Domestic hospitality industry faces a bleak year ahead

The Indian hospitality sector is witnessing its worst-ever season with average room rates in branded hotels at an 8-year low. Sluggishness in the global economy in recent years has resulted in poor demand from key source markets such as the US and Europe. Besides, a spurt in new supply of rooms too added to the industry’s woes.

According to HVS, a global hospitality services firm, the average room rate registered during the year (2013-14) was around ₹5,500, and RevPAR (revenue per available room) of ₹3,250. This range was last seen in 2005-06. It says, the average occupancy rate hovers around 57 per cent, which is the lowest in the last several years.

Hotel occupancy and average room rates have been under considerable pressure because the fresh supply of rooms has outpaced the growth in demand, says MD Kapoor, Secretary General, Federation of Hotel and Restaurant Associations of India (FHRAI). The federation’s research shows 2012-13 witnessed a 11 per cent growth in room supply while demand grew by 9.2 per cent in major cities. The demand-supply mismatch is more evident in the premium/luxury category. This subdued demand can be attributed to a slower than anticipated economic recovery in key source markets and also the sharp downturn in the Indian economy over the past two years, affecting business travel.

These factors have been partially offset by the continued resilience in demand from domestic leisure travellers, he said. According to FHRAI, in the premium segment, more than two-thirds of guests are business travellers or foreign tourists. Therefore, the slowdown in business and foreign travellers, coupled with the over-supply in this segment, has severely impacted premium hotel companies.

Besides, high inflation, especially a rapid increase in utility costs, rising interest rates and currency volatility had compressed margins for many, said Chandan Sharma, analyst with India Ratings & Research. “As increased choice for travellers has put enormous pressure on occupancy, the ability of hotel companies to pass on the increase in input costs to their customers was limited, impacting their profit margins,” he added.

T Nataraajan, Honorary Secretary, South India Hotels and Restaurants Association, and CEO, GRT Hotels and Resorts, says that in Chennai, supply is at least 1.7 times the demand. According to him, this made returns on investment for new properties a distant dream. The scarcity of land parcels and the skyrocketing prices and inordinate delays in securing Government approvals considerably delayed several projects and are further undermining investor sentiment in the sector too, he said.

However, the industry believes that green shoots will be seen towards the last quarter of the current financial year. “With a gradual turnaround in the domestic business sentiment towards the second half of the year and beyond, we expect hotel occupancy to pick up around that time,” said a senior official of leading hotel company. But given the strong supply pipeline of new hotel rooms, average room rates and RevPAR will take a little longer to recover, say some.