Spreading over 3m square kilometres, India rises in the snowy peaks of Kashmir in the north, and falls to the tropical shores of Kerala’s southern tip. In the west the barren rocky deserts of Rajasthan provide an arid, hostile environment, while in Bengal to the east lush jungles create a haven for wildlife. India’s size and diversity is matched by very few countries. Dotted across this vast and breathtaking countryside are huge metropolises, swelling secondary cities and many thriving regional centres, over 40 cities with populations 1m strong, all with their own particular industries and economies. But despite India’s huge scale, contrasting regions and scattered cities, one thing does link this spectacular country, growth.

The figures are staggering. India contains over 1.13 billion people, and is predicted to become the world’s most populous country by 2050, overtaking China as it swells to 1.6 billion. Three cities – Mumbai, Delhi and Kolkata - contain over 10m inhabitants, and those figures rise daily. The northerly state of Uttar Pradesh has a population of over 139m - approaching the 143m living in the whole of Russia and making it the most populated internal region in the world. Likewise, India’s economy is growing at speed. Real gross domestic product (GDP) grew by 8.5% in 2005, a further 8.8% in 2006, and according to the Economist Intelligence Unit (EIU) this trend will continue in 2007-08.

Yes, India is on the move and the hotel industry is not being left behind. Across India average room rates are sky-rocketing. In the twelve months to March 2007 average room rates have risen 28.7% to US$174, driving revenue per available room (revPAR) up 26.9% to US$122. The Indian hotel market however, does suffer from limited supply. There are an estimated 105,000 hotel rooms in India – a number comparable to that of Manhattan. This lack of supply, especially in the lower end of the market, combined with increased demand, is allowing hoteliers to push up average room rates.

For the first time India looks like becoming a major force in the world hotel industry. So what is fuelling this dramatic growth, and how sustainable is it? In this article we shall look at the factors defining this exciting period in India’s history. To gauge these trends there are no better places to look than India’s four major gateway cities - Delhi in the north, Chennai in the south, Kolkata in the east, and Mumbai in the west.

The new tiger economy

It has to be recognised that it is not India’s hotel industry alone that is prospering. Across the country industries are booming, encouraged by a strong and apparently stable economy. The government is looking east, to their heavyweight partner China and the heavily Chinese influenced Association of South-East Asian Nations (ASEAN), for trade and investment. Combine this with an increasingly close relationships with the US, already excellent ties with the UK and an, albeit partial, thaw in tensions with neighbour Pakistan, and India’s global network of friends looks pretty healthy. Key areas such as IT, pharmaceuticals and telecommunications have seen rapid expansion in recent years. Many companies outsource their operations to India, benefiting from a seemingly bottomless pool of skilled labour, cheap costs and hefty government incentives.

So what effect is this economic upsurge having on the hotel industry? Well, the EIU believes that approximately 80% of foreigners coming to India are there to do business. As business travel generally generates a higher spend than leisure tourism, it is plain to see why the Indian government is keen to promote this further. International tourism expenditure in India in 2006 was some US$8.7 billion, and is expected to rise to over US$10 billion in 2008, with the lion’s share of this being generated from the hotel sector.

It is no wonder therefore, that India’s government is tearing down the barriers to potential inward investment and continued growth. The central government’s expenditure tax is no longer applied to hotels and services charges have been slashed. The hotel industry is now classed as part of the country’s infrastructure by the government, lowering borrowing costs. The government is also issuing new long-term tourist visas to the citizens of selected countries, including the UK, Japan, Germany, France, Switzerland and Brazil. The five-year validity of the visa sends out a clear message: encourage repeat visits from wealthy tourists.

Hotel performance for gateway cities in India - twelve months to March 2007

Source: HotelBenchmark™ Survey by Deloitte

Island nation

India can almost be considered an island, and in ancient times it was. Approximately 6m years ago the Indian continental plate crashed into the Eurasian continent, an impact so severe it created the largest visible mountain range on earth – the Himalayas. With such a formidable boundary to the north and two long coastlines tapering to the southern tip - where the Bay of Bengal and the Arabian Sea meet at the Indian Ocean - India can essentially only be reached by air. The volatile border regions with Pakistan and Myanmar only serve to limit land access further. With the existing road and rail network often considered time consuming, unreliable or even unsafe, and a growing number of private low-cost airlines entering the market, domestic air travel across this vast land is also becoming increasingly popular.

Given the scale of India, air travel is a key sector. Domestic air travel throughout the country is becoming a cheaper, more feasible option with private carriers Kingfisher, Jet, Air Sahara, Indigo, Spicejet and Deccan Airways all expanding their fleets and cutting fares. In response to this, the national carriers Indian Airlines and Air India are doing likewise.

The majority of international visitors arriving in India fly into one of the four gateway cities. So how are the hotel industries in these metropolises being affected by, and reacting to, the overriding nationwide trends?

The capital: Delhi

The gateway to the north of India, Delhi is the starting point for the majority of India’s tourists. The apex of the revered Golden Triangle tourist track and capital of the ancient Murghal Empire, Delhi has enough attractions of its own to enjoy before tourists set off to Agra and Jaipur. However with thriving telecommunications, IT, banking and manufacturing industries, a key English-speaking workforce and a per-capita income more than twice the national average, Delhi is also a haven for business travel.

Delhi’s relevance to the world of business is enhanced by the presence of many major multinational companies, with local government actively promoting this area as a counter to the Financial Centre of Mumbai. With the exception of the Taj Group, all hotel industry major players have based themselves here.

A dramatic 35.7% rise in the twelve months to March 2007 forced Delhi’s average room rates up to an incredible US$225; the highest of all Indian cities. While occupancy levels decreased slightly to 74.8%. The main reason for this is under supply, especially in the lower end of market. As with all cities in India, the market in Delhi is dominated by 5-star and 5-star deluxe properties. Efforts are being made to solve this problem; with the local government introducing, as part of their Delhi Master Plan, a scheme intended to create a more even-spread accommodation hierarchy across the city, while also developing accessibility (road, footpaths, road bridges and parking). Another impetus for this is the fact that Delhi will host the forthcoming Commonwealth Games in 2010.

Between now and the Games, new developments in the National Capital Region (NCR - including Delhi and its suburban conurbations of Gurgaon and Noida) are set to include a 320-room Novotel, a 200-room Taj Hotel, three Starwood (the 300-room Westin New Delhi, the 97-room Westin Sohna-Gurgaon and the 220-room Sheraton New Delhi) and a 319-room Leela-Kempinski joint venture. The public sector is also playing a role with the state governments of Delhi, Haryana and Uttar Pradesh having ear-marked 75 potential NCR sites for hotel development.

Together with Mumbai, Delhi accounts for the bulk of inward arrivals. The modernisation plan for Indira Gandhi International Airport by its new private owners is already underway. This is expected to be completed by 2010 and will more than double its capacity.

The financial centre: Mumbai

The capital of the western Maharashtra state, Mumbai was created as a deep water port by the British and Portuguese, and began to boom following the construction of the Suez Canal. It is now the financial capital of India, home to the Reserve Bank of India, the National Stock Exchange and the more traditional Bombay Stock Exchange, contributing an estimated 40% of India’s foreign trade. Mumbai also has thriving industries revolving around IT, engineering and healthcare sectors. Most Indian conglomerates have their corporate offices here, including Tatas, Birlas and Reliance. This status makes Mumbai a haven for national and international business travel.

Mumbai experienced revPAR growth of 40.8% in the year to March 2007. This, again, is due to a sharp increase in average room rates, which rose 35.6% to US$202 over the same period. Occupancy for this period stands at 75.9%. Once again an extremely top-heavy market dominated by luxury properties, as well as a shortfall in supply, is forcing this trend. Increased capacity at Mumbai’s Chatrapati Shivaji International Airport has exacerbated the problem and allowed hoteliers to force average room rates even higher. With the proposed, further expansion and modernisation of the airport by its new owners, and with the new airport planned in the eastern suburbs of Mumbai, the city looks set for an even greater increase in arrivals. Planned developments over the next two years by Marriott, Four Seasons and Accor’s 300-room Sofitel Mumbai will help.

The growth city: Kolkata

The capital of West Bengal, Kolkata is the hub of trade into eastern India. As a traditionally socialist city, Kolkata had been unattractive to inward investment. The state government (the longest serving democratically elected communist government in the world) had long favoured trades’ unions and workers’ rights, and consequently the post-independence days had seen Kolkata lose out as international companies located elsewhere. However since 2000 with changed leadership, IT and manufacturing sectors are now revitalising the city. With its prime location for trade routes with China and the ASEAN countries, and direct flights to Brunei, Bangkok and Singapore, Kolkata looks set to grow and grow.

Although revPAR remains the lowest of the gateway cities, Kolkata’s rate of growth is among the country’s highest. An average room rate rise of 35.7% in the year to March 2007 is on a par with Delhi. Average rates for this period stand at US$120, having hit a peak of US$160 in January 2007, while RevPAR grew 35.6% to US$83. But as the city’s status as a centre of industry grows in the coming years, will supply become increasingly outstripped by demand? In the hotel sector Marriott plan to open a new 250-room Courtyard property in the city by 2009, while Hilton, with its Indian development partner DLF Ltd, also has a new opening planned in the city. It remains to be seen however, if the supply of beds in the city can reach the necessary levels for the projected visitor boom.

The ‘resort’: Chennai

Despite the 12km-long Marina Beach that defines Chennai’s eastern limits, the capital of Tamil Nadu state and the gateway to south India is no beach resort, but a major industrial centre. The traditional hub of India’s automobile industry is also now becoming a major IT centre, housing manufacturing plants for companies such as Dell, Nokia, Samsung and Cisco. Naturally the meetings, incentives, conference and exhibitions (MICE) tourism is a major sector, with the 2,000-capacity Chennai Conference Centre providing an excellent facility. Many of the positive effects of Bangalore (India’s Silicon Valley) have also rubbed off on Chennai, with many IT outfits reportedly considering Chennai more favourably due to the infrastructure that the city offers.

With revPAR growth of 27.2% for the twelve months to March 2007, Chennai follows the pattern of India’s gateways cities. Average room rates, rising 32.5% to US$135, accounted for this growth, while occupancy fell slightly to 75.2%. Direct air links with many ASEAN countries and the Middle East show strong potential for further growth through MICE tourism. Leela-Kempinski plan to open the 300-room Leela Palace Kempinski Chennai by 2008, while the 253-room Hilton Chennai is set to open in December 2007. Both hotels will include significant conference facilities, including a 1,600 square metre convention centre at the Leela-Kempinski.

Average rooms rates across India’s gateway cities March 2006-March 2007

Source: HotelBenchmark™ Survey by Deloitte

Indian summer: the autumn effect

The autumn time is always a good period for the Indian hotel industry. The searing temperatures of the summer months cool off to create a more visitor-friendly climate, and India’s inbound tourist cycle begins. This starts in late September/early October and runs through until February or March. Inbound tourism takes a significant leap around this time, and with the government’s ‘Incredible India’ campaign compounding the already versed impacts of India’s economic growth, and increased capacity at India’s two main airports in Delhi and Mumbai, 2006 was an especially good autumn. A good conference season and the fact that cricket-crazy India was hosting the autumn ICC Champions Trophy led to the number of inbound tourists growing 13% to over 4.4m in 2006.

The impact of this combination of factors saw hotels able to force room rates up dramatically. Although previous year comparisons had been positive throughout 2006, momentum gathered in autumn and October saw room rates across India rise 36% to a national average of US$196. By November this had risen further to a staggering US$215, levelling at US$205 in December. The biggest individual impact of this autumnal boom was seen in Mumbai in November 2006, when the soaring average room rates and high occupancy levels saw revPAR swell to US$213 – a staggering 83% rise from the previous year.

A false dawn...?

‘Make hay while the sun shines’, appears to be the current motto of India’s hoteliers. But can average room rates be forced higher in future years and if so, how high? Already Mumbai and Delhi have average room rates comparable to the traditionally most expensive cities in Asia. Delhi’s average room rate for the April 2006 to March 2007 period (US$225) outstrips all its regional rivals, including Singapore (US$138), Shanghai (US$138), Hong Kong (US$190) and Tokyo (US$196). But how high can they go?

A hotel construction boom in years to come looks like resolving the supply problem in all sectors. India’s budget sector in particular looks set to take off, with Accor and Hilton planning to launch their Ibis, Formule 1 and Hilton Garden Inn brands across the country. Whitbread Plc, operator of the UK’s Premier Travel Inn budget chain have committed to opening several hundred hotels across India and China in the next 5 years, while the easyGroup has also identified India as an important market for its easyHotel.com brand.

Local operators are also expanding their portfolios, with Sarovar having launched its Hometel budget brand, and South-India based Choice Hotels looking to open 8-10 budget hotels a year in the next 3 years. And development is planned not only in the gateways cities, but new, rapidly growing metropolises such as Bangalore, Hyderabad, Pune, Chandigarh, Indore and Jaipur. Once this happens it is likely that the new competitive climate will force average room rates, even in the top end of the market, to plateau or fall.

…Or a bright future?

To maintain such growth, India’s economy needs to continue its boom and the government continue to invest in the country’s infrastructure. There seems no reason why, with India’s wealth of resources and skilled labour, the economy cannot continue to grow at speed. With a booming IT sector, India is ideally placed to thrive in the 21st century. However justification of such high average room rates can be found only in world-class facilities and back-up services for the business traveller. If the logistics of travel itself are troublesome, business people may be dissuaded from travelling to India. As India’s cities attract increasing numbers of visitors, the surrounding services need to be improved.

However with the increasing supply of air travel it is becoming easy to travel around this vast, spectacular land. Whether you enter by the north, south, east or west - through Delhi, Chennai, Kolkata or Mumbai – India is now becoming more accessible. As urbanisation increases, from sprawling gateway metropolises, to the rapid-rising secondary cities, and small but swelling regional cities, the need for hotel rooms will keep pace. International chains have realised this great opportunity, and even although average room rates cannot continue to climb as steeply in future years as was seen in 2006-07, a large increase in supply will compensate for this. Growth is growth in any form.

The HotelBenchmark™ Survey by Deloitte contains the largest independent source of hotel performance data in the world and tracks the performance of over 7,200 hotels and 1.3 million rooms every month. Monthly surveys are produced on the following areas:

  • Four regional rate and occupancy surveys covering Asia-Pacific, Europe, Central & South America and the Middle East & Africa.
  • Twelve country/sub region rate and occupancy surveys for Australia, Benelux, China, Germany, India, Italy, New Zealand, Nordic Countries, Qatar, Southern Africa, Spain and UK.
  • Two city rate and occupancy surveys for London and Paris.
  • Monthly profitability surveys on Germany and London.
  • On an annual basis we produce profitability surveys tracking performance across all regions of the world.
  • Daily HotelBenchmark™ tracks rate and occupancy everyday for a number of markets across the Asia, Europe and the Middle East.

Mark Elliott
+44 (0) 20 7303 0670
STR Global