Indian hospitality sector: the opportunities ahead
Mandeep S Lamba, President (South Asia), HVS Anarock, shares investment opportunities for Indian hospitality sector
The year 2021 has been a mix of challenges, learnings and successes for the Indian hospitality sector. While the year got off to a good start, thanks to increased domestic leisure travel spurred by a steady decline in active cases and the start of the country’s vaccination program, 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 has been more proactive this time around, managing the hurdles and building on the lessons learned the previous year. At the height of the second wave, some hotels, mostly in malls, partnered with hospitals to provide isolation and quarantine facilities to improve occupancy. Once demand started to rise, 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 attract pet parents.
As a result, India’s hotel sector has recovered faster than expected, with occupancy approaching the 60% mark by October 2021, bolstering the sector’s hopes of a stronger rebound. Growth in domestic leisure travel, significant pent-up demand and the resumption of domestic business travel are all contributing to a strong recovery. Weddings and social events are also driving demand in some markets. This positive travel sentiment, boosted by lesser restrictions between states, fewer Covid-19 cases and a higher vaccination rate in the country, should continue during the remaining part of the year which has always been the best. month due to the start of the holiday season. Additionally, after a nearly two-year hiatus, small and medium-sized domestic MICE events are making a comeback, fueling demand for hotels. We expect the sector to end the year with national occupancy of 46-49%, up 11-14 percentage points from 2020. Meanwhile, RevPAR is expected to reach Rs 2,000-2,300 , helping the sector’s total revenue to reach 50-55. percent of pre-Covid-19 levels.
Performance of the Indian hotel sector in 2021
We expect robust demand to tip the fortunes of the sector, bringing sector performance from October to December 2021 closer to pre-pandemic levels, with a few markets, such as Goa and Chandigarh, even surpassing pre-pandemic performance. pandemic for the quarter.
Hoteliers also continued their expansion plans, signing smaller properties with an increased focus on Tier 3 and Tier 4 cities, leading to an increase in brand openings and signings by properties over the past few years. first nine months of 2021 compared to last year.
Hotel occupancy, which was hit hard in 2020 due to Covid-19 travel restrictions, has been recovering strongly since the third quarter of 2021. Growth in domestic leisure travel, significant pent-up demand, the resumption of business travel in the country, weddings and social events are all contributing to this recovery. Small and medium-sized domestic MICE events are also making a comeback, fueling demand for hotels.
Average rates, which had struggled as hotels tried to increase occupancy, began to improve in all markets over the past two months.
2022 and beyond: upcoming investment opportunities
Among the benefits of the turmoil caused by the pandemic, the Indian hospitality sector has learned to adapt quickly, think outside the box and embrace new ideas faster than ever. As the sector continues to rebound in 2022 and beyond, here are investment opportunities we believe will gain momentum.
After nearly two decades of waiting, we expect occupancy to reach 70% in 2024.
Explore the under-exploited leisure segment: Most of the hotel development in India over the past decade has focused on major business destinations, as business and corporate travelers accounted for a significant portion of hotel demand. Additionally, due to the lack of infrastructure and the seasonality of leisure travel, hoteliers have found this category less profitable. However, with domestic leisure tourism coming to the rescue of the sector in the post-Covid-19 era, hoteliers have once again realized that leisure travel rebounds faster than business travel in times of crisis. crisis. Also, compared to business travelers, vacationers tend to stay longer and use more hotel services. Average hotel rates in leisure destinations are also likely to be higher than in business hotels, making investment more attractive.
In addition, the government has announced significant investments to improve the country’s road and rail network, as well as plans to privatize airports in Tier 2 and Tier 3 cities, which will help improve regional and last-mile connectivity to India’s hitherto unexplored and underserved tourist destinations. . For example, the number of operational airports has increased from 50 in 2000 to 153 in 2020, with plans for another 100 by 2024. The government also plans to develop an additional 8,500 km of national highway which will facilitate road travel in the future. As a result, domestic leisure tourism is getting the attention it deserves, with hotel companies renewing their focus on increasing their presence in leisure destinations. This segment, however, continues to be underserved as there are several nascent tourist spots in India where travelers still struggle to find good quality branded accommodation. As last-mile connectivity to previously unexplored tourist destinations improves, hoteliers now have the opportunity to further tap into this underserved segment.
Unleash ancillary revenue streams: The hospitality sector has lagged behind other travel-related industries when it comes to unlocking ancillary revenue streams by traditionally focusing on additional services such as catering and spas. However, as room revenue has become negligible during the pandemic, the hospitality industry has been forced to find innovative ways to utilize its assets, opening up ancillary revenue streams including food delivery, laundry services, homemade meals, to name a few. Having understood the true potential of ancillary revenue to increase revenue, hoteliers should now take advantage of the vast untapped opportunity by utilizing the existing infrastructure for new business prospects. This could include a space dedicated to coworking spaces, monetization of parking spaces, deployment of electric vehicle charging stations, rental of kitchens for cloud cooking needs during off-peak hours and other optimizations. space and similar services. This strategy will improve customer engagement and brand loyalty, while increasing real estate revenue per square foot.
Partnership with brand restaurants: Hoteliers are expected to reinvent F&B by leasing space to stand-alone marquee restaurant brands on a revenue-sharing model that can benefit both parties. Restaurants can benefit from the hotel’s captive clientele, location and branding advantages, while hotels have the opportunity to enhance the guest experience by becoming a “destination” for guests of the hotel and the inhabitants, which translates into increased revenue and profitability of the restaurant business.
Branded Residences Assessment: Branded Residences, still a niche concept in India, is another opportunity hospitality players should seriously consider in the post-Covid-19 era to diversify their risks and sources of income. By leveraging their brand through affiliation, the hotel operator can not only receive royalties/licensing fees, but diversify their revenue streams by providing end-to-end property management and a full range of services such as concierge, housekeeping, laundry, maintenance and F&B services. This is a lucrative model as hotel operators can leverage their brand image for high-end housing projects and earn not only royalty licenses and services provided, but also the commission charged on the sale of each house.
Leverage the popularity of alternative hosting: Traveler preferences have changed significantly 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 travelers. These segments offer travelers the best of both worlds: the privacy, security, flexibility and convenience of private accommodation combined with the pleasures and comforts of a hotel, especially for those traveling in small groups or with families and pets. Although no official statistics are available, our estimates suggest that vacation rental occupancy has increased by 40-50% from the pre-pandemic average. However, these segments are still poorly organized with the presence of few branded hotel players, particularly in the luxury segment. As a result, new players are likely to enter these segments with lucrative investment models, especially for expansion in underserved leisure destinations, due to lower overhead costs and higher profitability than of a hotel. IHCL, for example, launched the amã Stays & Trails brand to foray into the growing homestay market. Likewise, major international hotel companies have already branched out 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 hospitality sector over the past few months has been encouraging, but there are growing fears that the new variant, Omicron, could cause a difficult start for the global travel and hospitality sectors in 2022. Consequently , it is essential that hoteliers persist in adapting and innovating and taking advantage of the opportunities presented to them, as the waves of Covid-19 continue to rock the boat of recovery.