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Incredible (for) India…

Jul 20, 2008

The Incredible India campaign has taken off for the country making the tourism sector witness huge buoyancy in recent times. The marketing strategy has helped India achieve unprecedented growth in terms of both volume and value.

Foreign tourists arrivals to the country have grown at a cumulative annual growth rate of 15.86 percent touching almost 4.2 million in 2007, an increase of 12.4 percent compared to 2006. Foreign exchange earnings from tourism registered a cumulative annual growth rate of 30.97 percent in the same period with figures for 2007 closing at $ 11.956 billion – an impressive spike of 33.8 percent over 2006. Domestic tourism continues to surge, showing more than encouraging trends with tourist visits over 461 million in 2006. By 2010, with the Commonwealth Games to be held in New Delhi, India expects to hosts 10 M tourists.

Everything seems perfect. The problem: lack of rooms.

With a massive shortage of hotel rooms and the highest room rate in Asia, India presents an attractive proposition for new hotels. All over the country, several domestic and global players are rushing to supply much-needed demand for 100,000 new rooms planned for 2010, some 11, 732 sited in Mumbai alone.

As early as 2010, India will have surpassed China in GDP growth expected at more than today’s 14 percent per annum (with 400 million middle class population), including industrial and infrastructure growth of 9-10 percent per annum. In five years, India will confront investment rates of over 9 percent, savings rates of over 12 percent and GDP growth rates of up to 27 percent, said Surjit Bhalla, chairman and managing director, Oxus Investments.

Yasheng Huang, professor Sloan School of Management at MIT said for years, India has defended democracy with a sheepish apology about growth rates being terrible. “That low growth rates are an acceptable price to pay to govern a democracy as large and diverse as India. There is no need to apologize now. India has ended the infamous ‘Hindu rate’ of growth and begun its own economic takeoff – growing at a speed of the ‘East Asian rate’ of 8-9 percent a year – also in terms of depth and breadth.

“But there is no decline in corruption in India. The downside to all progress – the power of the bureaucrats has become less too. We have corruption – but the efficient kind,” Bhalla said, comparing theirs with inefficient corruption in Russia, Vietnam and China.

According to Homi Aibara, partner at Mahajan & Aibara, in 2007, over 130 million square feet got built up while 309 million square feet are still under construction. “Bangalore leads followed by Mumbai, Chennai, Pune, Hyderabad and Calcutta. The compounded growth is expected to be 40 percent over a three-year period,” he said.

India currently undergoes the same cycles as other global market players. Abhijit Beej Das, managing director, India, Molinaro Koger said, “Energy and fuel prices are high. Credit markets in India are tough. Rising inflation in wholesale prices and amortizations are a pain. There are restrictions in foreign debt for hotel projects. There is a huge drop in demand for BPOs or business process outsourcing. Despite the bad news, we have the highest ADRs in the market with Mumbai and Delhi at top position. However, we have the lowest available rooms and very low new supply in CRDs,” said Das adding the sub-prime crisis and the global economic slowdown have not skipped the country. There is also medium-term oversupply in certain markets expected while shortage of labor may affect hotel operators in the short run.

Das looks ahead however to a healthy correction in key markets, land increases will soften in key markets; significant increases in transactions are expected but slower growth may slowdown raw material price hikes. “There are plenty of opportunities including the development of mid-scale assets in tier 2, funded by growth. However, corruption is still out of control and others in Asia are better off,” he added.

Perhaps all the growth in India is going out of whack. “There’s growing appetite for super-luxury hotels – the so-called Rolls Royce high-class society in India are growing at 6 percent. There’s a growing middle class. The super-wealthy class in India is booming. Inflation is thus a concern during times of a shortage of sufficient healthy correction in the market. What’s next?” Das asked.

Foreign direct investments infused surpass a staggering $4.5 billion in India. Vijay Thaker, Horwath HTL, sees businessmen rushing into the hotel sector. He said in India, every businessman needs to have a hospitality asset. Every real estate track needed to be in the hotel sector while rates stand at $150-$180 and occupancies are healthy at 65-70 percent over the years.

Rooms are a big deal. Thaker added, “But rates in occupancy will drop. There is gross undersupply in 8 major cities. Mumbai and Delhi have only 14,000 rooms combined. There’s rapidly growing demand and occupancies current inventories cannot provide. Unfortunately, there is concentration in the 5-star luxury sector,” he said blaming on the side, poor quality and consistency with mid-priced hotels, the international chains pressure to increase supply, predominance of business travels with the leisure market growing slower.

According to Thaker, higher rates have caused occupancies to drop in Bangalore; it is set for further correction in the next 10 years. Hyderabad will see a correction drop in 2008. “Bangalore, Pune and Hyderabad will be sizeably impacted. Five-star hotels will be hit but the correction will be necessary to address demand growth. We’ll witness a sharp rate correction in occupancy,” he said adding, “Real estate developers will change course and may end up dropping some hotel projects.”

On the upside, there will be major opportunities in the 3-4 star categories and budget segments. High land costs do not mean only 5-star hotels will survive. Lesser-stars are viable. Reduced rates will weaken the market. “There will be distressed market situations. Be prepared,” warned the experts from India. “There will be no dull moment.”

Incredible (for) India…

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