Great expectations for Indian hotels

BANGALORE - India's hospitality industry is set for dramatic growth in the next couple of years. There is a serious shortage of hotel rooms, and demand far outstrips supply. Hotel room rates are going through the roof, especially in the cities. But with the industry showing very bright prospects, investment in the sector is witnessing a sudden spurt.

For decades, India was a paradise for backpackers on a shoestring budget or "nirvana seekers" eager to escape the rat Great expectations for Indian hotels
By Sudha Ramachandran

BANGALORE - India's hospitality industry is set for dramatic growth in the next couple of years. There is a serious shortage of hotel rooms, and demand far outstrips supply. Hotel room rates are going through the roof, especially in the cities. But with the industry showing very bright prospects, investment in the sector is witnessing a sudden spurt.

For decades, India was a paradise for backpackers on a shoestring budget or "nirvana seekers" eager to escape the rat

race in Western societies. Much has changed since economic liberalization and the software boom. While curious backpackers keen to discover India continue to pour in, it is business travelers who constitute the bulk of visitors to the country in recent years. There are medical tourists, too - those who come to India for inexpensive but top-class medical treatment. A booming economy, growing affluence and cheap domestic flights have induced many Indians to travel as well.

But there aren't enough rooms in hotels to accommodate them all.
The scarcity of hotel accommodation is obvious from the fact that while all of India has about 110,000 hotel rooms (about the same as metropolitan New York), Shanghai alone has some 130,000 rooms. And only a quarter of India's 110,000 rooms are in the branded segment.

"India needs another 125,000 hotel rooms at least by 2010 to meet the surging demand, particularly in the upper and middle ranges," an official in the Ministry of Tourism told Asia Times Online.

"The demand for rooms has grown across the country. In towns like Agra, Goa and Khajuraho it is tourists - domestic and foreign - [who] are driving the demand. But it is business travelers [who] are pushing up demand for hotel rooms in Delhi, Mumbai and Bangalore," said.

Bangalore accounts for the bulk of foreign business travelers visiting India annually - 51% compared with 35% who go to Mumbai and 26% to Delhi. Ninety percent of the hotel clientele in Bangalore consists of foreign business travelers. The city's booming information technology (IT) sector is fueling the soaring demand for hotel rooms here.

Hotel rooms in Bangalore are booked months in advance. Rooms at the Taj West End, the Leela Palace Kempinski and the Park Hotel are all booked through March.

Until a few years ago, it was possible to get a room in a luxury hotel in Delhi, Mumbai or Kolkata at about US$60 a night. Today, the average tariff for a single-occupancy room in a luxury hotel in India is about $325 a night.

A study conducted in 2005 by the travel consultancy Business Management International found that the average room tariff in Bangalore's hotels is the third-highest (after Moscow and Rome) in the world. The cheapest single-occupancy room at the Taj West End costs $400 per night (plus 12% taxes), while at the Leela Palace Kempinski the tariff for a standard single occupancy is $480 plus taxes.

Room rates in India's top 10 cities are said to have gone up by 30-55% in the past year. While hotel owners are in high spirits over the soaring tariffs, industry watchers are not too pleased with the trend. Manav Thadani, managing director of HVS International-India, a consulting firm for the hospitality industry, has said this will not be beneficial in the long run as it will turn away leisure traffic and the lucrative conference segment from India.

The scarcity of hotel rooms and the exorbitant tariffs of hotels in Bangalore have prompted some domestic business travelers to stay in Chennai, 320 kilometers to the east, and to fly in to Bangalore during the day to do business here. It is far more economical to book a flight between these two cities than to shell out for a room in a Bangalore hotel.

Indian software giants Wipro and Infosys are taking steps to provide their guests with accommodation. "Getting a room in Bangalore is next to impossible," said Mohandas Pai, director of human resources at Infosys. "We get about 40-50 visitors a day, apart from high-value overseas clients. If we manage to get any rooms at all, the transit time taken to commute between the hotel and the campus takes several hours."

This has prompted Infosys to set up an in-house 500-room hotel-like complex for its clients and other visitors coming to Bangalore. By this June, Infosys expects to have 15,000 company-owned rooms across India.

The hunger for hotel rooms is likely to grow further as the Indian economy expands in the coming years. In addition there are events such as the Commonwealth Games in Delhi in 2010 and the finals of the Cricket World Cup in Mumbai in 2011 that will add to pressure.

The Indian government is beginning to see opportunity in the hospitality sector. According to the World Travel and Tourism Council, the hospitality sector, which has been growing at an annual rate of 8.8%, has the potential to earn $24 billion in annual foreign exchange by 2015.

The government has approved about 300 hotel projects. Most of these are likely to be completed in the next three years and are expected to increase capacity by about 75,000 rooms. It is also encouraging private individuals to start up bed-and-breakfast businesses in their homes.

In addition, it is allowing 100% foreign direct investment in hotels. Several international hotel chains are either entering the Indian market or expanding their presence here significantly. Leading the pack are such giants as Marriott, Hilton, Wyndham and Accor, which have announced different investment plans.

Hilton, for instance, has joined hands with Indian real-estate developer DLF to set up 75 hotels and serviced apartments over the next seven years. The joint venture is valued at $550 million. And Accor has formed a joint venture with Emaar MGF to bring Formula-1 budget hotels to India. Wyndham has teamed up with Bangalore-based Royal Orchid Hotels to develop 10 Ramada hotels that will have at least 1,000 rooms.

And Indian giants such as ITC and Taj Group are expanding too, adding rooms and facilities to their hotels or opening new hotels in prime locations.

The past year was an exciting one for India's hospitality sector. Hotel construction took a giant leap forward. Thirty-five five-star hotels began functioning during the year, and 155 more are being constructed. Some 112 new projects that will open up some 3,500 rooms were sanctioned in southern Indian cities, which are at the forefront of the IT and IT-enabled-services boom. In Bangalore alone work on 27 new hotels and serviced apartments was set in motion. That should add more than 6,100 rooms to accommodation facilities here in the coming years.

Full or near-full occupancy in hotels, soaring tariffs and booming profits over the past year have fueled great expectations of the future for the hospitality sector in India. And big business and private individuals are scrambling for a share in the cake.

Sudha Ramachandran is an independent journalist/researcher based in Bangalore.