Hotel industry won't have discretionary pricing power anytime soon: SAMHI

Goldman Sachs-backed SAMHI has cautioned the hotel industry that the sector will not have discretionary pricing power anytime soon and the inflation-adjusted growth in room rate will be in single digits.

SAMHI, a hospitality sector asset owner with a portfolio of 30 hotels and 4,000 rooms, works with multiple brands from leading hotel chains like Marriott and IHG.

Ashish Jakhanwala, founder and CEO at SAMHI, said consumers are reluctant to accept a high tariff.

“I firmly believe that a meaningful rate growth is coming. But I think the definition of meaningful is different for different people. To me, it means that if inflation is about 4 per cent, the rate of growth could be 6 to 8 per cent. The real growth rate post inflation is not more than four per cent,” he told Business Standard.

“A lot of my peers are expecting it to completely disassociate with inflation and go to 10 or 12 per cent. I will get growth, but it will not be discretionary,” he added.

Jakhanwala said a number of his industry colleagues are of the view that the combination of low new supply and rising demand will perk up occupancy levels to 85 per cent from about 70 per cent now.

“People believe an 85 per cent occupancy will offer a discretion to price the rooms. I want them to look at the airline sector and the telecom sector where capacity utilisation is not a problem but nobody can claim to have discretionary pricing power. It is a lesson that I have received. The sector is driven by similar kind of consumers,” he added.

According to hotel research firm STR, the average occupancy nationwide for branded Indian hotels has just increased by 0.1 per cent to 64.9 per cent in the January to November period of Calendar Year 2018.

The average daily rate (ADR), as well as the revenue per available room (RevPAR), has grown by an identical 1.4 per cent. However, in Mumbai, a leading market, ADR growth is just 2.3 per cent while RevPAR increase is 4.4 per cent. If one adjusts the 2.3 per cent rate with inflation, there is actually no growth.

RevPAR is calculated by multiplying the average ADR by the occupancy rate. In New Delhi, the ADR growth is 6.8 per cent with a RevPAR growth of 11.2 per cent. 

“There is a friction in the fact that the rate growth is happening slower than all of us would have expected it to be. Consumers will not let you have discretionary pricing power in any sector, not so early. Moreover, there is also the availability of capital to create alternative lodging options,” Jakhanwala said, adding displacement will benefit the OYOs and Fabs of the world.

He said the hotel industry faced a similar displacement in its last peak cycle more than a decade ago. “There were no OYOs but there were guesthouses of companies. Infosys, Wipro and other IT companies would have had over 10,000 rooms in guesthouses between Bangalore and Hyderabad and displacement happened. Today, it will happen towards the tech aggregators.”

SAMHI, which also counts GTI Capital and IFC as its investors, has deployed Rs 2,800 crore to build, acquire and renovate hotels over the last seven-eight years. 

Jakhanwala said the company was looking at some new acquisitions but could not close any in 2018.

“We expect some of the deals we were pursuing to close in 2019. It takes too long to close deals but we are confident that this year we should add 600-800 rooms through acquisitions.”