space have gained momentum in the last few years and will continue to be an attractive option for developments in large land parcels. A good example of how to utilise retail and a first class business hotel would be the recently opened Ishta hotel in Bangalore. We foresee many more similar developments taking place due to the high cost of real estate. In most hotel markets during the past 12 months, insufficient availability and high room rates create conditions that are not conducive for large international conferences to be held. Logistical bottlenecks in these markets also pose a problem. Post 2009, once several markets see an increase in supply, most hotels would adopt an aggressive marketing strategy for the MICE segment and demand from this category is likely to rebound strongly. The outlook for the hospitality market in India is optimistic and will continue to remain so, in our opinion. The economys buoyancy, initiatives to improve infrastructure, growth in the aviation and real estate sectors and easing of restrictions on foreign investment will fuel demand for hotels across star categories in the majority of markets. Indias hotel industry is increasingly being viewed as investment-worthy, both within the country and outside, and several international chains are keen to establish or enhance their presence here. We anticipate that, over the next three to five years India will remain as one of the worlds fastest growing tourism markets and will be hard to ignore.
Hotels in India - Trends & Opportunities 2001 13

HOTELS WITHOUT HOTELIERS!

Introduction
It is party time for hotel companies in India! Domestic companies are aggressively adding rooms and setting up greenfield projects. Foreign hotel companies are making full use of the relaxed norms for foreign direct investment in India. In the next five years, we should expect to see around 40 different hotel brands dotting the Indian landscape. The addition of many new hospitality products, and a much larger and more sophisticated hotel industry in India will bring with it a new set of pressures. Four years ago, hotel managers talked of raising occupancy and average rate as their biggest challenge. Matters like Human Resources were low on their list of priorities. Today, however, hotels are vying with each other to capture the best talent. Most of the time, it simply a matter of

numbers: as more rooms and more properties are added, a larger number of people are needed to lead, to manage and to execute the various functions involved in operating a hotel. Hotel managers are acknowledging the short supply of quality manpower to be the biggest obstacle they face. Trained personnel are being actively recruited not only by competing hotel companies but also by sunrise sectors like retail, BPO and aviation. The balance of power is steadily shifting from employers to employees. The addition of even one new hotel in a city seriously impacts the HR equilibrium of existing hotels with similar market orientation. If the present situation is disturbing, the not-so-distant future is frightening! Imagine a hotel without hoteliers! This article aims to assess the human resource requirement for the Indian hospitality industry from 2006 to 2011. Our findings are based on HVS research into various important hotel markets

in India, and our knowledge of new room supply in these cities, specifically pertaining to brand affiliated hotels. We have tried to present a detailed illustration of manpower demand, which will provide the broad indicators to analyse the forthcoming requirement for hotels in 10 major cities in India. Our estimates of demand in each city have been subdivided for different categories of hotels luxury, midmarket, first class and budget, for the purpose of comparison. Table 1 illustrates the new room supply expected to enter 10 key hotel markets in India. This encompasses the development of branded as well as quality independent hotels. More than 53,000 hotel rooms, all corresponding to hotels with brand affiliation, are in various stages of planning and development in the above ten cities, and expected to enter in a phased manner by 2011. Despite all the interest generated by midmarket and budget hotel

Table 1: New Room Supply - by Market Orientation

14

Hotels in India - Trends & Opportunities 2001

HVS International

development, around 53% of the development is still concentrated in the luxury and first class (Fivestar Deluxe and Five-star) segment. This segment is also characterised by its higher service orientation, which makes it particularly vulnerable to the manpower crunch. Table 2 presents room supply expected to enter the aforementioned 10 markets, in each year for the period 2006 to 2011. The year 2006 will witness approximately 1,100 rooms being added in the branded segment, which translates to a meagre 2% of the proposed supply of 53,000 rooms. The impact of these new rooms on the existing hotel set will remain local in 2006; the present war for talent is more the result of poaching by existing hotels and other sectors. The bulk of the projected supply will be added between 2007 and 2011, and we expect the employee shortfall to assume vast proportions in the next five years. This shortfall in manpower every year due to additions in room
Table 2: New Room Supply - 2006-2011

inventory can be gauged by an Impact Multiple. The impact would be six times greater in 2007, when compared to the base year 2006. In other words, the shortfall will multiply six times in 2007 and 18 times in 2009! These indications clearly point toward a major talent drought. HVS research indicates that the average employee to room ratio is 1.8 in hotels in India, across all market orientations. The only exception is the three-star hotel category where the ratio drops to 1.5 per room. Though Indian hotels remain overstaffed by 2025% compared to international standards, we have used these very ratios to estimate the requirement of manpower. Table 3 presents the manpower requirement (across all hotels segments) by the new supply and its growth in 2006-2011. As indicated by the above table, branded hotels in the ten selected hotel markets would require approximately 94,000

fresh employees in the next five years, more than twice the existing requirement. With the larger volume of new rooms being added in the luxury and first class hotels, these segments would, naturally, have the larger manpower requirement. A major portion of demand is from cities like Delhi/NCR and Mumbai, which account for around 23% and 21%, respectively. However, the real challenge will be presented by cities like Bangalore, Hyderabad and Pune. Though individually they only require around 12%, 11% and 6.5% of the demand pie, the percentage increase in manpower is the highest in these markets, ranging between 500-900%. These cities have a relatively low room base and hence would find it more difficult to cope up with the explosive growth. Presently, these three cities offer a comparatively lower cost of living and higher quality of life, to their residents. The cost to company of an employee in these cities will start

HVS International

Hotels in India - Trends & Opportunities 2001

15

Table 3- Manpower Requirement

increasing once demand starts kicking in. It is expected to be comparable to Delhi and Mumbai by 2008. Thereafter, the low manpower base and comparable salary levels would force these cities to look at established hotel markets like Mumbai and Delhi to obtain managerial and supervisory levels of hotel staff. It is to be noted that our estimates do not include demand arising from the loss of hotel personnel to another sector because of the absence of relevant data.

standards in the next three years. This will have a twin effect; firstly, lesser number of managers will be lost to other sectors owing to purely financial reasons. Secondly, more and more Indian companies will be able to open the gates for expatriates for key positions. While a crunch for managers will still be felt, the real challenge will emanate from the supervisory/ junior management positions. It takes around 3-4 years to prepare people at this level because of the skilled nature of the job and its accompanying high service orientation index. Our interaction with the HR heads of various hotel corporations in India reveals only about 20% of new hotel management graduates are deemed employable. The rest is absorbed by an erratic mix of budget hotels, unbranded hotels, QSF restaurants, food service, airline and the BPO sector industries.

HVS Executive Search remains a close partner to the hospitality industry. We feel that the industry has not yet fully realised or come to terms with the magnitude of the problem that is. So, whats the way out? My recommen-dations to address the twin issue of talent acquisition and retention: Start now ! Well established hospitality organisations will need to start imme-diately to meet the severe resource crunch 2008 afterwards. Scale up the intake - The industry will need to learn to absorb people in huge numbers. Attrition will be imminent. The emergence of the Retail industry is expected to adversely affect Hospitality, just like what the BPO industry did in the late-1990s. Hotels will need to strengthen their HR and training processes to face the churn. Valuable lessons can be learnt from the BPO and ITeS sectors in India, which operate with a marketwide attrition rate of 30%.
HVS International

The Road Ahead

Practically, all hotel companies in India have embarked upon a compensation revision exercise in the last three years. Salaries for the managerial level have taken a quantum leap, anywhere between 60-100%. Compensation at this level is expected to rise further and be commensurate with international
16 Hotels in India - Trends & Opportunities 2001

 Improving industry interface with academia - It is a common knowledge that the best MBA schools regularly use the services of practicing industry experts as guest/visiting faculty. However, even the relatively well-known hotel schools of India witness negligible involvement from the industry. Complaints about the bad quality and low employability factor of fresh hotel school graduates need to be addressed holistically. Hotel companies, especially those in the luxury segment, need to get together and share industry knowledge with students of accredited schools. Conducive work environment - In order to attract quality talent, hotels need to be seen as fun places to work in by todays generation. The stiff, hierarchal set-up is pass. Transparency and comm-unication can be used effectively to get the employees involved with the growth of the company. It is appalling to understand that a significant number of employees in some of the top hotel companies wish to have an improved performance management system and HR participation. Work-Life balance - This is the soft underbelly of hotels. A majority of hoteliers looking out of this sector mention work-life balance as the main reason. The fast-changing family system in India and increased responsibility of both sexes has made it difficult for even die-hard hoteliers to ignore the social and personal aspects of their lives. Haphazard steps have been taken in this direction but they are certainly not adequate.
HVS International

Outsourcing - Hotels need to learn to outsource areas of operation where they do not possess key competence. Internationally, hotels manage to save millions of dollars per year by outsourcing activities like restaurants, security, accounting, housekeeping, amenities, maintenance etc. This has to be complemented by a comprehensive Quality Control mechanism to ensure the outsourced function conforms to the brand standards. Temporary workforce - Hotel companies need to develop a flexible workforce, which can be summoned when the need arises. One globally accepted method is to induce a parttime workforce from college or universities. The extent of usage of this flexible staffing is generally inversely proportional to the market orientation of the hotels. This, therefore, will be a more fruitful strategy for the midmarket and budget segments. While, temping for hotels is not a full-scale solution, this is an area worth exploring. Interested hotel companies will need to support entrepreneurs to establish such temp-workforce in local markets. Technological intervention The industry needs to wake up to the benefits of superior technology to achieve a higher operational efficiency. The luxury and first class hotel segment could focus towards standardization and product enhancement via technology. The mid-market and budget segment needs to reduce the ratio of employee to room by the innovative use of technology.

Acknowledgements

The Hotels in India - Trends & Opportunities report has been developed for the benefit of employees, developers, investors and operators with an interest in the tourism industry in India. The study has been made possible only with the contribution and support of all the domestic and international hotel chains, to who HVS International would like to express its gratitude and appreciation. If you or any of your colleagues would like to receive complimentary copies of this publication, or HVS Executive Search information, kindly send your e-mail address along with full contact details to Swarn Jaitly at sjaitly@hvsinternational.com. Alternatively, please visit our website www.hvsinternational.com and register yourself.

About HVS

HVS International is the worlds leading full-service consulting and appraisal firm devoted exclusively to the hospitality industry. Founded in 1980 in the United States, the company has 22 offices across the globe. Since 1980, HVS has consulted with over 15,000 hotels in more than 70 different countries worldwide. The South Asia office is based out of New Delhi, India. HVS International has been operating in India for ten years. The New Delhi team has worked on projects ranging from feasibility and marketing studies; valuation of hotels; residual land values; operator search & management contract negotiations; development strategies for new brands; research reports and investment services. Our clients in India include Indian Hotels, EIH Ltd,
Hotels in India - Trends & Opportunities 2001 17

ITC Hotels, Hotel Leela Venture Ltd, Intercontinental Hotels & Resorts, Mandarin Oriental, Carlson Hospitality, Global Hyatt, Hilton International, Choice International, Merrill Lynch, Lehman Bros., IFC, ICICI Bank, Sun Group, Emaar (Dubai) and Kingdom Hotel Investments, among others. In May 2001, we launched HVS Executive Search, to cater to the staffing needs of the hospitality and related services sectors like real estate, media, insurance and aviation. Apart from being the first retained search firm for the hospitality industry in India, HVS Executive Search also provides

services in areas of HR Consulting and Compensation Survey & Design. In addition to its New Delhi office, HVS Executive Search has international offices in New York, London, Moscow and Hong Kong. In India HVS Executive Search has offices in Mumbai, Hyderabad and Chennai. HVS Executive Search has also launched two websites: 2020skills.com and hospitalitycareernet.com . 2020 Skills is an internet- based assessment tool specifically designed for service industry professionals, for assessing performance characteristics and

cultural compatibility. 2020 Skills was authored by professors Florence Berger and Judy Brownell of the Cornell University School of Hotel Administration and HVS Executive Ssearch. The assessment profile has three unique levels: senior, midmanagement, and line. The site can be accessed at www.2020skills.com. www.hospitalitycareernet.com is a web site that provides state-ofthe-art solutions for employment news, career advice, compensation assessment, and more. It has become one of the most efficient ways to recruit, hire, and retain employees.

About the Authors

Manav Thadani joined HVS Internationals New York office as a Consultant and Valuation Analyst in September 1995. Prior to joining HVS, he gained six years of operational experience in various hotels in New York City. In early 1997, Manav planned the opening of HVS Internationals first Asian office in India, which was established in New Delhi later in the year. As Managing Director and Partner of the New Delhi office he is responsible for all HVS activities in the region including the Consulting and Executive Search services. Manav holds a Masters degree in Food Service Management from New York University (NYU), prior to which he completed his undergraduate education in hotel management at NYU. Saurabh Gupta joined HVS Executive Search as an associate in October 2004 and currently heads the Hospitality vertical for HVS Executive Search, India. He has extensive knowledge on the dynamics of the human resource element in the service industry. His operational experience in hotels and restaurants help him to conduct assignments in various sectors like hospitality, retail, consulting, healthcare and real estate. He is also involved with the execution of key expatriate searches. Formerly, he was associated with Foresight Hospitality Group, UK as Head for the new restaurant projects in China and India. Prior to this, he was employed with Taj Group of Hotels in operational areas in various Indian cities.
18 Hotels in India - Trends & Opportunities 2001 HVS International

HVS International

Hotels in India - Trends & Opportunities 2001

19

DIVISIONS
Consulting & Valuation Services Executive Search Investment Services & Brokerage Food & Beverage Services Asset Management & Strategic Advisory Services Organisational Assessments - Performance Cultures Timeshare Consulting & Shared Ownership Services Gaming Services Interior Design Convention, Sports & Entertainment Facilities Consulting Marketing Communications Technology Strategies HVS/Ultimate Parking Solutions Golf Services Restaurant Managment & Advisory Services
20 Hotels in India - Trends & Opportunities 2001

OFFICES:
Asia - Pacific New Delhi Hyderabad Mumbai Hongkong Shanghai Singapore Sydney Europe London Madrid North America New York Atlanta Mt. Lakes, NJ Denver Dallas
HVS International

ADDRESS CORRECTION REQUESTED

Vancouver Toronto Miami San Francisco Boulder Washington DC Chicago Phoenix Weston, CD Boston South America Buenos Aires So Paulo

HVS International C-67, Anand Niketan, New Delhi-110021 INDIA Phones : 91 11 41663031

HOTELS IN INDIA TRENDS & OPPORTUNITIES