What’s spurring the growth of mid-tier hotels in India

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Published: April 1, 2019 2:11:49 AM

The breakeven point for mid-tier hotels is usually lower, at three to four years, when compared to that of premium hotels — in which case, it takes at least five to six years.

Sarovar Hotels, says that the market can grow as much as 20% a year, depending on the number of properties launched.

The Indian middle-class is travelling a lot, be it for business or pleasure, much to the delight of the hotel industry, particularly the mid-tier segment. RedSeer Research estimates the mid-segment hotel market in India to be worth approximately $4 billion, growing at an average of 17% annually. Rising affordability, steady appreciation of the dollar (making international travel less attractive to Indians) and an increase in business activity in tier II and III cities are the top three reasons for this surge. Furthermore, there is greater influx from international travellers in the mid-tier hotel segment, as they prefer affordable yet safe
accommodation.

Besides, the new GST norms that levy much higher taxes on top-end hotels, have boosted growth in the mid-tier segment.

Room to grow

Typically, a mid-tier hotel is one that offers rooms in the price range of `3,000-7,000, and belongs to the two, three or four star category. The star rating is assigned to a hotel depending on the amenities available in the room as well as at the property, and the quality of service provided, among other factors.

Oyo entered the mid-tier hotel segment with Oyo Townhouse in January, 2017. Since then, it has launched 45

Townhouse properties, mostly in India and the UK, and plans to have 400-500 operational properties in a few years. Ankit Tandon, COO, Oyo Townhouse, says the company is targetting India’s “millennials and business travellers”. It is expanding in both business destinations, like the metros, and leisure destinations like Goa and Jaipur.
The occupancy rate (OR) — the ratio of used rooms to total number of available rooms at a given time — in this segment has steadily grown from 3% in FY16 to 67.5% in FY18, according to data from CARE Ratings. Oyo’s Townhouse hotels are able to maintain an OR of 90%, while Lemon Tree manages 75% and Ginger Hotels 65-70%, according to RedSeer.

Sarovar Hotels saw 68% OR in FY18, and is aiming for 72-73% in FY19. The hotel chain plans to open around 17 new properties this year; currently it has 80 properties across leisure and business destinations. Ajay K Bakaya, MD, Sarovar Hotels, says that the market can grow as much as 20% a year, depending on the number of properties launched.

A hospitable environment?

The mid-market segment has become highly competitive, with branded hotels such as The Fern, Lemon Tree (including Red Fox), IHCL (Ginger Hotels), and the like, expanding rapidly in the segment in the last few years. “With improved demand in FY18, average room rates have managed to register an increase of around 4% y-o-y to reach `3,900, after seeing a decline over the last few years,” shares Darshini Kansara, analyst, CARE Ratings.
However, she adds, that while the number of rooms has increased in the mid-market segment, the quality of rooms has taken a beating with the proliferation of non-branded hotels in this segment. RedSeer estimates that 35% rooms in the mid-tier segment are part of chain-affiliated hotels — an increase from 32% in 2017.

There is much more room to grow and bridge the demand-supply gap. Lemon Tree has around 3,000 rooms across 29 properties in its pipeline till 2021, while Ginger Hotels hopes to have 100 hotels in its portfolio by 2022. In its report, RedSeer says that like Ginger and Lemon Tree, most hotels in the mid-segment cater to business travellers, but that is slated to change. Out of the 29 hotels that Lemon Tree is planning, over 65% are located at leisure locations like Goa, Rishikesh, Gulmarg and Mussoorie. Ginger, too, plans to have 40% of its upcoming properties in leisure destinations.

The market will be abuzz as mid-segment hotels from international chains such as Courtyard by Marriott, Garden Inn and Hyatt Place expand their footprint. Kansara expects the market to see considerable growth given the value proposition. “These players offer five-star category services at lower rates, thereby attracting demand for the segment,” she says.

It also makes better business sense for hotels as far as investments go. The breakeven point for mid-tier hotels is usually lower, at three to four years, when compared to that of premium hotels — in which case, it takes at least five to six years.

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