Sunder Advani, Chairman & MD – Advani Hotels & Resorts (India) and Vice Chairman – World Travel & Tourism Council (II) outlines some key measures needed to better harness the potential of the hotel industry and boost tourism numbers.
A new entrant in the hospitality industry, planning to set up a hotel, faces many challenges before he can obtain a long-term loan of even 50% of the project cost. He has to show that he has someone who can manage his hotel and that the project is viable. In order to be economically viable, especially in India where land costs account for a high proportion of the hotel project cost, a hotel needs to be of a minimum size. In the U.S., a hotel below 150 rooms is not normally a viable project even though interest rates are about 5% and the loans are repayable in over 20 years. If one builds a mid-segment hotel of at least 150 room, it would cost about INR 75-150 crores without the cost of land.
A new entrepreneur, without having land, would need to secure the land before he approaches financial institutions for a loan. He would like to know if and to what extent he would receive a loan for his project.
Unfortunately, financial institutions do not commit to loans until a full feasibility report is presented including approval of the project by the Department of Tourism. The Department of Tourism will not approve any hotel project unless the promoter not only shows he has ownership or lease of the site and if the promoter has obtained various clearances including CRZ, Municipal approvals etc. Hence, the promoter will have to make a sizeable investment before he knows if he will obtain any financial help. Hence this avenue of attracting new entrants will fail unless some changes such as single window clearance etc. are initiated by the Government.
The other source for expanding room capacity are existing hoteliers. Many of these have expanded and have debts which they are unable to service. Since the hotel industry has a long gestation period and based on the poor performance of the industry in the last several years when there was a large supply of new rooms, investors have shied away from creating more capacity. In our industry, there was a supply glut of rooms from 2006-07 when supply of rooms was growing must faster than the increase in demand. As a result, the average occupancy of hotels in India declined from its peak of 71.5% in 2005-06 to 59.3% in 2011-12. Average occupancy has started to increase and has touched 65.6% in 2016-17.
The average room rate, which is the other measure of viability, has been constantly declining from 2007-08, when it was INR 7989, to INR 5527 in 2015-16. The combination of these is captured by REVPAR which has constantly declined from 2007-08 when it was INR 5496 and had declined to INR 3275 in 2013-14.
If one examines the average occupancy by Star Category, 3-Star and 5-Star Deluxe hotel have recorded the highest average occupancy of 66.5%. Last year, 2-Star hotels have recorded the worst occupancy of 62.7%.
When one examines the ARR, the growth has been the highest in 4-Star hotels and 3-Star hotels when they were INR 4639 and INR 3265 respectively in comparison to INR 9098 in 5-Star Deluxe hotels.
Although there is no clear definition of mid-market hotels, one can assume it relates to hotels of 3-Star and 4-Star and some in 5-Star category. Some international brands are known as mid-market brands, for e.g. Ramada, Holiday Inn, Sheraton, Doubletree by Hilton, Radisson, Novotel, Courtyard by Marriott, but they are classified as 5-Star hotels in India.
There has been an adverse effect on the hotel industry initially because of demonetization and recently due to GST. Much of the impact is on hotels that have a room rate of over INR 7500 in certain seasons when occupancies are high. We have made representations that a GST rate of 28% is much too high and will lead to foreign tourists avoiding India in favour of competing destinations. Even our domestic tourists and MICE traffic will consider overseas destinations.
The other source for adding to capacity is real estate developers. As the real estate industry is going through a rough period, this source has diminished.
Recently, I have learnt that commercial banks and financial institutions are hesitant to lend to hotels. Unless the government declares hotels as a priority industry, this situation will continue and new entrants with limited investment will not come forward to invest. Moreover, policies have to be announced for at least the next 5 to 10 years so that the potential investor is assured of some return after making the investment.
The repayment time for loans given by lending institutions to hospitality industry has been about 6 years. This will need to be increased to at least 12 years as hotels have a long gestation period, partly because it takes a longer time to build a hotel in India. The time taken to build can be reduced if there is a single window clearance for hotels. The government may also consider offering a lower interest rate to hotels. That portion of revenue earned in foreign exchange (as it amounts to an Export) can be given as a rebate on GST.
Another incentive the government may consider is to share 50% of the cost of feasibility studies undertaken by a promoter before he applies for a loan from a financial institution.
The need to establish title to a site before Tourism Department approval is given can be relaxed. The need to have approval of all authorities before Department of Tourism approves a project can be omitted.
Some of the other measures to improve tourism could be as follows:
- Since we have a short tourism season, efforts should be made to attract nationalities that do not mind coming during the hot summers or rainy monsoon periods.
- Promote Convention Tourism by building Convention centers in Cities close to a beach. viz Mumbai, Goa, Chennai.
- Good guides trained in foreign languages / pre-recorded cassettes available at monuments
- Place emphasis on promoting culture to those countries which are familiar with Moghul history viz UK, Australia, South Africa
- Bollywood is a big attraction but we do not have an easy way of showing it e.g. Universal Studios Tour in Hollywood.
- Concentrate on NRIs in U.S to bring their friends to India