Introduction: Numbers! They have an intriguing way of making people create opinion, it has often been said that numbers don't lie;

What can be minced in words becomes bare in numbers, while quantifying the past is clearly important, if one would like to assess how it may have shaped the present or will impact the future, it is very important to note that it's not just the numbers that tell you the facts. It's the story behind these numbers that really matters.

HVS India has been tracking the performance of the Indian Hotel Sector since the mid nineteen nineties. We have therefore collated a substantial amount of data regarding the average rates, occupancies and supply-demand dynamics over the past eighteen years. While we have presented this information as part of our annual Trends & Opportunities report for several years now, it may help to scrutinize the story behind these numbers and analyze some of the key take-aways that present themselves to us.

Years 1996/97 to 2001/02: The Down-Cycle

Those familiar with the very nature of the hotel sector are also aware of the fact that this business is cyclical. The hotel sector went through a rough patch from the late nineties to the early two thousands. It was the early stages of supply growth and as India began to find its feet in it's recently privatization focused and open economy format, development of hotels across the major cities started to take place at a steady pace.

Moreover, the Pokharan Nuclear tests led to sanctions against India and the Kargil war also caused a decline in the overall sentiment. As randed/organized supply grew from about 18,000 rooms in 1996/97 to 26,000 rooms by 2001/02, nationwide occupancy declined from 63% to the mid fifties during this period.

The 9/11 attacks in the United States acted as the final nail in the coffin and these six years ended at a dismal nationwide occupancy of 51.6%. A year on year 7% increase in supply translated to a 1% decline in ARR and a 4% decline in occupancy on a CAGR basis.

• The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes was negative. What this means is that increase in branded hotel inventory had a negative impact on nationwide occupancies and average rates on a compounded basis during this six year period; as supply pressure had clearly outpaced demand growth, even though absolute demand (occupied room-nights per day) did grow by 3% CAGR. The outcome in terms of hotel performances could be qualified as a down-cycle!

FIGURE 1: YEARS 1996/97 TO 2001/02: THE DOWN-CYCLE

Years 2002/03 to 2007/08: The Up-Cycle

Two significant global events took place in fiscal year 2003. The SARS epidemic hit China in November 2002 and outbound travel to Southeast Asia as well as China declined for the next couple of years. America declared war on Iraq in March 2003 and the entire Middle East felt the pressure of reduced travel as well.

Indians, who travelled to these two destinations for leisure started to look inwards and for the first time we saw a notable increase in domestic travel as a result. This fueled room-night demand across destinations. (This trend has only grown with time and in fact, the hotel sector owes a debt of gratitude to the domestic traveler today).

This was also the period where India's economy saw strong year on year growth as is evident in the growth of the country's real GDP from 2002/03 to 2007/08 being north of 8% on an average. In fact the last three years in this cycle saw more than 9% growth in year on year GDP numbers.

Earlier, the Vajpayee led NDA government had focused on infrastructure during its tenure and subsequently, various national and state highway projects took shape in this period. Keeping pace with the larger economy's growth focus, India's branded hotel inventory touched almost 47,000 rooms by 2007/08.

The fact that inventory grew at a CAGR of 12% and occupancies rose by 4% while ARRs averaged 20% growth on a CAGR basis from 2002/03 to 2007/08 are all testaments to the glory years of the hotel sector in the mid two thousands.

• The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes was positive. What this means is that increase in branded hotel inventory had a positive impact on nationwide occupancies and average rates on a compounded basis during this six year period. Absolute demand (occupied room-nights per day) also grew by 16% CAGR. This was clearly an up-cycle.

FIGURE 2: YEARS 2002/03 TO 2007/08: THE UP-CYCLE

Years 2008/09 to 2013/14: The Down-Cycle

Lehman Brothers filed for Chapter 11 Bankruptcy in the United States on September 15th 2008. The most audacious and horrifying terrorist attacks in the history of India took place in Mumbai on November 26th 2008. Not only did they jolt the country at large, these attacks hit the hotel sector with all their might by attacking two iconic hotels in the country's financial capital. 2008/09 is one of only two years in the last 18 (the other being 2001/02) where the actual demand for room-nights (RPDs) declined over their previous year. Clearly, this cycle started on a poor note.

Additionally, the euphoria of 2005 to 2008 had led to various hotel projects being announced across the length and breadth of our nation and supply began to exert pressure on markets across India starting 2009/10. In fact, new branded supply has grown at an average of 17% from 2008/09 to 2013/14.

The previous momentum of year on year growth in room-night demand did not diminish though as it grew at an average of over 16% for the same period. However, this came at the cost of average rates declining at a CAGR of 6% during this cycle. Occupancies also went back to the late fifties and we expect 2013/14 to close with a nationwide occupancy of about 57%.

• The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes was negative. What this means is that increase in branded hotel inventory had a negative impact on nationwide occupancies and average rates on a compounded basis during this six year period, in spite an absolute demand growth (occupied room-nights per day) of 16% CAGR. Overall, this has been another down-cycle.

FIGURE 3: YEARS 2008/09 TO 2013/14: THE DOWN-CYCLE

Years 2014/15 to 2019/20: What's next?

So what does the next cycle hold in store for our sector, and is it even fair to assume that the next cycle is around the corner? While there are a few known parameters that can be quantified, there are also some key learnings from the previous cycles that one can draw from in making assumptions for the future.

The base of existing branded supply has grown from about 18,000 rooms in 1996 to about 108,000 rooms in 2013/14. HVS has collated data that forecasts a 13% growth of branded supply in 2014/15, a 10% growth in 15/16 and a 6% growth in 16/17. A bulk of what was planned during the middle of the past decade has thus either already entered the markets or is close to opening in the next twelve to eighteen months.

Developers and lenders are both wary of the sector, thanks to the hangover effect of the last few years. NPAs and CDRs are the new TLAs (Three Letter Acronyms) in town. (As an additional note, we would like to highlight that lenders - public and private sector alike - need to also read this article and understand the cyclical nature of this business.

Rather than fearing this sector, they should pay heed to the fact that they need to continue lending during the down cycles and be careful in avoiding situations where borrowers may end up over-leveraging their projects during the up-cycles.)

Based on the various reasons discussed above, we have assumed the nationwide supply to grow further by only 5, 6 and 7% in 17/18, 18/19 and 19/20 respectively. Resultantly, we expect branded supply to grow at CAGR 9% over the next six years. Demand, however, has continued to grow in the double digits for the past decade and in fact grew on an average of 13.8% year on year in the two previous cycles (twelve year average).

We are of the view that demand will continue to grow at a similar pace over the next six years and have assumed an average of 13.5% growth in room-night demand (RPDs) for this period. We also believe that as branded supply continues to get absorbed and demand continues to grow in the double digits over the next six years, while ARRs may not see the 15% to 20% growths as were witnessed in the previous up-cycle, but they will likely grow by at least 10% CAGR over the next six years, most of it in the latter half of the cycle.

The country stands on the brink of elections and our view is that while the prospective outcome is open to debate; it would not be entirely absurd to assume that the Modi led NDA alliance stands a fair chance of securing the mandate. It is also our view that while changes in policy may take time to get implemented, changes in perception happen fairly quickly.

The hotel sector may well be one of the first to get impacted when things go sour, but it is also typically one of the first to enjoy the benefits of change in investor and/or consumer sentiment. A stable government in the centre would likely mean an improvement in our medium to long term real GDP growth rates.

While the next twelve to eighteen months will continue to see the last leg of supply pressure, we are of the view that India's hotel sector will soon be welcoming it's next up-cycle!

• The key take away here is that the correlation between supply growth and both ARR as well as occupancy changes will likely be positive. This coupled with the overall sentiment that we believe will change for the better, means that any increase in branded hotel inventory will have a positive impact on nationwide occupancies and average rates on a compounded basis during the next six years. The next up-cycle is no more than twelve to eighteen months away!

FIGURE 4: YEARS 2014/15 TO 2019/20: WHAT'S NEXT?

In conclusion, we agree that there is no one ‘India market' and the various cities and micro-markets therein may well have different outcomes over the next few years. We also agree that the numbers will indeed speak for themselves in the months and year ahead. However, as the data being discussed looks at India holistically, we believe that the story behind these numbers is indicative of a strong and much awaited rebound for the hotel sector.

About the Author

Achin Khanna is the Managing Director of the Consulting & Valuation practice at HVS South Asia. Over the past six plus years at HVS, he has directed a large number of assignments, performed economic feasibility analyses and large scale portfolio valuations ranging from limited-service properties to upscale and luxury hotels, successfully conducted operator searches and participated in management contract negotiations. He has extensive experience in conducting hotel valuations, both in India and internationally. Additionally, Achin spearheads the Transaction Advisory services in South Asia. As a part of this vertical, he specializes in undertaking exclusive buy/sell mandates for hospitality/mixed-use assets. His clients include public & private sector banks, private equity firms, real estate developers, hotel companies, state agencies and management companies. Achin holds a Bachelors of Science degree in Hospitality Management from Widener University, Chester, PA and a Masters in Business Administration degree from The University of Phoenix, Arizona, USA.

akhanna@hvs.com

About HVS
HVS is the world's leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries.  Established in 1980, the company performs 4500+ assignments each year for hotel and real estate owners, operators, and developers worldwide.  HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 30 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. www.hvs.com

HVS INDIA, established in 1997, conducts assignments within India and the Indian sub-continent for leading hotel companies, banks, and hotel development and investment groups. With Indian hotel development still a strong investment, our firm is on the valuation panel of several domestic private and public banks. Services offered are: HVS India plays host to the annual Hotel Investment Conference - South Asia (HICSA), the leading hotel investment conference in the South Asian region.

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