Indian hotel sector: The opportunities that lie ahead

Mandeep S Lamba, President (South Asia), HVS Anarock, shares the investment opportunities for Indian hospitality sector

The year 2021 has been a mixed bag of challenges, learnings, and successes for the Indian hotel sector. While the year took off on a high note, thanks to the surge in domestic leisure travel spurred by a steady drop in active cases and the start of the country’s vaccination programme, the recovery was quickly hampered by new restrictions and lockdowns imposed in response to the country’s second wave. Although Covid-19 caught us off-guard the first time around, the sector was more proactive this time, managing the hurdles and building on the lessons learned the year before. At the peak of the second wave, some hotels, mainly in commercial centres, teamed up with hospitals to provide isolation and quarantine facilities to improve occupancy. Once the demand started picking up, hoteliers thought out-of-the-box to create various weekend, staycation, workcation, wellness and F&B packages to appeal to a variety of customer segments. Some have even introduced pet-friendly policies to appeal to pet parents.

As a result, the Indian hotel sector has been regaining ground faster than expected, with occupancy approaching the 60 per cent mark by October 2021, strengthening the sector’s hope for a stronger rebound. Domestic leisure travel growth, significant pent-up demand, and the resumption of business travel in the country are all contributing to a strong revival. Weddings and social events are also driving demand in certain markets. This positive travel sentiment, spurred by lesser restrictions across states, fewer Covid-19 cases and a higher vaccination rate in the country, is likely to continue into the remaining part of the year which have historically been the best months due to the onset of the holiday season. Moreover, after a nearly two-year hiatus, small-to-medium-sized domestic MICE events are making a comeback, fueling demand for hotels. We expect the sector to close the year with a nationwide occupancy of 46-49 per cent up 11-14 percentage points from 2020. Meanwhile, RevPAR is expected to rise to Rs 2,000-2,300, helping the sector’s total revenues to reach 50-55 per cent of pre-Covid-19 levels.

Indian Hotel Sector Performance in 2021

We expect the robust demand to tip the sector’s fortunes, bringing the sector’s October-December 2021 quarter performance closer to pre-pandemic levels, with a few markets, such as Goa and Chandigarh, even exceeding pre-pandemic performance for the quarter.

Hoteliers have also continued with their expansion plans, signing smaller properties with increased focus on Tier 3 and Tier 4 cities, resulting in an increase in brand openings and signings by properties in the first nine months of 2021 compared to last year.

Hotel occupancy, which was hit hard due to Covid-19 related travel restrictions in 2020, has been witnessing a strong recovery since Q3 2021. Domestic leisure travel growth, significant pent-up demand, the resumption of business travel in the country, wedding and social events are all contributing to this recovery. Small-to-medium-sized domestic MICE events are also making a comeback, fuelling demand for hotels.

Average rates, which had been struggling as hotels tried to boost occupancy, have begun to improve across markets in the last couple of months.

2022 & Beyond: Investment Opportunities Ahead

A few upsides of the turbulence caused by the pandemic has been that the Indian hotel sector has learned to adapt quickly, think out-of-the-box and embrace new ideas faster than ever before. As the sector continues to rebound in 2022 and beyond, here are investment opportunities we expect will pick up steam.

After a nearly two-decade wait, we expect occupancy to hit 70% in 2024.

Exploring the underpenetrated leisure segment: Most of the hotel development in India during the last decade has focussed on key business destinations as corporate and business travellers accounted for a large share of hotel demand. Moreover, due to a lack of infrastructure and the seasonal nature of leisure travel, hoteliers found this category to be less profitable. However, thanks to domestic leisure tourism coming to the sector’s rescue in the post-Covid-19 era, hoteliers have, once again, realised that leisure travel bounces back faster than business travel during a crisis. Additionally, compared to business travellers, leisure travellers typically stay longer and utilise more services at the hotel. Average hotel rates in leisure destinations are also likely to be higher than business hotels, making the investment more attractive.

Furthermore, the Government has announced significant investments to improve the country’s road and rail network, along with plans to privatise airports at Tier 2 and Tier 3 cities, which will help improve the regional and last-mile connectivity to India’s hitherto unexplored and underserved tourist destinations. For instance, the number of operational airports has increased from 50 in 2000 to 153 in 2020, with plans of another 100 by 2024. The Government also plans to develop an additional 8,500 km of national highway which will facilitate road-trips going forward. As a result, domestic leisure tourism is getting the attention it deserves, with hotel companies renewing their focus on increasing presence in leisure destinations. This segment, however, continues to be underserved as there are several fledgling tourist places in India where travellers still struggle to find good quality branded accommodation. As last-mile connectivity to previously unexplored tourist destinations improve, hoteliers now have an opportunity to tap further into this underserved segment.

Unlocking ancillary revenue streams: The hotel sector has lagged other travel-related industries when it comes to unlocking ancillary revenue streams by traditionally focussing on additional services such as F&B and spas. However, as room revenue became negligible during the pandemic, the hotel sector was compelled to find innovative ways to utilise their assets, opening ancillary revenue streams including food delivery, laundry services, DIY meals to name a few. Having understood the true potential of ancillary revenues in increasing the top line, hoteliers should now take advantage of the vast untapped opportunity by utilising existing infrastructure for newer business prospects. This could include having dedicated area for co-working spaces, monetising car parking spaces, deploying electric vehicle charging stations, leasing kitchens for cloud kitchen requirements during non-peak hours and other similar space and service optimisation. This strategy will enhance customer engagement and brand loyalty, while increasing real estate revenue per square foot.

Partnering with branded restaurants: Hoteliers should reimagine F&B by leasing spaces to standalone marquee restaurant brands on a revenue-share model which can be beneficial for both the parties. Restaurants can benefit from the hotel’s captive clientele, location benefits and brand image, while hotels get an opportunity to elevate customer experience by becoming a ‘destination’ for both hotel guests and locals, resulting in higher F&B revenues and profitability.

Evaluating hotel-branded residences: Branded residences, still a niche concept in India, are another opportunity that hospitality players should seriously consider in the post-Covid-19 era to diversify their risks and revenue streams. By leveraging its brand through affiliation, the hotel operator can’t only receive royalty/ licensing fees, but diversify income streams by providing end-to-end property management and a full range of services such as concierge services, housekeeping, laundry, maintenance and F&B services. This is a lucrative model as hotel operators get to leverage their brand equity towards premium housing projects and earn not only from royalty licensing and services provided but from the commission earned from the sale of each home.

Tapping into popularity of alternative accommodation: Traveller preferences have changed considerably since the onset of the pandemic, resulting in a growing preference for vacation home rentals and homestays as alternatives to hotels and resorts among several domestic travellers. These segments provide travellers the best of both worlds – privacy, security, flexibility, and convenience of a private lodging combined with the pleasures and comfort of a hotel, especially for those traveling in small groups or with families and pets. Although no formal statistics is available, our estimates suggest that the occupancy for the vacation rental business has grown by 40-50 per cent from the pre-pandemic average. However, these segments are still highly unorganised with the presence of few branded hospitality players, especially in the luxury segment. As a result, new players are likely to enter these segments with lucrative investment models, particularly for expansion in underserved leisure destinations, due to lower overhead costs and higher profitability than a hotel. IHCL, for instance, has introduced the brand amã Stays & Trails to foray into the country’s fast-growing homestays market. Similarly, leading international hotel companies have already diversified into the vacation rental space globally and it is only a matter of time before they do so in India as well.

The remarkable recovery of the Indian hotel sector in recent months has been encouraging, but there is growing concern that the new variant, Omicron, could cause the global travel and hospitality sectors to have a difficult start to 2022. Therefore, it is critical that hoteliers persist to adapt and innovate and take advantage of the opportunities available to them, as Covid-19 waves continue to rock the boat of recovery.

This article was published in BW hotelier issue dated '' with cover story titled 'INVESTMENT SPECIAL ISSUE VOL 7, ISSUE 6'

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