Welcome change: overseas buys drive hospitality sector growth

Written by Shweta Bhanot | Mumbai, Dec 28 | Updated: Dec 29 2007, 06:23am hrs
The year 2007 saw the adoption of a single tariff structure in the Indian hospitality industry, escalating room rates, private equity investment and entry of new players. It was also witness to the growing appetite and confidence among Indian hoteliers for overseas buys. A classic case can be of The Indian Hotels Company (IHC), which expressed its interest in acquiring 100% stake in Orient Express Hotels (OEH), although the move was rejected by the latter.

While hoteliers saw adapting single tariff structure as a rational step to synchronise to the changing global dynamics, travellers with greater spending power looked at destinations abroad more viable for holidaying. During the year, the rupee appreciated by 12%, which also generated a fair amount of excitement among prospective buyers looking at taking advantage of the opportunity and made import of foreign equipments cheaper.

The rising demand and supply gap resulted in escalating room rates. Over the twelve months, hotel room rates have seen a rise of around 20%-22%, said Dinesh Khanna, president, Federation of Hotel & Restaurant Associations of India (FHRAI), adding, If we want to cater to 10 million tourists from 4 million at present, we need more 1,00,000 to 2,00,000 rooms in the country Average room rates also saw growth across segments compared with previous years in the range of 5%-15%, depending upon the city.

According to a report by HVS International, a total of 1,02,000 rooms will be added in the next five years in the Indian hotel industry. This gap is also seen a reason behind decline in occupancy. Occupancy came down to 2-3 occupancy points from 8-9 occupancy points, Khanna said. Escalating prices are seen as a long term dampener by analysts, who believe this is being manifested in sagging occupancy.

Analysts foresee room rates to start correcting in 12-13 months from now.

The industry is seen as investment-worthy by domestic and foreign players. It saw private equity (PE) funds flowing in during the year. Considering the last few hospitality deals, private equity investment runs to around $1,500 million. This includes New York based Berggruen Holdings investment of $100 million in its Indian hospitality venture Berggruen Hotels, Morgan Stanleys $37.7 million investment in Bharat Hotels and the $26 billion acquisition of Hilton Hotels by Blackstone Investment funds, among others.

DLF forayed into the sector with a controlling stake in luxury hotel chain Aman Resorts. Reliance Anil Dhirubhai Ambani Group is said to be talks with Starwood Hotels & Resorts for bringing their luxury brand, St. Regis in India. Surprisingly, Jet Airways is planning to set up a hotel in Brussels . The hospitality, tourism & travel sector is seen as a key driver of the economy and the government is planning to introduce more tax sops in the next fiscal. The government in a bid to fill in the demand-supply gap has initiated the idea of three hotels in each multi-product Special Economic Zones (SEZs) to be developed across the country which will provide developers various exemptions. Also promoting the public-private participation in the sector.

The key to sustainability is wholehearted support by the government to provide our industry an added impetus with tax benefits, world class infrastructure and communication facilities, said CP Krishnan Nair, chairman of The Leela.

In the coming year, Nair believes that the industry will see the influx of major international players into the Indian hospitality market, causing its own ripple effect in product and pricing. In the competitive scenario, only the fittest will survive. Hospitality is seen as the preferred industry for jobs by youngsters in the country. Currently, approximately 69,000 people work for hotels in the branded segment and expected to touch a mark of 1, 47,000 by 2012-13.

Asked what kind of the growth was expected, Khanna said, As we talk 25,000 rooms are being built in the country. It is this type of growth the industry is witnessing.

He, however, said that like the other businesses hospitality too will see price pressures and players cutting cost and making efficient allocation of resources.