INDUSTRY: HOSPITALITY AND TOURISM (2007-08)

Overview of the Hospitality industry in India

With its beginning in the early 90’s, the hospitality industry in India has a huge potential
to grow as the country has a rich heritage together with enormous business
opportunities that attract a large number of leisure travellers and foreign businesses.
India is firmly cementing its position as one of the leading stars in the hospitality
industry. With a 13% growth in the number of international visitors in 2006, and a rapidly
expanding domestic market, India is looking good on both fronts. A strong economy
boosted by continued inward investment, plus increased demand for business and
health travel all point to a golden future for this giant powerhouse.

Industry Structure:

The hospitality industry can be classified on the basis of the service to the service
clientele into:
ƒ The Premium segment (5 star deluxe and 5 star), catering mainly to the business
and upmarket leisure clientele.
ƒ Mid-market segment (3 and 4 star hotels), catering to a mix of leisure & business
travellers.
ƒ Budget segment (2 star and below), catering mainly to the low budget leisure
travellers.

Demand Drivers

The travelling classes

The India economy is on a high. Gross Domestic Product (GDP) is expected to grow at
8-9% over the next five years driven by inward investment. Many companies continue to
take advantage of the low operating costs in India and the quality of the local workforce
choosing to relocate their operations there.
A strong economy means more disposable income and increasing affluence for India’s
middle classes. India has a population of just over 1 billion, of which just under a third is
middle class. This figure is expected to hit 400m by 2010, overtaking the total
population of the US – and given the current economic growth this trend is likely to
continue.

Low-cost pioneers

The growth of India’s middle classes has spurred the development of low-cost airlines
and has naturally helped boost domestic travel across the country by making it more
affordable.

The first no frills carrier to hit the skies was Air Deccan in May 2003 and since then
operators have entered the market at a rapid pace. During 2005 alone - Go Air,
Paramount Airways and SpiceJet launched services and this shows no sign of slowing
down. IndiGo took to the skies in August 2006 and Omega Air, Magic Air, East West,
Indus, Premier Star Air and MDLR airlines are also all gearing up to make their debut
flights.

More reasons to visit

India’s Department of Tourism continues to promote the country through its ‘Incredible
India’ campaign, while gradually shifting the development of tourism from primary cities
to secondary locations. For example, Goa has seen a significant increase of luxury
resorts and is now a popular destination for the growing wellbeing travel market.
Although holiday travel now dominates the picture, increasing business demand, plus
India’s status as a hub for IT and commerce, is pushing up its share of the corporate
travel market. India is also developing the well-being and medical care market, with the
government introducing a ‘medical visa’ for foreigners seeking long-term treatment.

Shortage of supply

The growth of India’s most major chains such as Hyatt, Hilton, Starwood and Marriott
are all expanding across India. Most international brands have been focusing on the
upscale segment of the market especially in major cities or resort destinations.
However, attention is now being given to fill the gap in the mid-market and budget
sector. Accor will start to roll out its Ibis brand in Bangalore, Delhi, Jaipur, Pune,
Chennai and Mumbai in 2007. Marriott has launched the Courtyard brand with its hotel
at Chennai earlier this year, and at least four more properties will open in the next two
years. In addition, easyHotel has plans to open eight hotels in India by 2009.
Amongst the Indian chains, Taj has launched seven Ginger Hotels (formerly, IndiOne)
across India. Sarovar launched Hometel in Bangalore in February 2006 and is planning
to introduce this new brand in Gurgaon, Hyderabad, Jaipur, Mumbai, Pune and Baddi;
and Lemon Tree has launched two hotels in Gurgaon, and one more is planned in
Chennai.
Despite the increase in supply, India still faces a shortage in accommodation. Across
India the supply growth has been held back due to the difficulty of acquiring sites for
new hotels. That said it is estimated that 35,000-40,000 new rooms are currently
planned. However with hotel demand expected to grow at 18% annually for the next few
years, major cities will continue to suffer supply shortages. Several cities, including
Delhi, the host city for the 2010 Commonwealth Games, are now gearing up to meet
increased demand with announcements of new hotels being made almost on a weekly
basis.

Past performance

With strong domestic and international demand, it is no surprise that the hospitality
industry is flourishing. Hospitality majors in the country have witnessed a confidence-
boosting increase, both in occupancy and average room rates (ARRs), for the third year
in a row. The industry, which saw a 12-month growth of 23.7 per cent in average rate
during 2005-06, continued to grow at a similar pace, as opposed to the 20.7 per cent
growth of the previous year 2004-05. The all-India occupancy level was at 70.8% and
many cities were completely sold out on a number of weekday nights, resulting in hotels
hiking their rates sharply. The largest increases were seen in the luxury segment,
followed by the mid-market and budget segments.

According to hospitality consulting and appraisal firm HVS International, hotels in cities
like Delhi, Hyderabad and Jaipur were able to charge higher tariffs because of the
demand-supply imbalance. Hotels across all categories also witnessed an improved
foreign-domestic guest ratio. Therefore, despite a stronger rupee, the growth in average
rate in dollar terms was higher across all categories.

Hyderabad replaced Bangalore as the fastest growing average rate market, registering
a growth rate of 36.7 per cent, an important achievement, considering the city was the
weakest in terms of average rate ten years ago. Goa and Kolkata together saw the
highest growth in occupancies, followed by Chennai and Hyderabad. The occupancy
levels for Hyderabad (83.1 per cent) and Delhi (81.7 per cent) are those unmatched for
nearly ten years. Bangalore, however, saw a marginal decline, with an occupancy level
of 79.6 per cent. Chennai, Kolkata and Mumbai achieved 78.3 per cent, 76.4 per cent
and 75.3 per cent occupancy levels respectively.
But capacity addition is being planned and according to industry estimates, the potential
new room supply has already touched 48,500 new rooms. This does not include Pune,
which alone has at least 25 hotels under development. Also, about 4,600 rooms will
enter this market in the next five years. The biggest growth in the proposed supply of
new hotel rooms is being seen in the two IT cities of Bangalore and Hyderabad.
However, HVS believes an acute shortage of rooms will persist in these five or six major
markets, at least for the next four years, and will result in huge levels of un-
accommodated demand.

Future Outlook

Indian luxury hotel operators and foreign chains are rushing to expand in the budget
segment, where demand from domestic business and leisure travelers is soaring, but
the rising cost of land could be a major concern. A shortage of hotel rooms in India,
whose booming economy draws in hordes of business travelers every day, has driven
room rates sharply higher.

Most luxury hotels in Mumbai, New Delhi and Bangalore are booked till mid-2007, with
rates at Bangalore's Leela Kempinski and the Hotel Imperial in New Delhi hitting $280-
$290 a night, nearly three times the average room rate in the United States. In the
absence of motels, that presents an opportunity for mid-priced hotels in a segment
crowded with local family-owned, standalone hotels.

"There is a clear absence of a branded product in this segment. This category has so
far been very unorganised, so we see tremendous potential " said Uday Narain (Chief
Operating Officer of Roots Corp., which operates Indian Hotels Co Ltd's mid-priced
chain, Ginger) who estimates that growth in this segment would be about 40 per cent a
year over the next two to three years.
"The budget hotel model, with no frills and low overheads, is absolutely suited for India.
We are going to see an addition of just as many economy rooms as luxury rooms, if not
more, over the next three to five years," said Siddharth Thaker of consultancy HVS
International in India.

An estimated 100 economy hotels are being planned in India over the next three to five
years by firms including leader Indian Hotels, as well as Accor, Marriott International,
Intercontinental Hotels, Starwood Hotels, Hilton Hotels and Shangri-La. HVS expects
another 100,000 to 125,000 hotel rooms will be added in the next five to seven years,
with average room rates rising by 20-25 percent over the next two or three years. Indian
tourism demand will grow at 8.8 per cent over the next 10 years, fuelled by higher
incomes and lower air fares, recent estimates of the World Travel & Tourism Council
show.

Service Apartments

The concept of service apartments is still relatively new in India, but given the new job
market dynamics, higher disposable incomes and increasingly harassed lifestyles, it
won’t be long before it becomes commonplace. Whether you are on a training
programme, a two-year contract, or simply visiting friends in a new city, you are likely to
use these readymade luxury flats rather than a hotel.

The concept of service apartments, though a recent phenomenon in India, is an

established global concept. Villas in Spain, flats in the UK, apartment complexes in the
US, have all created a vibrant and viable market for those wanting more than just a
room in a hotel. Service apartments fulfil the needs of individuals and organisations
(corporate and entrepreneurs) for a convenient and cost-effective alternative to ordinary
accommodation options. Service apartments are a part of the ‘extended-stay’ sector,
still a relatively unexplored concept in India. Basically an offshoot of the inn and
hospitality industry, apartment hotels or aparthotels are now a way of life abroad. In
1974, the US-based Marriott chain launched the concept as a large-scale commercial
enterprise with its first Residence Inn. The Lakeside Chalet by the Powai Lake in
Mumbai is a Marriott property. A complex of 179 one- and two-bedroom luxury
apartments, it’s the only aparthotel of its size and scale in India.

Options for Long Staying Guests

There are three kinds of extended stay facilities now available.

First are hotel suites, offered by most five-star hotels. These come with living room and
workspace, in addition to the standard bedroom. Most long-staying guests or LSGs are
executives of multinational companies. "A special service package is designed for the
LSG in which housekeeping and the chef cater to the tastes of the guest," says Sajid
Mahmood, marketing director, Radisson India.
The second category is the aparthotel, of which there are only a couple in India. "The
whole idea is to offer people a residential-style apartment with hotel-like amenities,
including full kitchen and security," says Rajeev Menon, general manager, Marriott
Executive Apartments, Mumbai, which started operations in June 2000. With the
apartment block in the hotel premises, guests also get a 20 per cent discount on use of
facilities like health spa or business centre.

The third category is the service apartment. These could be a single flat owned by
individuals, a set of two or three used exclusively for this purpose by developers, or
custom-built blocks of service apartments. Usually, there are no public areas like
lounges or restaurants but some operators provide a pool, health club and conference
hall.

Rents for service apartments vary from Rs. 7,000 a month for a small studio apartment
to over Rs. 1 lac a month for a plush three-bedroom pad. "A person can walk into an
apartment with nothing but the clothes he is wearing," says Jaideep Ahuja, who owns
and operates several three-bedroom service apartments in Delhi’s Defence Colony.
Everything required for daily living is provided for or made available on demand.

What Are Service Apartments

“It is best described as a suite with all the comforts of home including kitchen and
laundry facilities. In addition, an apartment hotel offers all the luxuries and amenities
that an exclusive hotel provides i.e. 24 hours room service, high speed internet access,
gymnasium, pool etc,” says Rajiv Menon, general manager, Marriott Lakeside Chalet,
Marriott Executive Apartments.

Another way to describe them are as fully furnished apartments of various

configurations i.e. studio/one bedroom/ two bedroom etc, normally equipped with either
a partially or a fully equipped kitchen. They also offer on-site management and in many
cases a host of additional facilities such as a recreation centre, convenience store,
coffee/snack bar, business centre etc.

Service apartments can be classified according to how they are housed. These could
be:
ƒ Stand-alone - Developments that are exclusively built for the purpose of being let
out as service apartments. Very similar to private residential developments.
ƒ Mixed Use - Apartments that are part of a larger development which could
comprise of commercial and retail spaces.
ƒ Hotel - Service apartments which are a component of a larger hotel development.
They could be housed on separate floors or wings.
Types

The market has evolved over the last several years to cater to the needs of each user
type. This has led to their classification into three distinct segments:
ƒ Budget
ƒ First class
ƒ Luxury

Facilities Provided in different apartment categories:

Budget First Class Luxury
Weekly housekeeping Bi-weekly Daily housekeeping
Coffee makers housekeeping Coffee makers
Irons Coffee makers Washing machine
Refrigerators Laundromat Dryers
TV Irons Irons
Microwave Mini kitchenette Full kitchen
Safe deposit lockers TV TV
Safes Music system
Snack / coffee bar Internet connectivity
Gym Safes
Business services On site restaurant
DVD Players Room service
Business centre
Health club
Gym
Recreation centre
Crèche

Features

Homely - First, everything is done to ensure that the flat has a homely look and feel.
Amit and Pavit Kohli of Enkay Condominiums have ensured that each of their 20
apartments is tastefully decorated, and even small essentials like key and magazine
racks are provided.

Privacy - It’s important to ensure that a resident’s privacy is not breached and that
small transgressions or breakages are ignored. When a family with a young child moved
out, the Kohlis found that all the walls were coloured with crayon. "That’s okay. When I
say it’s your house, it is yours. There is little intrusion," says Amit.

Housekeeping - The apartments are cleaned everyday. "Our cleaning staff is never
alone in the apartment. A manager always accompanies them," says Pavit. Towels are
changed and beds made every day, with linen changed once a week. Extra appliances
like colour televisions, ovens or music systems are provided without question. At Ahuja
Residency, every house has an attendant for errands like fetching groceries, posting
letters or even rustling up a quick breakfast. And security is a key concern, with all
homes provided with a safe.

Services Offered - Service apartments offer a range of facilities that guests can benefit
from. Services in the nature of separate living and sleeping areas, a fully equipped
kitchen and work station to mention a few. Most apartment hotels provide facilities
which are at the disposal of the guests living in hotels, such as 24-hour room service, a
multi-cuisine restaurant, 24-hour concierge and security, daily housekeeping, laundry,
dry cleaning services, grocery delivery, fitness centre, swimming pool, internet access,
DVD players with large televisions, functional work stations with access to broadband
connectivity, two telephone lines with IDD and voice messaging facilities, spacious
kitchens equipped with refrigerator, electric cook top and oven, microwave, toaster,
coffee maker, electric kettle, dishwasher and personal washer and dryer, crockery and
basic cooking utensils. Some also have a doctor on call, children’s play area, baby
sitters, and dedicated car parks. In some cases you could even find gift shops, business
centres, preview theatres, banqueting facilities and a whole lot more.

Besides, most apartment hotels are strategically located in the city centre, mainly in the
commercial and financial districts of metropolitan cities. A few hotels also have some
rooms which are designed in the form of apartment hotels, where the guests can avail
of all the facilities within the hotel premises.

Other amenities
ƒ Air-conditioned and furnished flat.
ƒ Attached bath.
ƒ Fully equipped kitchen.
ƒ Colour TV, fridge, washing machine, and locker.
ƒ Telephone connection, Net connectivity.
ƒ 100 per cent power back-up.
ƒ 24-hours security.
ƒ Fire safety.
ƒ Private parking.

Service Apartments versus Hotels

According to Menon, service apartments are designed to meet the needs of the
business executives planning to stay in an urban destination for 15 days or more. Living
for a long period in a five-star hotel can be monotonous. The hotel room, which is
basically four walls, can get claustrophobic whereas an apartment hotel gives you
space with flexibility. The service apartment facility is typically targeted towards the
corporate executives who work at a location distant from home for a long period of time.
Service apartments are particularly popular with business travellers, both mid-level and
senior management level business executives. Other patrons include expatriates, non-
resident Indians visiting the country for long spells, people renovating their homes and
of course foreigners visiting the city for long durations.
Says Sunil Taneja, general manager, Taj Wellington Mews Luxury Residences,
Mumbai, “Consulates are a big segment as they usually have dignitaries living for
protracted periods and they tend to look for more plush and up-market residential
buildings to lease apartments. With hotel chains such as our own foraying into the
service apartment segment, they can now enjoy all the conveniences of a leased
apartment without the logistics of actually leasing one.”

Since apartments are fully equipped with kitchen facilities, one can cook to suit one’s
palate. There are a lot of vegetarian Indians and, for some, there are restrictions such
as no garlic and onion in their food. A service apartment allows guests to live in the
comfort of their homes and habits. Meals can be prepared in fully equipped kitchens in a
service apartment, which is not the case in a hotel.

Prakash Wadia, CEO, Ascot Hotels, says, “A service apartment is more spacious and is
equipped with amenities, which a long-staying guest needs. During our market research
we found executives in India really do not want to cook but would like to fix an
occasional breakfast, heat packaged food, and store food. So we provided a big
refrigerator, microwave and toaster. Further, unlike a hotel, the guest can bring food
from outside and eat it in the room, which not only gives variety, but saves money.”
It is also more cost effective to cook when one is staying in a city for months on end.
Rajeev Chopra, managing director, The Residency Hotels Pvt Ltd, points out, “Self
catering is not very popular with Indians as they have cooks to do it for them. Foreigners
and expatriates on the other hand quite appreciate the concept and love to cook their
own meals. I think it’s really about opening up a range of options to cater to a wider
audience.”

Another prime benefit of an apartment is storage space, especially for documents like
mailers, brochures, etc. Feels Chopra, “Service apartments are very convenient and in
fact combine the best elements of a hotel and a home. While all the chores of
maintaining a house are negated, there are the benefits of being service like in a hotel.
It basically gives guests the choice of either doing it themselves or have it done by
someone else.”

Cost Effectiveness

On an average, the difference in price between the hotel and the apartment hotel can
vary as much as 15 to 30 per cent. For a one-bedroom apartment, the difference could
be approximately 15 per cent and, for a two-bedroom apartment, the cost could range
anywhere between 30 to 40 per cent.

The cost of an apartment hotel is approximately 20 per cent less than the cost of staying
at an ordinary double room in a hotel of equivalent standard. For instance, guests
staying at five-star hotels spend anything between Rs1500-Rs.2000 daily on meals
whereas in the apartments the guests have the option of cooking their own meals. One
can also save a bundle on laundry services. On an average, a guest staying at a five-
star hotel pays Rs 400 for his laundry daily. In Marriott Executive Apartments each floor
has a Laundromat, and the rooms are provided with an iron and ironing board. Thus,
the apartment hotels are very economical from a long-term perspective.

The cost saving is therefore not in the average rate of an apartment, it’s the savings of
the incidentals that makes a service apartment more economically viable. Points out
Wadia, “The room rate of a service apartment is equal to the rack rate of a single room
in a five-star hotel. For instance, we are charging Rs 2,000 for guests staying for more
than five months and 2,500 for guests staying between a week and five months.
Compare the other costs and it will tell all. If a laundry charge of a shirt is Rs 75-100 in a
five-star hotel, it will cost Rs 20 in a service apartment, a cup of coffee will cost Rs 20
instead of Rs 120. So it becomes value for money for long-staying guests from all
aspects, not just room rent.”

Entertaining business associates and clients is also an expense corporates need to

incur. If one is looking at a short stay then entertaining doesn’t pose a problem but for
long staying guests, treating clients in five-star hotels is just not viable. In such cases,
an apartment with a well furnished, spacious drawing room can be put to good use. In
fact some hotel chains have even made banqueting provisions to cater to their
expatriate and long staying guests. Wellington Mews of the Taj group has made
provision for a banqueting facility as well. Says K. Mohanchandran, resident manager,
Taj Wellington Mews Luxury Residences, Mumbai, “We have provided for a lounge with
a bar counter that would be able to host 50 to 70 guests at a time. Given that the target
is corporates posted on long projects or consulate employees, we’re obviously looking
at people moving with their families. The banquet area will make for a convenient space
for guests to host parties or conferences within the complex, making it very convenient
for them. Outside of this, if they do have larger requirements, we have three hotels
within the city and two within the same vicinity.”

Overview of the Hospitality Industry in Kolkata

The city is largely a business destination — almost 60-70 per cent of its guests are
corporate travellers, out of which 60 per cent are from within the country. Thus, there is
a limit beyond which ARRs cannot be raised. Due to the high share of domestic
travellers, Kolkata is relatively less volatile when it comes to room demand.

Demand Drivers

IT/ITeS: Sectors such as IT, pharma, leather and biotechnology are the key demand
drivers. While the American and European companies focus on Bangalore and
Hyderabad, Indian companies are expanding in Kolkata. Cost cutting and cost effective
project implementation needs are pushing Indian companies to Kolkata. As Kolkata is a
net exporter of power, the advantage of uninterrupted power supply at highly
competitive rates has enhanced its attractiveness for IT/ITeS companies. Besides, the
development of the new IT hub in Rajarhat/New Town would benefit the hospitality
industry over the medium to long term.
According to the report, "Emerging City Winners Profiles: Kolkata", released by Jones
Lang LaSalle, one of the world's leading real estate services firm, an increasing
corporate presence in the city is also triggering growth for Hospitality properties.

Abhishek Kiran Gupta, Senior Manager, Research, Jones Lang LaSalle, India says
"Kolkata is now on the 'global radar' of multi-national companies - a large skilled labour
pool, a pragmatic, business-friendly and stable business environment, active promotion
and incentives, combined with low operating costs and the city's strong cultural heritage
are attracting the attention of both the domestic and international business community.
The city has become a favoured destination for IT/ITES activities, with a rapidly growing
corporate presence. Kolkata now has most of the ingredients in place to move its
economy up the value-chain - its size, skill base and heritage point to a significantly
higher international profile over the long term".

He further added "Hotel demand is being boosted by corporate business and tourism.
The Kolkata real estate market is now on the radar of leading national and international
developers, all keen to participate in Kolkata's increasingly dynamic real estate market".

According to the report, Kolkata, whose economy grew by 8% in 2005, is home to 175
IT and ITeS firms which employ approximately 40,000 people. Stimulated by the growth
of the IT/ITeS sector, hotel room demand in Kolkata is expected to grow at an annual
11.7% over the next five years and supply at 15.4% per year.

Future Outlook

In 2005-06, Kolkata witnessed a decrease of 2.1 occupancy points: from 67.1% in 2004-
05 to 65.0% in 2005-06. Average rates in Kolkata increased by 20.1% from Rs. 2,210 in
2004-05 to Rs. 2,668 in 2005-06. Kolkata is expected to see 12 new hotels, service
apartments and mixed-use developments with approximately 2,000 rooms entering the
market in various categories over the next few years. The key room demand generating
areas of Kolkata traditionally included Dalhousie, Writers Building, Park Street, Central
Kolkata and Port of Haldia. The city has more recently witnessed development in the IT,
ITeS, BPO and financial services sectors, particularly in Salt Lake, which is increasingly
contributing to demand for room nights in the city. Upcoming commercial suburbs
include Salt Lake, Rajarhat, along the EM Bypass, Kolkata West International City,
Dankuni and Kariadanga. Kolkata is also gaining popularity as a MICE destination, with
a large number of conferences currently hosted at Science City.

Developments Envisaged In the City Of Kolkata

Kolkata is the newest of the metro markets to hit boomtime. A progressive government
policy has resolved the issue of securing land tracts for development. Add to it the
growing business interest in the city and you have a heady mix. Taking to this cocktail
are a host of biggies from all parts of the country and local players.
West Bengal’s stagnating economy has hit the growth curve for the last 4-5 years.
Because of land ceiling laws, no entity could own more than 7 cottahs (500 sq metres).
Trammell Crow Meghraj Property Consultants reckons many national and international
players are interested in Kolkata. DLF, Unitech, Salim-Ciputra and Keppel Land have
live projects. Non-Kolkata developers have also bid for the Dankuni township project
and many more from Mumbai, Delhi and South East Asia are scouting for land and/or
project opportunities. Unitech is working on a 100-acre residential project and a 50-acre
IT project. Keppel Land is working on a 25 acre project, while Godrej Properties is in a
joint venture in Salt Lake’s Sector V with Salarpuria (1.6 million sqft).

Several IT infrastructure projects are coming up in the State. The DLF Group is
developing a 1.3-million-square-foot IT Park at Rajarhat. The first phase of the Rs.280-
crore project will be commissioned in June. Soon to be completed are several other
walk-in infrastructure projects such as Infinity (Tower II), Infinity Benchmark, Infinity
Waterside and Technopolis and the Millennium Park.

Indonesia’s Salim Ciputra group is building a 390 acre residential project in Dankuni in
West Howrah and Dankuni township (400 acre residential). Mr Sushil Mohta, MD, Merlin
Projects and VP, Confederation of Real Estate Developers Associations of India, says
national players have begun eyeing the city only recently after the success of the South
City project. The South City project offers 40 lac sq. ft. over a 31 acre plot and also
eastern India’s tallest residential blocks.

Unitech’s Rajarhat residential project has already created quality benchmarks and DLF
and Keppel Land are expected to up base standards up in IT/ITES buildings.

Following developments is foreseen in the city of Kolkata:-

ƒ Development that has happened in the New Town has been incredible. Like all
cities of India, FAR norms and restrictions are also taking their toll on the growth,
which is more horizontal than vertical.

ƒ The zone has a typical mixed-use development plan where commercial,

residential and services are all intermingled to form a neo colonial development.

ƒ The developing authority HIDCO is town planning the entire area very well so
that there is no major arterial confusion left for future.

Source: www.indianexpress.com, www.hotelbenchmark.com