India’s hotel supply: too little, too slow

INDIA – India added 14,000 rooms last year, the highest in any year, but that’s a drop in the bucket compared to its massive population and growing middle class. Accor Group Chairman and CEO Sébastien Bazin believes India should build multiple times more rooms to keep up with future demand.

Having overtaken China as the world’s most populous country last year, India’s hotel keys per capita is indeed infinitesimal, even when another 67,000 rooms in the pipeline open by 2027. The inventory then will cross 250,000 rooms in 2,550 hotels, from 183,000 rooms in 2023, Horwath HTL India projects.

China, with about the same population as India at 1.4 billion people, added 107,500 rooms in 2023 alone, and pipeline at end-2023 stood at 3,800 hotels with 690,000 rooms, according to Lodging Econometrics.

Like China, India’s hotel industry is fueled by a huge domestic market comprising more than two billion trips in pre-pandemic 2019. The driver is India’s fastest-growing segment, the middle class, which is now 30% of the population, according to People Research on India’s Consumer Economy. The think-tank said that by 2047, when India marks 100 years of nationhood, its population will be 1.7 billion and of this, one billion people will be middle class.

That’s the kind of math that has Bazin all shook up. Speaking recently at South Asia hotel investment forum organized by Hotelivate, he minced no words in cajoling owners to be more ambitious in building hotels in India as they will be benefit from the great demand to come.

Accor CEO Sébastien Bazin

Hospitality is “super easy” to predict and to participate in, Bazin said. Its success is linked to mainly two things, demographics and the emerging middle class. He showed how America’s success in getting cash flowing from standardized, affordable hotels was replicated in Europe, China and now it’s India’s turn to seize the moment. He acknowledged that it might be more complex in India, referring to long-standing issues such as scarcity and the high cost of land, or that wealth in secondary and tertiary cities are in the hands of different families. But he believes the complexities could be overcome.

“Those cities exist, the money exists, and you know what, the airlines exist now because they have opened hubs,” Bazin said.

It puzzles him that the top five Indian hotel companies combined have fewer than 1,000 hotels, while the top five leaders in China have more than 25,000 hotels, he said.

“I met with owners last night. Everybody is super pleased – oh, I’m going to do five hotels; I’m going to do two hotels; we’re going to do 31 hotels. That is nonsense,” Bazin said. “Accor alone in France, which is a tiny place, has 2,000 hotels for [a population of] 70 million people. And people are telling me we’re going to be great doubling from 100 to 200?”

Bazin went on to question whether India could go from 1,000 hotels to 15,000 hotels without waiting 15 years? “Demand is there in the emerging middle class... They need affordable housing, they need to discover their own country, they also need to go international,” he said.

Bazin added that developers in India may not need Accor or Marriott, by the way. “You may decide to do it on your own. I guarantee the Chinese will do it on their own; it’s only a matter of 20 years when they will control 80% of the market [just like] the Americans control 90% of their own market,” Bazin said.

Bazin’s rousing speech came as India’s hotel sector is enjoying, as Horwath said, “an Amrit Kaal” or “an era of elixir” with another record year in 2023. All-India occupancy was 64%, on par with 2019’s 65%, which was the highest since the 2007/2008 global financial crisis. ADR was INR7,500 [$90] with luxury hotels in eight markets enjoying five-digit ADRs, Horwath said.

It follows then that this may be the era that makes Indian owners less “shy” about investing, kickstarting the faster growth that Bazin believes India deserves.

Indian owners and operators contacted by Hotel Investment Today think so, too. As Ashish Jakhanwala, managing director and CEO of SAMHI Hotels, an investment and development firm, said, “Consistent good performance will attract investment and provide growth.”

It’s happening

Puneet Chhatwal, managing director and CEO of Indian Hotels Co. Ltd., said of its 201 operating hotels in India, 89 were added just in the last six years. Its pipeline of 90-plus hotels means it will open at least 25 hotels each year for the next few years.

Indian Hotel Co. Ltd. CEO Puneet Chhatwal

The top five hotel companies in India by number of operating hotels continue to be Indian brands. Only two international chains are this set, he added.

Chhatwal also cited a recent JLL report that shows greenfield projects totaled 13,700 keys in 2023, versus 8,000 keys in 2022, saying this reflects developers’ confidence in the long-term potential of the sector.

“Hotel construction in India is led by developers more than institutional capital,” Chhatwal said. “The developers understand the nuances of the market and its heterogenous nature and are primarily seeking value creation, therefore are led by returns more than brands.

“There are competing uses across varying real estate formats for AAA locations, including commercial, residential, retail and entertainment, healthcare, education and hospitality. Therefore, developers seek skin in the game – participation in investment from brands, reflecting their commitment to build hotels which are comparatively seen as a riskier asset class, given the absence of cashflow generation during construction. The sooner the brands recognize and respond to these needs, their journey of building scale in India will accelerate.”

SAMHI’s Jakhanwala said the issue isn’t a lack of ambition, or complex development, or else there wouldn’t be a build-up of office market as seen in India today. “Cost of capital continues to be very high in India. So, the commensurate return expectations can make hotel investment a difficult decision,” he said.

Nandivardhan Jain, founder and CEO of Noesis Capital Advisors, urges policymakers to reduce an arduous hotel development cycle that often spans 36 to 48 months. “This prolonged timeline, stemming from factors like land acquisition, regulatory approvals and financial closures must be streamlined to within 24 months.”

This prolonged timeline, stemming from factors like land acquisition, regulatory approvals and financial closures must be streamlined to within 24 months.

Nandivardhan Jain

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Additionally, he said, authorities could catalyze a wave of investment in the industry with measures such as putting hotels under the infrastructure umbrella instead of commercial real estate.

With companies like Noesis anticipating a “fivefold increase in demand” in the coming years, supply will always play catch up unless these issues are overcome.

Jesper Palmqvist, STR’s senior director APAC, agrees with Jain. “Supply is not where it should be, but you’re [India] held back by the structural limitations mentioned. I don’t disagree with Bazin, but India is at the start of being a hotel development nation – where China was 25 years ago but with different reasons, trajectories and history. It’s moving and is better than five to 10 years ago, but some things just can’t be switched overnight.”

Be original

All the big global chains are loving India, but being asset light, most are unlikely able to put real skin in the game. Hyatt Hotels Corp. claims it is the only major international brand company that has put a significant investment in assets in India. In February, Juniper Hotels, a joint venture between a Hyatt subsidiary and India’s Saraf family, established in 1998, went public.

When asked how global companies could show more love and help accelerate the development pace, SAMHI’s Jakhanwala said, “Financial alignment with owners is always helpful, whether it’s co-investment or through other forms. But even more important is recognizing that India no longer needs an ‘adapted Western strategy.’ It demands an original script, both in product and operating model.

Jakhanwala said data shows a large proportion of new supply in leisure and secondary cities. “Large cities do not have a sizable new supply pipeline,” he said. “Conversion is clearly the way [for globals] to grow but often these chains are constrained by self-imposed brand standards.

“Pace of new construction is definitely slow – great for investors/owners but perhaps not so much for operators.”