HVS - Hotels in India - Trends and Opportunities (1)

7/27/2019 HVS - Hotels in India - Trends and Opportunities (1)

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HVS International Hotels in India - Trends & Opportunities 2001 1

HOTELS IN INDIATRENDS & OPPORTUNITIES

2006 Edition

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

Also in this issue :

HOTELSWITHOUTHOTELIERS!

Table1: Number of Respondents

IntroductionThe New Delhi office of HVSInternational celebrates its 10th

year of operations in the Indiansub-continent. This has alsoallowed us to witness a full cyclefor the hotel sector in the country.

The last three years have beenparticularly exciting with theindustry performing exceptionallywell. More interestingly, it hastaken us approximately 11 yearsto reach or exceed the previousoccupancy highs seen in the mid-nineties. This publication assessescurrent trends and presentsfuture opportunities for the hotel

industry in India. As always,apart from conducting specificresearch for this publication, wehave included macro dataprovided by the Department ofTourism. The publication brieflydiscusses the tourism industry inIndia in the context of the presenteconomic scenario and presents

the results of our survey on theperformance of mostly brandedhotels, analysed by each segmentof the hotel market, as well as bymajor cities.

In the current edition, we have

chosen to share detailedinformation about the type of newhotel supply entering the majorcities. For each city we havepresented the new supply, itsmarket orientation and evensuggested the number of hotelsunder construction or activedevelopment. As in previouseditions of this report, we have,

once again, presented ourassessment of industry trends anddevelopment opportunities; this isincluded as part of the FutureTrends section. Detailed analysisof new hotel supply has allowedus to predict the kind ofmanpower requirements thecountry needs to just match up to

the expected growth. We continueto maintain that human resourceswill be the biggest challenge facingthe industry as we move forward.In this context please do giveHotels without Hoteliers! includedin this report a read.

In addition to this document, wepublish The Indian Hotel IndustrySurvey on an annual basis, inassociation with the Federation ofHotel & Restaurant Associationsof India (FHRAI). Thispublication, the only one of itskind in India, provides detailedfinancial and operatinginformation on the hotel industry,analysed by star category, acrossall majorcities in thecountry. Thenext edition( 2 0 0 5 / 0 6 )will beavailable by the end of the year.

This is the tenth edition of HVS

Internationals Hotels in India -Trends and Opportunities

publication, providing us with aunique opportunity tounderstand industry dynamicsthrough eleven years ofperformance trends representingperiods of peaks and valleys. Thisyear, a record 252 hotels, havinga total room count of 33,501rooms, participated in our

survey. Table 1 illustrates surveyparticipation for the years 1999/2000 to 2005/06.


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2 Hotels in India - Trends & Opportunities 2001 HVS International

The Indian Economy - AnOverviewThe Indian economy grew at arobust rate of 8.4% during 2005/06 against the 7.5% rise seen in2004/05. A recovering agri-

culture sector and sustainedgrowth in the industrial andservices sector contributed to theincrease. The Services sector hasmaintained a steady growthpattern since 1996/97. The shareof Services in the overall economyhas increased greatly over thepast few decades, from 37.6% ofGDP in 1983/84 to 51.7% in

2004/05. Independent sourcesestimate the share of the servicessector in the overall economy for2005/06 to be around 60.0%.This sector is presently also thelargest contributor of roomnights for hotels in India, and itscontinued growth has greatlyinfluenced the current boom indemand, particularly in theNational Capital Region

(comprising Delhi, Gurgaon,NOIDA and some othersurrounding areas), as well as inBangalore, Chennai, Mumbai,Hyderabad, Kolkata and Pune.Recent trends indicate that theservices sector is going to fuelgrowth in many more secondarycities across the country.

The share of Agriculture in the

overall economy has declinedsteadily over the past decades.While agriculture and alliedactivities are the main source oflivelihood for 58% of Indiaspopulation, the share of thissector in the overall economy hasdecreased gradually, from 36.6%of GDP in 1983/84 to under20.0% of GDP in 2005/06 as perindependent sources.

Real growth in the Industrialsector was higher at 8.7% during

2005/06 against the 8.6%increase seen during 2004/05.Despite the manufacturing sectorgrowing at an impressive pace,the industrial sector failed torecord a higher increase as

growth slumped in the mining &quarrying sector. Growth in thesesectors decelerated to 0.9%against the 5.8% rise observedduring 2004/05. Manufacturingrecorded its best performance sofar by growing at 9.0% during2005/06, in addition to the strongincrease of 8.1% seen during2004/05. The construction sectorcontinued to expand at a fastpace by growing at 12.1% during2005/06 in addition to the 12.5%rise seen during the previous year.The share of industry in theoverall economy has remainedstable over the past few decadesfrom 25.8% of GDP in 1983/84 to26.8% in 2004/05.

The Services sector continued to

drive growth in overall GDP in2005/06, rising by 10.0% inaddition to the 9.9% increasewitnessed during the previousyear. Of the services sector, trade,hotels, transport and comm-unications continued to grow atan accelerated pace. According torevised estimates, it expanded by11.5% during 2005/06 against the10.6% growth recorded during

the previous year. Performance ofthe financing, insurance, realestate & business services sectorremained at 9.7% during 2005/06. Community, social andpersonal services witnessed aslowdown, growing by 7.8%during 2005/06 as comparedwith the robust increase of 9.2%observed during 2004/05.

Our estimates indicate that IndiasGDP growth over the next fewyears would continue to be driven

by services and internationaltrade. Within Services, the keysectors that would spearheadgrowth are aviation, retail andcommercial real estate, ITeS,telecom, hotels, insurance, and

financial services. This growth inServices is expected to furtherincrease demand for hotel roomsof all categories across thecountry.

With more than half of its five-year term still to run, the IndianNational Congress-led coalitiongovernment will have to tread afine line between its reformambitions and policycompromises with its politicalallies. The government will try todistribute the benefits of economicgrowth more widely, and Indiaseconomic boom will continue.Real GDP growth is forecast toslow down from 8.5% in fiscalyear 2005/06 (April-March) to7.5% in 2006/07 and 7.4% in

2007/08.

Inflation has been kept undercontrol considering the highinternational oil prices. As of mid-September 2006, inflation standsat 4.7%. The rupee, hasdepreciated against the dollar onaccount of the huge oil importsat higher prices. This has,however, had a positive impact

on Indias exports.

The creation of Special EconomicZones (SEZs) across the countryis expected to provide an impetusto exports from the domesticmarket, especially from the IT andITeS sectors. The empoweredgroup of ministers (EGoM) hasrecently cleared the regulations

for setting up multi-product,product-specific and specialisedSEZs, which would encompass,among others, clusters such as


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info-tech, gems jewellery andbiotechnology. Approximately400,000 acres of land is expectedto be converted into 100-150 SEZsacross the country.

Table 2 reflects key statistics forthe Indian tourism industry.

Trends & Developments inTourismThe year 2005 has been recordedas the best year till date, withforeign visitor arrivals reaching arecord 3.92 million, resulting ininternational tourism receipts of

US$5.7 billion. The strongperformance in tourist arrivals in2005 is attributable tofundamental reasons such as astrong sense of business andinvestment confidence in India:inspired by Indias strong GDPperformance, strengthening ofties with the developed world andthe opening of sectors of theeconomy to private sector/

foreign investment. Significantly,the bulk of international arrivals

into India, both in 2004 and 2005,have been business travellers.Furthermore, Indias growingrecognition as an exciting placeto visit (The Readers TravelAwards 2006, conducted byCond Nast Traveller has recentlyplaced India at number four

among the worlds must-seecountries, up from number ninein 2003) has helped boost itsimage as a leisure destination. TheIncredible India campaign has alsobeen a huge success.

Domestic travel, both business and

leisure, has benefited from a strongperformance of the corporate sectorin India, and the overall sense ofoptimism with regard to theeconomy. The increase ininternational flights, seat capacityand frequency into the country andthe decision to allow private airlines

like Jet Airways and Air Sahara tofly overseas has had a positiveimpact on tourist and businessarrivals into India, by way of

providing additional seats to keydestinations. Increase in charterflights into India and new airlinesproviding additional seats fordomestic travel are expected tohave a significant impact onaffordable air travel within the

country.

Domestic demand for hotels inIndia is much higher thandemand from foreigners andmuch of the domestic demand isnot leisure-related but tends to bebusiness demand. However, withliberalisation and an overallimproving economy, an

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 Indianleisure 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 andother 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 expansionand 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


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compared to 2004/05.International passenger trafficobserved a growth of 16.9% in thesame period. Private airlinesaccounted for 77.0% of the totaldomestic traffic.

The policy initiatives announcedby the UPA government,including the Open Skies Policy,permission for domestic airlines tocommence international flights,start-up of various low-costcarriers, and fleet expansion bydomestic players have had amarked impact upon airlinetraffic. A significant newdevelopment is the growth of low-cost carriers. With the upsurge inthe tourism industry, moreforeign carriers are seeking tostart services to, or increase theirexisting operations in India, andthis would include varioussecondary cities as well.

The outlook for the tourism

industry is strongly encouraging, atleast in the medium term. Thispositive outlook is supported by anexpected increase in governmentinvestment and improvedexchange rate trends. Travel agentsand industry experts expect a goodseason this year, considering astable political and economicclimate worldwide. Domestictravel is also like to witness strong

growth and, according to HVS, willbe the real driving force for thisindustry over the next decade orso. This segment will be helped bythe growing wealth base of Indiaspopulation, increase in hotel roomcapacity and discounted fareoptions, as air travel to many partsof the country is still relativelyexpensive.

Survey ResultsThe HVS International survey hasbeen computed by dividing the

respondent branded hotels intotheir respective classifications ac-cording to star grading. As be-fore, we have examined the per-formance of ten major cities acrossIndia, wherever a reasonable

sample allowed. While most ofthe data provided to us is in In-dian Rupees, we have presentedsurvey results in US Dollars aswell.

For the third year in a row mostmarkets across categorieswitnessed an increase both interms of occupancy and averagerate. However, the occupancygrowths were a lot more tepidthan in the past few years and thefive-star category actually sawoccupancies decline marginally.Average rates, on the other hand,saw exceptionally strongincreases over the previous year.The demand-supply imbalance incertain cities like Delhi,Hyderabad and Jaipur enabled

hotels in these cities to chargehigher tariffs across all marketsegments. As a result, theindustry saw a 12-month growthof 23.7% in average rate (in 2005/06), as opposed to a growth of20.7% the previous year.Occupancy growth, which hadbeen a robust 7.1% the previousyear, showed a marginal growthof 2.6% (in 2005/06). Table 3

reflects room occupancy by hotelclassification for the period 1995/96 to 2005/06. Table 4 presentsaverage rate performance inRupees for the same period whileTable 5 reflects average rateresults in US Dollars.

Average rates in 2005/06witnessed a sharp increase across

all market segments. This ispartially attributable to the strongdemand: All-India occupancytouched the 70.8% mark for the

first time. Many cities werecompletely sold out on a numberof weekday nights, resulting inhotels taking their rates up

sharply. The largest increaseswere seen in the luxury segment

followed by the mid-market andbudget segments.

The highest annual growth in

average rate, in Rupee terms, waswitnessed in the five-star (28.8%)and five-star deluxe (26.6%)

categories followed by the four-star category (23.0%). The averagerate for three-star properties

showed a lower increase (11.7%).It may also be noted that, over aten-year period, the compounded

average rate growth in Rupeeterms has been the strongest in thefour-star category followed by

five-star and five-star deluxehotels. Our market researchindicates that hotels across all

categories have witnessed animproved foreign-domestic guestratio. Therefore, despite a stronger

Rupee, the growth in average ratein US Dollar terms has beenhigher across all categories.

Average occupancy witnessed an

across-the-board growth, for thefourth consecutive year. Notsurprisingly the three-star (budget)segment witnessed the highest

growth at 8.3%. This was followedby the five-star deluxe category at

4.3% and four-star at 0.7%. Thefive-star category, however,showed a marginal decline inoccupancy (-1.1%). Overall,

occupancy levels have shown asmaller increase this year

(compared to 2004/05), as marketsnow have a higher base against

which to benchmark their growth.

The emergence of relativelynew feeder markets and


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

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

consistent demand from nichemarkets, such as the extended-stay segment and the growingairline industry, have resultedin a higher level of basedemand that ensures a

minimum level of occupancy.This demand has beenextremely advantageous, as itenabled hotels to indulge inproactive yield management,rate contracting and microsegment planning.

In terms of RevPAR (RoomsRevenue per Available Room), allstar categories experienced healthygrowth in 2005/06. Five-star deluxehotels experienced the maximumgrowth in Rupee terms (32.1%)

followed by five-star hotels (27.3%)and four-star hotels (23.9%). Thethree-star segment witnessed theleast improvement (21.0%). In USDollar terms the five-star deluxesegment showed the highestincrease (33.3%), followed by the

five-star (28.5%) and four-star(25.0%) segments. Table 6 presentsRevPAR performance in Rupees forthe period 1995/96 to 2005/06 andTable 7 presents the same in USDollars.

In terms of city analysis in 2005/06, Goa and Kolkata together sawthe highest occupancy growth(10.7%); this was followed byChennai (7.4%) and Hyderabad(5.6%). HVS will like to highlight

Table3:Key Operating Characteristics by Hotel Classification Occupancy


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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 citywideoccupancies, 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 andMumbai achieved 78.3%, 76.4%

and 75.3% occupancy res-

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 fast-

growing 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 makeadjustments 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 second-

highest 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

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

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


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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-starand 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 early2007 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 of14.9% and 13.1%, respectively.

Comparatively Mumbai (the

market rate leader in the mid-

1990s) 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 rateleader 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 leisuremarkets 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 SupplyLast 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


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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)


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ten cities was 22,400. This year

the potential new room supplyhas touched 48,500 new rooms.HVS has been tracking newsupply very closely each year, andwe have come to realize thatthere is a good deal ofmisinformation, and speculation,where new supply is concerned.

We consider it important toidentify and inform our readersabout the actual new supplyexpected to enter the main hotelmarkets, and also indicate howthe new supply would be

allocated between the differentsegments.

In Table 13, we present theexisting and proposed qualitysupply entering each of the tenmarkets covered in this report. Thetable has the anticipated growthover the next five years and also

shares a probability factor (activesupply) to reflect those hotels,

which are either underconstruction or hotels that HVS isconfident will open beforeDecember 2008. Following this

table we have presented our viewson the key cities. Here, we mustmention that HVS has not trackedthe occupancy and average ratesfor Pune. However, this city alonehas at least 25 hotels underdevelopment and approximately4,600 rooms will enter this marketin the next five years.

Predictably, the biggest growth in

proposed supply is beingwitnessed in the two IT cities ofHyderabad (513.7%) andBangalore (408.9%). This high

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

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


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growth can easily be attributed tothe existing low base of qualityhotel supply in each of thesecities. However, when we look atactual rooms expected in thesemarkets, the traditional markets

of the National Capital Regionand Mumbai are still way ahead.Delhi (NCR) also has the largestactive development in progress, at74%. Most of this development isin Gurgaon and neighbouringNoida and amounts to 47 newhotels in the NCR with 10,800rooms; much of this is owing tothe Commonwealth Games to beheld in the NCR in 2010. In fact

there appears to be a paradox inDelhi. On one side various groupsare saying there is a shortage ofrooms and new hotels should bedeveloped. The DDA (DelhiDevelopment Authority) isauctioning hotel sites, whichwould be considered at bestmediocre sites. Due to the hypein proposed hotel shortage a fewrecent auctions have gone at

prices which just do not justifyhotels to be financially viable.

There have been recent instancesin the NCR, Kolkata andHaryana where new hoteldevelopers have made financialbids that will make it practicallyimpossible for these hotels tomake any money due to the highprice of land. The state

governments in these areas aresuggesting they are doing a greatjob of providing hotel sites but wequestion their intentions. After allif you are paying top dollar forland then it automatically makesit impossible for the budget hotelsto come up on these sites. Somuch for the Aam Admi plank(common man) the politicianstalk about. These state

governments will be better offrelaxing the FSI norms for hotels,which are at abysmally low levels(average 2.0 FSI) when compared

to other international desti-nations. The two stategovernments of Rajasthan andAndhra Pradesh have addressedthis issue and made some newprovisions. While doing so they

should make parking normstougher to address the issue ofcars overflowing into the streets.

Mumbai has traditionally been avery good market for hotels. Ourresearch into the city indicatesthat demand grows byapproximately 1,000 room nightsper day every year. We believe theproposed new supply - which

would equal about 36% of theexisting 9,000-odd rooms - willnot be inadequate to meet thecitys requirements and we thinkthe market is ripe for more supply,especially keeping in mind thatthe city will shortly have anupgraded airport and also a newconvention centre.

Bangalore has been on the radar

of quite a few developers mainlydue to the spectacularperformance of the city over thepast 2-3 years. However, we mustrealise that the performance isdue to the historical low supplyof quality hotels. Once the supply demand equilibrium is reached(around 2009/10), HVS predictsthat there will be sharp ratecorrection in the Bangalore

market. Therefore, having theright location, operator or aunique USP for the market is ofutmost importance.

Hyderabad is a relativenewcomer and is fast becomingan important hotel market. Itenjoys the highest occupanciesamongst the major cities and hasseen huge rate improvements in

the current year. The new HICC(Hyderabad InternationalConvention Centre) managed byAccor and owned by Emaar has

made the city an important MICEdestination in southern India.This is helping Hyderabad inducea fair number of room nights andshould serve as a good exampleas to what convention centres can

do, in terms of influencing marketdemand. With the new airport atShamshabad and hugedevelopments on the IT front weexpect Hyderabad to remain afantastic opportunity for growth.Despite the 513.7% growth innew supply and 57%convertibility we remain verybullish on this market and feelstrongly that Hyderabad will

remain undersupplied for sometime to come.

Another market we areextremely confident of isChennai, which historically hasperformed very steadily. WhileChennai expects a 212.4%increase in its room supply only36% of this is likely to bedeveloped in the next few years,

and this therefore offers goodopportunities for investors to lookat. Chennai enjoys the advantageof strong growth in the IT/ITESsector coupled with gooddemand from the automobilesector, which has a strongmanufacturing base in the city.

Our favorite leisure destinationremains Goa. We have over thelast few years shared witheveryone that this resortdestination offers greatopportunities for investors tomake investments. We believethat Goa hotel supply will rise by116.9% over the next five yearsbut a very low percentage (18%)may actually get developed.Apart from being very popularwith Europeans, Goa is nowincreasingly sought-after bydomestic tourists as well as thegrowing MICE segment.


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Jaipur is another market that iswitnessing a lot of supply action.

Jaipur as a leisure market hasdone relatively well. We believe

Ja ipur has the potent ial ofconverting itself into a more all-

round destination, owing toproximity to the NCR, itspositioning in the Golden Triangle(Delhi- Jaipur-Agra) and alsobecause the city is the entry pointto many other places of interestin Rajasthan. Jaipur has recentlystarted seeing IT/ITES coming inand this is giving the commercialsegment additional room nights.If the city were now to add a

convention centre it would seeMICE demand grow extensively.At present 213.4% of new supplyis expected, however only 42% ofthis can be confirmed.

Kolkata has done relatively wellin the recent past. However, with182.1% potential supply and 62%probability of this supply enteringthe market shortly we are a bit

worried about the citys potentialas an attractive investmentdestination for those not alreadyactively involved in the market.Our worry stems from the factthat recent site auctions havebeen at exorbitant prices, whichare forcing new owners to tie upluxury and first class propertiesonly. Over the past eight yearsKolkata has remained a US$70

US$90 market which wouldmake it difficult for all these newluxury players to successfullypenetrate the market to makegood financial sense.

Going forward, the biggestchallenge, given the presentsupply scenario, will be theavailability of quality sites forhotel projects. Site location,

accessibility, visibility andproximity to key demand areasare critical factors for long termfeasibility of hotels and lack of

good sites would have a negativeimpact on the supply front. Thereal estate market, too, has seenits best times in the last two tothree years, and existing landprices across most cities are

somewhat prohibitive, especiallyfor standalone propertydevelopers.

Future TrendsWith most cities showingimpressive demand for hotelrooms, we believe that operatorswill try and optimise demand andput in place proactive ratemanagement strategies. This year

we expect many hotels to increasetheir annual rates (typically donein October before the peakseason). With demand projectedto remain strong for the next two-three years and with hardly anynew supply entering the variousmarkets, we expect the rates tocontinue to go up annually by 20-25%. There is not much potentialfor increase in occupancy, as

mentioned before, as most citiesare driven by commercialdemand, with occupanciesalready in the high 70s or low 80s.Due to low weekend traffic thesemarkets cannot improve theiroccupancies much further.

We would like to point out someemerging trends that are likely tohave a long-term impact on the

hotel industry in India. Firstly,India is in danger of becoming anexpensive hotel market. One canimagine luxury hotels ofinternational standards chargingUS$200 to US$300. However,there are many mid-market andfirst class hotels with huge roomtariffs, at least in some markets,and products that are just not upto international standards.Bangalore is a classic case: thecity has turned away much of its

MICE and airline demand and

many FIT travellers today preferto make just day trips.Hyderabad, in this respect, is fastbecoming another Bangalore andit seems pointless for the city tohave an international convention

centre when rooms withreasonable rates are not available.

The industry will also have anacute shortage of manpower inthe foreseeable future and payrollcosts will shoot up, directlyimpacting hotels bottom lines.While this scenario will certainlyprevail in South Asia, theproblem of inadequate trained

manpower persists inter-nationally as well. We expect tosee certain new developments,both in India and elsewhere:Many more hotels will need torely heavily on technology andsomehow reduce the employee toroom ratio. Secondly, outsourcingof services will increasedramatically in the next fewyears. Currently only a fewservices - mostly security,landscaping, some maintenance,and potentially somehousekeeping activities - arebeing outsourced. In the futureone could have potentially allactivities related to reservationand MIS reports, accounting,payroll & HR functionsoutsourced at the global level.

Table 14 presents key operatingstatistics for five-star deluxe andfive-star hotels in key cities, for theperiod April to August 2006.Comparisons with thecorresponding period last yearhave also been presented, toillustrate the extent of change.

Performance trends for the first

five months of 2006 areencouraging. All the marketshave registered strong growthand are continuing to show


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marginal increase in occupancywith the exception of New Delhiand Hyderabad. Goa once againwas the occupancy growthleader with a growth of 8.0%. Thisfollows a huge growth the

previous year of 32.7%.

Average rate performance hasbeen exceptionally strong in eachof the cities with growth rangingbetween 23.2% for Goa to 49.0%for Hyderabad. The two IT citiesof Bangalore and Hyderabad sawthe maximum supply come in andtherefore the occupancies in thesecities remained flat (Hyderabad)

or Bangalore (marginally up by3.4%). In terms of RevPAR themarket, in the first five months of2006, has grown by 48.6% forHyderabad and 43.5% forMumbai. Interestingly, theslowest growth in terms ofRevPAR is the Bangalore marketat 30.7%. In most cities there ishardly any new supply enteringthe market in 2006 and even 2007

appears to be slow in terms ofnew supply. Therefore, we believethat there will be further rateincreases in the current year andalso into next year.

The NCR is likely to witness themaximum development of hotelsin the next few years. TheCommonwealth Games to behosted in New Delhi in 2010 is

likely to induce strong demandand greatly assist in theabsorption of additional supply inthe market. Developers, however,need to be careful not to beswayed by the Games alone but

to see the long-term viability ofhotel projects. The new airportand the surrounding areas arecertainly another source ofinduced demand in the markets.In fact Hyderabad, Bangaloreand Mumbai will greatly gainfrom the development of the newairports.

A buoyant economy, robust

corporate results and a boomingstock market are strong indicatorsfor surging domestic leisuredemand. Foreign tourist arrivalshave grown by approximately15.0% in first eight months of2006. The period from October toFebruary is considered the peakseason across most leisuredestinations and demand is likelyto further improve during this

period. Continued demandgrowth from the domestic as wellas the foreign travel circuits willlead to higher occupancies andrates across all key leisuredestinations. We also stronglybelieve that for the next fiveyears, secondary markets willbenefit the most, with improvedair connectivity to other cities andthe development of national

highway infrastructure. Withlimited room inventory base andvery little supply addition,existing hotels in these marketswill gain the most.

OpportunitiesWe continue to believe that themid-market and budget hotelshave good potential across thecountry. However, it is becomingincreasingly important to have abrand or a unique USP to surviveany future potential excess supplyor, for that matter, an unforeseendownturn. Over the past 24months high growth markets

such as Bangalore and Gurgaonhave seen a lot of hoteldevelopment activity, howevernot all of it has materialised intoactual construction of hotels.Therefore, a wise strategy forthese and other cities would be toobserve the progress of projectsunder development, as well asdemand trends, before aninvestment decision is taken.

Equally important would be thesegment an investor chooses toenter. Just because there happensto be a site which is available fora luxury hotel does not mean thatit would be the best investmentdecision for that particular site.

Our research in India hasindicated that there is a strongpositive correlation between hotel

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


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demand and commercialdevelopment, especially in areaswhere IT/ITeS is growing. We areyet to see the true impact ofdemand for room nights thatnew airport terminals can

generate in a particular market.New airport projects surelyprovide some excitingopportunities for hoteldevelopment. The growingnumber of domestic budgetairlines and improved frequencywill further enhance demandfrom the transient and airlinemarket segments. Globally hotelslocated around airports tend to

do well and we believe a similartrend will be seen in India.

Over the past two years, thebiggest surge in demand has beenfrom newly developedcommercial zones. These includeareas such as Whitefield inBangalore, Navi Mumbai,Manesar near Gurgaon, HITECand the Gachibowli commercial

zone in Hyderabad, Rajarhat andSalt Lake City in Kolkata,Kharadi and Kalyani Nagar inPune, and the Ahmedabad-Ghandinagar highway. Severaldevelopers are planning hotels atthese locations as they see goodopportunity here.

The creation of special economiczones across the country isexpected to provide an impetusto exports from the domesticmarket, especially from the ITand ITeS sectors. Approximately400,000 acres of land is expectedto be converted into 100-150 SEZsacross the country. We at HVSbelieve that each of the majorSEZs will have the capacity toabsorb multiple hotels (in itscomplex) and the smaller oneswill be able to absorb at least onehotel, particularly in the mid-market and budget space.

The government is also workingon a plan to set up specialeconomic and investment regionsin six states across the country.These regions, possibly of the size

of 200-250 km, will have world-

class infrastructure set up by theconcerned states and the centralgovernment. The concept is basedon such regions in China, theUSA and the Netherlands and isbeing discussed at the inter-ministerial level before it isfinalised. These regions willcontain many special economiczones, industrial parks, projects

and factories and essentially linkall of these into one massiveindustrial investment region.These investment regions are mostlikely to be located at Haldia inWest Bengal, Vizag in AndhraPradesh, Dahej in Gujarat,Ratnagiri in Maharashtra,Mangalore in Karnataka and theKundli-Panipat belt in Haryana.

Apart from this, HVS considersthat certain new niche areas of

growth could provide goodopportunity. For example Manaliis being considered for thedevelopment of Indias first SkiVillage of internationalstandards. This will help instimulating and inducing muchnew domestic and international

demand. Manali, whichhistorically has been a weakseasonal market, can become arobust year-round leisure market

providing economic andemployment boom in the region.The advent of Condo hotels intoIndia is also a good possibilitywith several hotel operators nowwilling to lend their nametowards the same.

Mixed-use development projectsthat include a hotel, retail and

commercial space have gainedmomentum in the last few yearsand will continue to be anattractive option fordevelopments in large landparcels. A good example of how

to utilise retail and a first classbusiness hotel would be therecently opened Ishta hotel inBangalore. We foresee many moresimilar developments takingplace due to the high cost of realestate.

In most hotel markets during thepast 12 months, insufficient

availability and high room ratescreate conditions that are notconducive for large internationalconferences to be held. Logisticalbottlenecks in these markets alsopose a problem. Post 2009, onceseveral markets see an increase insupply, most hotels would adoptan aggressive marketing strategyfor the MICE segment anddemand 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 forhotels 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 theworlds fastest growing tourism

markets and will be hard to ignore.


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HOTELS WITHOUTHOTELIERS!

IntroductionIt is party time for hotel

companies in India! Domesticcompanies are aggressivelyadding rooms and setting upgreenfield projects. Foreign hotelcompanies are making full use ofthe relaxed norms for foreigndirect investment in India. In thenext five years, we should expectto see around 40 different hotelbrands dotting the Indianlandscape.

The addition of many newhospitality products, and a muchlarger and more sophisticatedhotel industry in India will bringwith it a new set of pressures.Four years ago, hotel managerstalked of raising occupancy andaverage rate as their biggestchallenge. Matters like HumanResources were low on their listof priorities. Today, however,

hotels are vying with each otherto capture the best talent. Most ofthe time, it simply a matter of

numbers: as more rooms andmore properties are added, alarger number of people areneeded to lead, to manage andto execute the various functionsinvolved in operating a hotel.

Hotel managers areacknowledging the short supplyof quality manpower to be thebiggest obstacle they face.Trained personnel are beingactively recruited not only bycompeting hotel companies butalso by sunrise sectors like retail,BPO and aviation. The balanceof power is steadily shifting fromemployers to employees. Theaddition of even one new hotel ina city seriously impacts the HRequilibrium of existing hotels withsimilar market orientation. If thepresent situation is disturbing,the not-so-distant future isfrightening!

Imagine a hotel without hoteliers!This article aims to assess thehuman resource requirement forthe Indian hospitality industry

from 2006 to 2011. Our findingsare based on HVS research intovarious important hotel markets

in India, and our knowledge ofnew room supply in these cities,specifically pertaining to brandaffiliated hotels. We have tried topresent a detailed illustration ofmanpower demand, which will

provide the broad indicators toanalyse the forthcomingrequirement for hotels in 10 majorcities in India. Our estimates ofdemand in each city have beensubdivided for differentcategories of hotels luxury, mid-market, first class and budget, forthe purpose of comparison.

Table 1 illustrates the new roomsupply expected to enter 10 keyhotel markets in India. Thisencompasses the development ofbranded as well as qualityindependent hotels.

More than 53,000 hotel rooms, allcorresponding to hotels withbrand affiliation, are in variousstages of planning anddevelopment in the above tencities, and expected to enter in a

phased manner by 2011. Despiteall the interest generated by mid-market and budget hotel

Table 1: New Room Supply - by Market Orientation


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development, around 53% of thedevelopment is still concentratedin the luxury and first class (Five-star Deluxe and Five-star)segment. This segment is alsocharacterised by its higher service

orientation, which makes itparticularly vulnerable to themanpower crunch.

Table 2 presents room supplyexpected to enter the afore-mentioned 10 markets, in eachyear for the period 2006 to 2011.The year 2006 will witnessapproximately 1,100 rooms beingadded in the branded segment,which translates to a meagre 2%of the proposed supply of 53,000rooms. The impact of these newrooms on the existing hotel setwill remain local in 2006; thepresent war for talent is more theresult of poaching by existinghotels and other sectors. The bulkof the projected supply will beadded between 2007 and 2011,and we expect the employeeshortfall to assume vast

proportions in the next five years.This shortfall in manpower everyyear due to additions in room

inventory can be gauged by anImpact Multiple. The impactwould be six times greater in2007, when compared to the baseyear 2006. In other words, theshortfall will multiply six times in

2007 and 18 times in 2009!These indications clearly pointtoward a major talent drought.

HVS research indicates that theaverage employee to room ratiois 1.8 in hotels in India, across allmarket orientations. The onlyexception is the three-star hotelcategory where the ratio drops to1.5 per room. Though Indianhotels remain overstaffed by 20-25% compared to internationalstandards, we have used thesevery ratios to estimate therequirement of manpower.

Table 3 presents the manpowerrequirement (across all hotelssegments) by the new supply andits growth in 2006-2011.

As indicated by the above

table, branded hotels in the tenselected hotel markets wouldrequire approximately 94,000

fresh employees in the next fiveyears, more than twice theexisting requirement. With thelarger volume of new roomsbeing added in the luxury andfirst class hotels, these segments

would, naturally, have thelarger manpower requirement.A major portion of demand isfrom cities like Delhi/NCR andMumbai, which account foraround 23% and 21%,respectively. However, the realchallenge will be presented bycities like Bangalore,Hyderabad and Pune. Thoughindividually they only requirearound 12%, 11% and 6.5% ofthe demand pie, the percentageincrease in manpower is thehighest in these markets,ranging between 500-900%.These cities have a relativelylow room base and hence wouldfind it more difficult to cope upwith the explosive growth.Presently, these three citiesoffer a comparatively lowercost of living and higher quality

of life, to their residents. Thecost to company of an employeein these cities will start

Table 2:New Room Supply - 2006-2011


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increasing once demand startskicking in. It is expected to becomparable to Delhi and

Mumbai by 2008. Thereafter,

the low manpower base and

comparable salary levels wouldforce 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 theabsence of relevant data.

The Road AheadPractically, 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%. Compen-

sation at this level is expected to

rise further and be comm-

ensurate with international

standards in the next three years.This will have a twin effect;firstly, lesser number ofmanagers will be lost to othersectors owing to purely financial

reasons. Secondly, more andmore Indian companies will beable to open the gates forexpatriates for key positions.While a crunch for managerswill still be felt, the real challengewill emanate from thesupervisory/ junior manage-ment positions. It takes around3-4 years to prepare people atthis level because of the skilled

nature of the job and itsaccompanying high serviceorientation index.

Our interaction with the HRheads of various hotelcorporations in India revealsonly about 20% of new hotelmanagement graduates aredeemed employable. The rest isabsorbed by an erratic mix ofbudget hotels, unbrandedhotels, QSF restaurants, foodservice, airline and the BPOsector industries.

Table 3- Manpower Requirement

HVS Executive Search remains aclose partner to the hospitalityindustry. We feel that the industryhas not yet fully realised or cometo terms with the magnitude ofthe problem that is. So, whats theway out? My recommen-dationsto address the twin issue of talentacquisition and retention:

Start now! Well establishedhospitality organisations willneed to start imme-diately tomeet the severe resourcecrunch 2008 afterwards.

Scale up the intake - The

industry will need to learn toabsorb people in hugenumbers. Attrition will beimminent. The emergence ofthe Retail industry is expectedto adversely affect Hospitality,

just like what the BPO industrydid in the late-1990s. Hotelswill need to strengthen theirHR and training processes toface the churn. Valuable

lessons can be learnt from theBPO and ITeS sectors in India,which operate with a market-wide attrition rate of 30%.


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ITC Hotels, Hotel Leela VentureLtd, Intercontinental Hotels &Resorts, Mandarin Oriental,Carlson Hospitality, GlobalHyatt, Hilton International,Choice International, Merrill

Lynch, Lehman Bros., IFC, ICICIBank, Sun Group, Emaar (Dubai)and Kingdom Hotel Investments,among others.

In May 2001, we launched HVSExecutive Search, to cater to thestaffing needs of the hospitalityand related services sectors likereal estate, media, insurance andaviation. Apart from being the

first retained search firm for thehospitality industry in India, HVSExecutive Search also provides

services in areas of HR Consultingand Compensation Survey &Design. In addition to its NewDelhi office, HVS ExecutiveSearch has international offices inNew York, London, Moscow and

Hong Kong. In India HVSExecutive Search has offices inMumbai, Hyderabad andChennai.

HVS Executive Search has alsolaunched two websites:

2020sk il ls .com andhospitalitycareernet.com. 2020Skills is an internet- basedassessment tool specifically

designed for service industryprofessionals, for assessingperformance characteristics and

cultural compatibility. 2020 Skillswas authored by professorsFlorence Berger and JudyBrownell of the Cornell UniversitySchool of Hotel Administrationand HVS Executive Ssearch. The

assessment profile has threeunique levels: senior, mid-management, and line. The sitecan be accessed atwww.2020skills.com.

www.hospitalitycareernet.com isa web site that provides state-of-the-art solutions for employmentnews, career advice,compensation assessment, and

more. It has become one of themost efficient ways to recruit,hire, and retain employees.

About the Authors

Manav Thadani joined HVS Internationals New York office as aConsultant and Valuation Analyst in September 1995. Prior to

jo ining HVS, he ga ined six years of operat ional experi ence in

various hotels in New York City. In early 1997, Manav plannedthe opening of HVS Internationals first Asian office in India, whichwas established in New Delhi later in the year. As ManagingDirector and Partner of the New Delhi office he is responsible forall HVS activities in the region including the Consulting and

Executive Search services.

Manav holds a Masters degree in Food Service Management from NewYork University (NYU), prior to which he completed his undergraduateeducation in hotel management at NYU.

Saurabh Gupta joined HVS Executive Search as an associate inOctober 2004 and currently heads the Hospitality vertical for HVSExecutive Search, India. He has extensive knowledge on the dynamicsof the human resource element in the service industry. His operationalexperience in hotels and restaurants help him to conduct assignmentsin various sectors like hospitality, retail, consulting, healthcare andreal estate. He is also involved with the execution of key expatriatesearches.

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 variousIndian cities.


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