Hotel rate increases to hit oversupply ceiling

However, there is no slowdown in the number of new properties being launched

The pace of economic growth may have slowed down, impacting global travel, but it hasn’t stopped hotel chains from opening more rooms for guests.  

Over 600 branded hotel rooms, including two from the Taj group, were added to the Indian market since the start of August, putting further pressure on existing inventory.

Research agencies tracking the sector expect average room rates (ARR) at the national level to go down this year in the run up to the peak season though hotel companies may bring about a marginal hike in some of the popular destinations such as Goa, Rajasthan and Kerala.

The oversupply in many markets, including Pune, Chennai, Bangalore and the national capital region (NCR), has restricted upward movement of room rates though occupancies are still at satisfactory levels, say hoteliers.

The industry-wide margins have nearly halved over the last five years to 18 per cent as on 2012-13 from a high of 37 per cent in 2007-08, on the back of the industry reporting a compounded annual growth rate of of a mere four per cent in revenues, said a report by ICRA, a rating agency.

S P Jain, chairman, Pride Hotels said: "The ARR in the first two quarters of this year is down in the industry. Occupancy, too, is under pressure at 60-65 per cent. Expansion plans of not just ours but of the industry, too, is expected to be hit as bottom lines have taken a knock".

ICRA expects industry-wide margins for the current quarter to ebb to a five-year low of seven-eight per cent on the back of decline in RevPAR (revenue per available room), seasonally weak July-September quarter and inflation in consumable costs. With uncertain demand conditions and further supply additions, the outlook for the Indian hotel industry during 2013-14 remains negative, according to ICRA. The down-cycle in the Indian hotel industry has stretched to five years (barring a brief pick-up in 2010-11), as compared to past hotel industry cycles globally, which has one-two years of lows, preceded by five-six years of highs.

India’s supply of rooms in the organised sector has almost quadrupled to over 93,000 at the end of last year from about 25,000 in 2000-01. A little over 50,000 branded rooms will be developed over the next five years, taking the total supply to about 144,000 rooms by 2017-18, according to HVS, a hotel consultancy firm.

Anil Goel, executive director (finance), Indian Hotels Company said: "People will rethink on investment (in the hotel sector). Some correction in bound to happen in supply." IHCL, a Tata Group company popular with the Taj brand, is India's largest hotel company (by room inventory).

Hoteliers have resorted to several steps to tide over the weakness, including deferment or even  cancellation of capital expenditure, restructuring of debt, infusion of funds through equity dilution or sale of non-core assets and project modifications. The weaker value of Indian currency in the past several months has, meanwhile, helped the industry gain from a steady rise in the number of tourists though growth is still lower compared to the previous year.  Foreign tourist arrivals in India reported a growth of 2.8 per cent for the first seven months up to July 2013, compared with eight per cent during the corresponding period last year. The CAGR in foreign tourist arrivals during the last seven years has been slightly over six per cent.