Change starts from within: That seems to be the lesson from India, which has been quietly planting the seeds of its transformation in the shadow of headline-grabbing neighbors like China. The country has been distracted by political turmoil after a change in government in May 2014, even though it aimed to jumpstart development and infrastructure improvements. But a positive outlook prevails with signs of encouraging economic growth and an increase in domestic tourism pointing to a payoff for companies with the capital to seize the opportunities.
Laying the groundwork
India has experienced steady, if not spectacular, growth. Its GDP nearly doubled from 2006 to 2014 and grew 7.4% in 2014-2015 alone. The hotels, transport and communications subsectors outpaced that at 8.4%, according to a 2015 HVS report.
It’s useful to take the long-term view on government-implemented improvements, according to HVS’ Asia Pacific Chairman Manav Thadani. “Nothing has happened on the tourism front, but the government is focusing on improving the infrastructure, getting roads up and running, fixing city infrastructure and making it easier for people to invest and do business.”
That can only help tourism, along with an “e-visa” initiative that issues visas within 48 hours and eliminates the need to visit an embassy, says Thadani, who founded SAMHI (see p38), an Indian hotel investment and development firm. According to HVS, Indian hotel rooms totaled 101,305 in 2014-2015, up from 95,414 for 2013-2014. One factor driving demand is an increase in domestic travel spending, which generated more than three-quarters of travel and tourism GDP in 2014. Leisure hotels are mushrooming, and the focus is on supply, particularly to the middle market, which can utilize modernized airports and airline connectivity.
Even in the luxury segment, the outlook is improving. While it remains challenging to develop luxury hotels in India, Oberoi Hotels & Resorts President Kapil Chopra is preparing two domestic openings this year, and with real estate prices trending down, he says, the metrics will improve.
“It’s a great time to have cash and go out and buy assets,” says Thadani, predicting pipeline growth over the next three to five years. Institutional capital is “sniffing” at India, he says, adding, “We are at the cusp of the next upcycle. We’ve had four to five bad years, and the supply pipeline is extra weak.
Trickle in the pipeline
According to Lodging Econometrics, India’s construction pipeline has decreased 22% by projects and 23% by number of rooms since 2014; the total pipeline fell 12% during that period. And of the top five cities by project pipeline count, only Bangalore’s increased.
“I believe we are in positive territory,” says Dilip Puri, managing director, India, and regional vice president, South Asia, at Starwood Hotels & Resorts. Starwood, which operates 47 hotels in India, including 31 luxury and 16 midscale properties, has 33 hotels in its pipeline, seven of which will open this year. “There is demand for quality lodging in Tier 2 and 3 cities, and we are the first international chain to enter some of these markets,” Puri says.
Starwood sees India as “under-hoteled.” “We believe that our guests are now taking shorter vacations and are looking for destinations that are well-connected and offer leisure facilities,” Puri says, adding that the company wants to develop its resort portfolio. Carlson Rezidor Hotel Group plans to open 16 hotels in secondary markets by the end of 2017; that’s in addition to its 76 hotels in the country.
“We believe the country offers an exponential opportunity for sustainable growth,” says William Costley, vice president, operations – South East Asia and India, at Hilton Worldwide. “The capacity in India, in terms of hotel rooms, is about 10% of what you would find in more mature markets around the world.”
Hilton’s pipeline of nearly 20 hotels and more than 3,000 rooms exceeds its current footprint of 14 hotels and resorts in 11 cities under Hilton Hotels & Resorts, DoubleTree, Garden Inn and Hampton brands. Its next scheduled opening is a Conrad in Pune, and it has marked more than a dozen cities for expansion, including Mumbai, the commercial capital; the IT and business hubs of Bangalore, Pune and Hyderabad; and Chennai, Jaipur and Kolkata.
“The metropolitan cities have the capacity to absorb a larger inventory, and aggressive economic growth in other regions and cities make these markets even more important,” says Costley, who describes Hilton’s strategy as asset-light and focused on management. “The religious circuit presents tremendous opportunities for budget and mid-market hotels.”
Challenges remain
But “the current liquidity crunch accompanied by the high cost of debt is an obstacle, especially given the capital-intensive nature of hotel development,” Costley says.
Thadani adds that politics can always derail opportunities, while Starwood’s Puri cites the slow pace of development, the even slower pace of infrastructure development in the hospitality sector, and a “multi-layered regulatory regime.”
The problem of how to drive better business remains. HVS’ Thadani says that while average RevPAR increased 12% last year, 75% came from occupancy rather than average rate. He believes that the country is ready for double-digit RevPAR growth – at least 11% or 12%, in each of the next three years. “A large part of that is going to have to come from the rate side of things and not from occupancy,” he says.
Oberoi “started increasing rates three years back,” Chopra says, when net operating margins were falling. “So we started driving rates… As a result, profits have grown close to 60% in the past three years.”
Others are still to follow Oberoi’s lead. “That is the biggest puzzle that these brands have to solve,” he says.