Vivek Nair, vice chairman and MD, Hotel Leela Ventures, say room rates have gone up by 15-20% YoY. Nair informs that the current average room rate in Bangalore stands at Rs 18,000.
According to Nair, room rates in Kerala have zoomed up by 35-40% YoY while rates in Delhi, Mumbai and Kolkata have remained constant as last year.
Sushil Gupta, MD, Asian Hotels says that the current rates are unsustainable and he sees the rates stabilising at USD 200-300.
Gupta further states there is a growth of 10% odd in room rates and the end of the year, it could increase by 20% as compared to last year.
Excerpts from CNBC-TV18's exclusive interview with Sushil Gupta and Vivek Nair:
Confirm for us, have you actually seen an uptake in room rates in the past few months and by how much?
Gupta: From last year, there is a growth of almost 10% odd. But I think by the end of the year it could be about 20% compared to last year.
Specifically, have you notched up room rates a little bit in the last 1-1.5 months?
Gupta: No, not really. In Delhi and Mumbai, it is a rather low season. I don't know about Bangalore but in Delhi, Mumbai, Kolkata, where we have hotels, the rates are almost the same, it hasn't gone up.
What kind of occupancy rates are you operating at now in your properties?
Gupta: As I told you, August is a low season, it is only by the middle of September that the season starts picking up and the occupancy and rates begin picking up. Typically, in summer and monsoons, one does not see any growth.
As regards to room rates, have you seen a genuine uptake in the past months or so and how much have you increased?
Nair: I wouldn't say in the past month or so but compared to the same period last year, it has been increased to about 15-20%. The total revenues have gone up in places like Goa because of the vast number of low cost airlines, which are covering these new destinations. In Kollam, Kerala, there has been an increase of about 35-40% and that too of domestic tourists and that's a very good sign.
What have rates in Bangalore been like; have they also gone up significantly?
Nair: Bangalore has a very unfortunate demand-and-supply mismatch. Current rates are hovering around Rs 18,000. Our hotel, Leela Palace has recorded Rs 19,500. But with the air show, which is coming up in February next year, there is even more clamour for rooms and so there are some hotels under construction. We will actually see them operational only in a year and a half, so the high rates will continue till that time.
Are these sustainable for a country like India to have $400-500 a night kind of tariffs or do you think something will crack?
Nair: Actually if you see it in the international perspective, topnotch hotels like Kempinski, Ritz Carlton, Four Seasons, The Mainland Oriental, Peninsulas, are located in all the top capitals and business centers in the world. All of them average about $600-700. In New York, it can go upto $800 a night. So it all depends on the demand-supply matrix at that particular point of time.
Of course, given our low cost of labour in India, the gross operating profit is as high as 50-68%, which is the figure in our case. But going forward, the good thing would be that the hotels, which are making it well this year, plough in money for new investments. There is a shortage of about 100,000 guest rooms today in the country according to the Ministry of Tourism, Government of India. So these amounts are ploughed back for expansion of existing projects.
Where is it that you see more headroom for prices or room rentals to inch up? Is it purely just a demand-supply imbalance picture at this point?
Gupta: In Bangalore, it is more of an aberration because the room inventory is very low. I don't think these kind of rates would be sustainable; about Rs 18,000-20,000, I don't see that.
In Delhi too, there is a little mismatch but there are more hotels coming up in Gurgaon. There are more properties in Bombay that are coming up but I think we should look at a rate of about $200-253, within that range it will continue to grow. That is the long-term, which I see in the hotel market. The rates will be between $200 and 300 and those are not high rates as such.
By when do you see supply coming in to bridge this gap and sort of cool down the rates a bit?
Gupta: I think in another 1-1.5 years, there are many hotels, which are in the pipeline in Bangalore. In Gurgaon, there are many hotels, which are in the pipeline. But at the same time if you look at the prices, the plots are being auctioned in Delhi and even in Kolkata, those hotels could be viable only with a room rate of about Rs 12,000 ARRs (Average Room Rate).
Aside from these metros and destinations like Goa that you mentioned, are you hearing of demand picking up in other cities as well now?
Nair: There has been an increase across the board. The maximum increase has of course been in the metro cities and resort destinations. But according to the Department of Tourism, this year we saw a 25% increase in foreign tourist arrivals. Of course that includes both business travellers and leisure tourists.
The recent auction notice put up by DDA (Delhi Development Authority) said that the minimum price for land at Dwarka, 10 minutes from the international airport of Delhi would be Rs 110 crore (Rs 1.1 billion) an acre.
If one were to build a hotel of about 300 rooms in a 4 acre plot, the minium price for the land would be Rs 440 crore (Rs 4.4 billion). It is guaranteed to be a failure right from the beginning because it will be impossible for revenues to service that high cost, the debt service coverage ratio would definitely be very low.
What do you see hoteliers doing in this kind of a situation with the kind of land prices, which are ruling in most of the metro locations, good locations atleast, do you see them just milking their existing properties while rates are good, or not actually building infrastructure, which might build the supply-demand gap eventually?
Gupta: The major problem is in a place like Delhi, all the hotel plots are designated by DDA, Delhi Development Authority, and unless they are designated, it is not a hotel plot. What needs to be done is to make more plots available and improve the infrastructure.
I am sure all this imbalance will disappear if you have more plots available. All these high rates are because of the paucity of plots and once there are more sites available, that is the only answer. Fortunately, in places like Bangalore and Hyderabad there are more sites available, so whatever imbalance is there, in few years, one will find that settling down.
But in Delhi, the only answer is to make more plots available; more sites available for making hotels and then these high prices will automatically come down, that is the only way I look at it.
While that happens, do you expect to see a significant uptake in margins for companies like yours every quarter?
Gupta: Yes, for sometime definitely, I think for another one or two years, there could be a growth in rates. Then I think the market will settle down, maximum after two years it should settle down and reach a normal situation where the growth rate may be 10% every year, or like that. But for two years there will be some imbalance.
Do you expect this to be the best year in the last 10 years for you at Hotel Leela?
Nair: I would think so, but I would concentrate on new facets of tourism, which have not come to India so far. For example convention tourism, it is the fastest growing segment of tourism in the world and it's a shame to say that we don't have any convention halls by the name in India. So the recently opened convention center in Hyderabad by the MR Group from Dubai is the only facility, but that can accommodate only upto 4,500 people.
I was recently in Hong Kong; they are hosting 12,000 delegates for the IMS Board of Governors meeting taking place next week. When can our country look forward to do something like that? The other fast growing segment is the golf segment, we have of late a few good championship golf courses, but that's the segment we have totally ignored. These two segments if properly nurtured, could bring in affluent upmarket tourists to India.
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