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Occupancy down, ADR in the dust, RevPAR squashed by inflation

- Judy Maxwell (Assistant Editor)
Occupancy down, ADR in the dust, RevPAR squashed by inflation

Say again what’s so great about India’s hotel market?

US hotel companies and a strong contingent of Indian-American hoteliers lately are trumpeting the economic advantages of investing in India’s hospitality industry.

Seeming to contradict even the most cautious foreign investor, two recent reports highlight the challenges facing the brands’ expansion schemes.

Dwindling hotel occupancy in major cities, declining room rates and therefore net operating income, lack of infrastructure needed to support travel and tourism, passenger airlines’ high ticket prices and the inflated cost of land for development are just a few of the caveats issued by researchers with HVS India and STR Global, who each have analysts on the ground in the emerging nation that saw its GDP growth go from 8.4 percent two years to an expected 5.4 percent climb this year.

 “The sharp occupancy decline is undoubtedly a matter of concern…” says a report by STR Global and Horwath HTL. The trend “clearly challenges the perception of India being ‘severely under-supplied’ – that position is, in some ways, shown up as a myth; if the under-supply were truly severe then the significant occupancy and rate decline should not have occurred.”

Struggling metrics

Since 2006, average hotel occupancy in India has dropped more than 10 percent, from 68.3 percent to 58.1 percent in 2012, reports STR Global and Horwath HTL in a recent study. In that same time period, average ADR went from 7,070 INR ($131) to 6,175 INR ($115) and average RevPAR dropped from 4,829 INR ($90) to 3,587 INR ($66).

Broken down into market segments, luxury and upper-upscale saw less of a decline in the key metrics than the upscale and upper midscale and the midscale and economy sectors. The top tier saw average occupancy drop from 61.8 percent in 2010 to 59.5 percent in 20012; ADR from 8,543 INR ($159) to 8,120 INR ($151); and RevPAR from 5,276 INR ($98) to 4,830 INR ($90).

Upscale and upper midscale metrics from 2010 through 2012 are reported as: Average occupancy, 61 percent down to 56.9 percent; ADR from 4,924 INR ($91.75) to 4,655 INR ($86.75); and RevPAR from 3,004 INR ($56) to 2,649 INR ($49).

Faring better than the top tiers, midscale and economy hotels saw slight increases in two of their metrics: Average occupancy down, 57.5 percent in 2010 to 56 percent in 2012; ADR up from 2,834 INR ($53) to 3,020 INR ($56); and RevPAR up from 1,630 INR ($30) to 1,693 INR ($31.50). And even this uptick is couched with warnings of looming inflation.

This, too, shall pass

“It really makes you think,” said Dhritiman Mukherjee, a researcher with STR Global in Mumbai, told Asian Hospitality Tuesday.  

The 2008 global recession and the terrorist attacks in Mumbai in 2008 and 2011 have not been good for India’s economy, he said. But those reading the tea leaves must understand that the US hotel companies eying more investment in India are looking to the long-term.  The noise and activity surrounding hotel development will “translate into a sizeable footfall in five to six years,” said Mukherjee. “We should not see declines in the market in those few years going forward.”

HVS Hospitality Services has a team in Gurgaon. The latest report, released in the fourth quarter of 2012, says while demand, occupancy and rates experienced a decline in 2011-2012, it was caused by a significant number of hotels opening all at once.

This blip will be overcome as travel increases both internationally and domestically and hotel brands begin to provide mid-scale and economy choices.  In the past 10 years, supply increases historically lead to an uptick in demand, said HVS in the report 2012 Hotels in India: Trends & Opportunities by Kaushik Vardharahan and Yashaas Rajan.

The HVS researchers say the decrease in demand is recent. They’ve tracked the industry for the past 17 years and “except for 2008/09, we have not seen room night demand decline in the country and any declines in occupancy levels have been a result of supply increasing faster than demand.”

What’s ahead

The HVS team reports that future supply is more evenly spread out and “should have a less detrimental impact on marketwide occupancy levels.”

Other future trends noted by HVS include:

·         More institutional investors in hospitality, “generally ensuring that unfeasible projects are not developed on a whim.”

·         These investors will begin to question brand standards, whether they are relevant to the actual business investment. “As our industry heads toward critical  mass, we believe that hotels will now have to be designed to meet the actual requirements of guests and  not be based solely on a brand’s wish list.”

·         More hotel transactions will occur as the hospitality industry in India begins to consolidate over the next 12 to 24 months as investments made in 2006-08 are “approaching the end of their investment horizon.”

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