80% and counting: Hotel occupancy gain strength in Delhi, Mumbai

A slowdown in addition of new supplies along with a growing travel sector has combined to push up the occupancy in hotels

Hotel occupancy in the country’s top two markets, Delhi and Mumbai, has hit 80 per cent in January-March, after over a decade. Occupancy in Delhi in 2016-17 was 70 per cent and around 75 per cent in Mumbai. 

Occupancy is the percentage of days for which rooms are booked in a given period. An 80 per cent occupancy implies that rooms were booked for five to six days a week in most branded hotels in these two cities. 

The increase in occupancy was due to growing demand from business and leisure travellers and a slowdown in addition of new hotel rooms. “Supply (addition of new hotel rooms) has slowed down dramatically while demand is growing. A city like Mumbai has almost no new hotel coming up this year and so is the case with Delhi. This is unheard of. There might be some openings here and there, but these do not even add a single per cent to availability,” said Arif Patel, vice-president, sales, marketing and distribution, at Accor Hotels, which operates the Ibis, Pullman, and Novotel hotels.

Patel said industry occupancy in Mumbai had crossed 78 per cent in the January-March quarter in spite of long weekends. “Our Mumbai hotels are trending higher than 78 per cent. Occupancy is not an issue unless there is any disruption. This is going to be a good year,” he said.

The situation is not much different in Delhi. Accor will seek opportunities in Delhi by partnering asset owners. “I do not think there will be many development opportunities in Delhi due to scarcity of land. We need developers and are willing to partner them,” said Patel.

Delhi is a key market for the hotel industry with the largest base of branded hotel rooms (14,296). This does not include micro markets, such as Gurgaon and Noida, which put together have 6,700 rooms, according to an HVS report for the year ended March 2017. Mumbai, including Navi Mumbai, had 13,494 rooms, followed by Bengaluru with 11,995 rooms. 

In the year ended March 2017, addition of new hotel rooms in Delhi grew by only 1.1 per cent, against a compounded annual growth rate (CAGR) of 5.3 per cent over the previous decade.

 Similarly, addition of new hotel rooms in Mumbai grew at 3.4 per cent in 2016-17, against a CAGR of 5.3 per cent over a decade. 

Radisson Hotel Group Chief Executive Officer (South Asia) Raj Rana said the first quarter was excellent in terms of occupancy and there were many occasions when some of its hotels were sold out. “Levels in excess of 90 per cent were tested. But that is where most of the good news ends,” he said, adding the average rate for branded hotels for the quarter ended March was just Rs 4,800 per room night. “These are low rates and remain a drag on the bottom line,” he added.

Rates are, however, catching up. But there is limited scope for hotel chains to expand quickly in cities like Delhi and Mumbai where the growth opportunity is higher. Rana said both the cities had high entry barriers due to exorbitant land costs, and zoning, and construction laws.

Umesh Saraf, joint managing director at Saraf Hotel Enterprises, which owns 10 hotels in India, most under the Hyatt brand, said the firm’s Mumbai hotels were seeing occupancy of 80 per cent. “Delhi is in excess of 75 per cent and touching 80 per cent,” he added. 

On challenges of building new supply, Saraf said the construction cost per key for a luxury hotel in Delhi would be so high that securing loans would be a challenge. Cost per key is the total amount spent in all areas of the hotel divided by the total number of rooms in the hotel. “It is not worth buying land and constructing only to face the long government approval process. The cost will go up to Rs 50 million a key and you will make no money. That is a reality. It is not viable to build a hotel today. Building will be suicidal. So, people will not mind paying a premium to acquire an existing asset,” said Saraf. He said his company was in acquisition mode and would look at buying assets in metro cities, particularly Delhi. 

HVS said the proposed supply had reduced significantly from 2007-08, when it was at its peak at 114,466 rooms. In 2016-17, the number stood at 47,067, a decrease of approximately 10,000 rooms from 2015-16. “While the branded supply (at the national level) has almost doubled from 2009-10 to 2016-17, the growth in demand has kept pace with, if not overtaken, the growth in supply. This strengthens our belief that there is still unaccommodated demand,” it said.