Indian Hospitality
Ready to Rock

It looks like the elephant, as India is fondly called by economists world over, has woken up and is on a rampage. In the last couple of years the annual GDP growth rate has been around 7.0 8.0 percent. Recent surveys by global economic analysts have slotted the Country's GDP in the 4th position in terms of Purchasing Power Parity. The general consensus is that the country's economy is no longer one that is dependant on servicing external consumption but driven by internal consumption.
It's no wonder that the last couple of years have seen an across-the-board boom for the agricultural, industrial and services sectors and naturally that includes hospitality and tourism too. The country's popularity as a business and leisure destination attracted 3.9 million foreign visitors in 2005, a growth of 13 percent over 2004. In the same year the country earned US$ 5.7 billion in foreign exchange from international tourism, a growth of 20 percent over the previous year. The forecasts are that 2006 will see India welcoming more than 5.0 million international visitors and earn close to US$ 7.0 billion in foreign exchange. In terms of global share of travel and tourism, India inched up from 0.39 percent to 0.49 percent in 2005. The Ministry of Tourism with its “Incredible India” campaign aims at attracting at least 1.0 percent of the global tourism business. The World Travel & Tourism Council forecast shows that the Indian travel and tourism industry will generate US$ 53.5 billion in economic activity in 2006 representing 2.1 percent of the nation's GDP, and the number will rise to US$ 128 billion per annum in the next decade. (figures by Department of Tourism)
There is reason for such belief. The indicators for business and leisure travel could not be better with the road, rail and air infrastructure improving. Today, with an “open sky” policy, the restrictions on the number of flights a foreign airline could operate from India are gone. Now the airlines can fly in and out of the Country from at least 20 international airports compared to just 4 some years back. Airports are being upgraded by the government and the private sector. Air charters are being opened up to allow even Indian nationals from using them for travel. Low cost airlines have made travel as affordable as rail. The aviation industry predicts that by 2010 the country will have over 250 aircrafts registered with private airlines alone, more than three times the present combined fleet of the government owned national carriers. The dangerous dual lane highways of the country are being converted to International class expressways. Better, faster, comfortable and safer trains are being introduced. The traveler now has a choice for cheaper, faster and better means of commuting within the entire nation.
The obvious beneficiary of all this increased traveling has been the hotel community. From the lows of years 2001/2002 where rooms at 5 star deluxe hotel were being sold for as low as US$ 50, the same class of hotels are now charging an average of US$ 175 or more. This is despite the addition of new hotels over the last three years over which the number of approved hotel rooms across all star categories has gone up by about 25 percent. But despite the euphoria, the travel industry is concerned. The demand for hotel rooms is outstripping supply so rapidly that there is a general feeling that if the total number of hotel rooms now standing at about 120,000 in the whole Country is not doubled by year 2010; then India may not see itself on the top 10 travel destinations on account of being a very expensive destination for holidaying. The present trend shows that by the time the Asian games are hosted in 2010 the total number of approved rooms across all star categories will not exceed 140,000 leaving a big hole to be plugged. Hotel majors across the world find it very amusing that such a powerhouse of a Nation has less number of hotel rooms than some Asian Cities on their own.
The travel industry predicts that the biggest demand supply gap is in the mid market and budget sector. The traditional hotel groups have for economic reasons stayed away from developing hotels in this segment as the cost of real estate being so prohibitive and other developing costs remaining equal, it makes more sense to build first class and deluxe category hotels. Hotel brands like “Trident” by Oberois, “Gateway” by Indian Hotels, and “Fortune” by ITC the three major hotel players were incubated to address the mid market segment. But in time these hotel brands inched themselves to compete with the 5 star segment. Furthermore, traditional hotel majors have largely concentrated development in established Indian business and holiday destinations and nearly 60 percent of all quality hotel development is found concentrated in the eight major cities of India. While lack of infrastructure in smaller towns has been blamed for the lack of hotel development; industry analysts speculate that it has more to do with the lack of competition in the hotel space in established cities to prompt the majors from looking elsewhere. Foreign hotel majors too have not shown keenness to invest monies but only propagate their brand and management services which are afforded by only large hotels in key cities.
This anomaly has surprising caught the attention of the new foreign venture funds and private equity capital market, and they have decided to do something about it. In the last one year (end 2005 to now) there have been spates of announcements that have rocked the hospitality industry:
• Bessemer Venture Partners and New Vernon Private Equity - investment of US$ 44 million in Sarovar Hotels for developing 35 'Hometels' in the budget segment.
• Warburg Pincus investment of US$ 60 million in “Lemon Tree” hotels to develop about 12 hotels in the US$ 75 to US$ 100 room rate market and 20 “Red Foxx” inns in the US$ 40 per night segment.
• India Hospitality Group, a Special Purpose Acquisition Company raised US$ 100 million on LSE AIM to buy in to or develop hotels in India.
• Berggruen Holdings - a private family trust has decided to invest US$ 100 million in the mid class hotels and create a management company and brand for managing the chain.
• Dawnay Day to introduce US$ 100 million capital in developing 20 hotels across the Country in the mid upper mid market segment.
• Navis Capital buys out 74% of Mars hotels, operators of “Gordon House” hotels for US$ 20 million.


What has shaken the industry is the fact that these funds have decided to back relative new entrant companies started by hotel professionals or go by on their own with new teams rather than team up with an industry major, and most of these new hotels would be in cities/towns largely ignored by established operators.
This is just the tip of the iceberg. Industry experts feel that this trend has been fueled by the fact that the Real Estate funds have realized that hospitality is the easiest medium of accessing the Indian Real Estate market which is still not fully deregulated and also not all that transparent whereas hotels can attract 100 percent equity for a project of any size. Moreover, with the belief that REITs will be a reality someday soon, hotels would make good investments from a revenue perspective.



It is anticipated that there is a further kitty of US$ 2 billion waiting to find its way to the hospitality industry through more foreign and domestic funds and local and select foreign hotel majors. Some of the other announcements are:
• Accor and InterGlobe a leading Indian travel player are to invest US$ 200 million to set up 25 “Ibis” brand hotels in the next 10 years.
• Indian Hotels to roll out at least 10 “Ginger” hotels by 2008 offering rooms between US$ 20 to US$ 25.
• Marriott and Hilton have both announced partnerships with leading real estate players in India to promote their “Courtyard” and Hilton Garden” brands respectively.
• Holiday Inn and Golden Tulip are eager to launch the 'Express” and “Tulip Inns” brands respectively in India.
In my analysis the total amount declared or estimated to be invested in India over the next five years in the mid class segment will yield about 50,000 hotel rooms built at an average cost of US$ 50,000 per room. So, does it look like this space is becoming crowded to the point of oversupply? Some may believe it is, and there is a growing murmur that too much money will just stoke the fire of increasing land and development costs upwards including increase in operating costs like interest rates, cost of skilled labour and cause sever shortage of hotel managers which in the long rum will force these so called budget entrants to re-price themselves upwards.
But those in belief of the “Great Indian Story” feel otherwise (me included). India has a long way to go before it is slotted as a mature market. The changing lifestyle of an average Indian prompted by new wealth and a desire for better quality of life is pointing to the direction that supply will be lapped up in the course of normal business cycle and in fact imbalance (if any) will create new business opportunities. Let's face it; the Country like the elephant is hungry for more more of everything.
(The author is a hospitality and travel industry analyst; and a consulting editor to New Media)