Post-COVID, hospitality will have to be nimble and visionary, says JLL's new report
Significant flight and hotel cancellations have been witnessed across major markets for both February and March 2020
The year 2020 started on a sombre note for the tourism industry with the spread of the COVID-19, which first emerged on a wide scale in China, before engulfing Asia Pacific first and thereafter spreading to the entire world.
There has been a sharp decline in travel across the region, as many companies have imposed travel restrictions on their employees. This has also led to additional declines in leisure travel across the world. Significant flight and hotel cancellations have been witnessed across major markets for both February and March 2020. If there is no improvement in the current scenario over the next month, this could be a difficult year for tourism in India and globally.
India has a strong domestic base, which we feel would continue to be the key driver of growth in this sector in this year. With the continued emphasis on enhancing affordable air connectivity, development of tourism circuits under government schemes and expansion of hotel and tourism infrastructure, we hope the country will be able to push through various setbacks of the first quarter of the year and drive tourism activity. In 2020, the hotel development pipeline is likely to be impacted.
Real estate developers and investors would prefer to secure cash flows to see off the current global crises triggered by the pandemic.
The focus shifts to Tier-1 cities
Focus on development could again get shifted towards Tier-1 cities, which are fundamentally stronger business driven markets. On the debt side, new hotel development will be impacted as there will be limited lender appetite, particularly in more volatile resort markets.
The hotel transactions market in 2019 was very buoyant and witnessed transactions worth US$ 762
million, clocking in the highest volume of transactions in India yet. This was largely backed by the acquisition of The Leela Hotels luxury hotels portfolio by Brookfield Asset Management and the acquisition of the Keys Hotels portfolio by Lemon Tree Hotels. The deal pipeline in 2020, at about US$ 1 billion worth of tradeable assets, remains strong.
Again, the dynamic situation caused by the fast spread of pandemic coronavirus (COVID-19), global trade tensions, geopolitical dynamics, slowing a global and Indian economy have already impacted
travel and trade volumes severely.
Private equity may look for over-leveraged assets and hotel companies
Furthermore, cracks could emerge from over leveraged assets and hotel companies—sellers who were fence-sitters may fall in the ring. Private equity could remain on the look-out for such value for money opportunities and structured deals. High net worth investors, who have strong balance sheets, will emerge as potential buyers in the medium-to-long term. In a scenario of early containment of COVID-19, we expect a recovery in trading could restart in third quarter of 2020.
Staycations in business hotels and resort holidays
Operationally, resorts that are located within five to six hours driving distance from cities will be the first ones to recover. Demand will be driven by domestic leisure travellers, who might still be hesitant to take flights and rather drive for short breaks over weekends. Business city hotels may receive “staycation” demand from city dwellers.
THE ECONOMY AT A GLANCE
- India’s GDP has grown by 6.1% y-o-y in 2018-19, which was a deceleration from 7% in the previous year.
- The quarterly growth of GDP declined to 4.7% in Q3 FY 2019- 20, brought about by weaker consumption, stress in the financial sector, contraction in manufacturing and exports, and slowing of investments.
- The Consumer Price Inflation (CPI) for December 2019 stood at 7.4%, which is the highest since May 2014 and 5.3pp higher than the same time last year. This rise is primarily due to the soaring food prices, with food inflation reaching 14.1%.
- India received total FDI equity inflows worth US$ 44 billion in FY 2018-19, which is marginally lower than the inflows in the previous year.
- Even with the economic slowdown, India remains one of the favourite investment destinations among emerging economies. The FDI inflows in the real estate sector were US$ 213 million, equivalent to 1% of the overall flow.
- In the near-term, growth in inflows may be subdued due to the economic slowdown and weak consumption levels. In order to achieve the goal of making India a US$ 5 trillion economy by 2024-25, investment activity will need to be more robust.
Tourism potential of India
- The Indian tourism sector has been resilient during a time of economic slowdown with foreign tourist arrivals (FTAs) in 2019 rising to 10.9 million, registering a growth of 3.2% over the previous year.
- Bengaluru leads the pack in terms of FTAs with a growth of 5.5% to 0.63 million in 2019.
- Domestic Tourism is still the mainstay of the sector in India- brought about by an increase in young travelers, higher disposable income, improved regional connectivity and new experiential formats of tourism. While 2019 figures are yet to be released, domestic tourist visits in India were estimated at approximately 1.82 billion in 2018 India ranked third among 185 countries in terms of travel and tourism’s total contribution to GDP in 2018 as per the World Travel and Tourism Council (WTTC).
- Foreign exchange earnings (FEE) amounting to US$ 29.96 billion were registered during the period January-December 2019, witnessing a growth of 4.8% over the previous year.
- While the travel and tourism sector provided employment to around 42.6 million people, amounting to 8.1% of the total employment opportunities in 2018, this figure is expected to rise by 2% per annum to 52.9 million jobs by 2029.
- India moved up six ranks from 2017 to 34 in 2019 on Travel & Tourism Competitive Index of the World Economic Forum (WEF).
- It also moved up one rank to 10th on this index among the countries in the APAC region.
- The hotel and tourism sector attracted around US$ 12.99 billion of FDI during April 2000-June 2019 according to the data released by Department for Promotion of Industry and Internal Trade (DPIIT).
- Reforms in the hotel and tourism-related industries and Foreign Direct Investment have resulted in India being ranked ninth in the world in the list of top economies for FDI inflows by the UNCTAD (United Nations Conference on Trade and Development) as per the World Investment Report 2019.
- 2.9 million tourists visited India on the e-Tourist Visa scheme as compared to 2.3 million in the previous year, thereby registering an impressive growth of 23.6%. Introduced in 2014, the e-Visa scheme currently covers 166 countries/territories for entry into India through any of the five seaports and 28 designated Indian airports.
- With a goal to achieve 1% share in world’s international tourist arrivals by 2020 and 2% share by 2025, a proposed budget of INR 2,500 crores (US$350 million) has been allocated to the tourism industry for the current financial year.
LOOKING BACK TO 2019 HOTEL BRAND SIGNINGS
There were several reasons for the excellent performance
Vibrant commercial real estate segment
The hotel sector was closely correlated with office sector growth in 2019, all seven business cities witnessed growth in hotels’ performances, barring Pune, which saw revenue per available room (RevPAR) staying flat, despite healthy office sector growth.
Other IT-driven markets of Hyderabad and Bengaluru, along with financial and consulting services hub Gurugram, were the star performers of 2019. Hyderabad and Bengaluru witnessed a RevPAR growth of 11.8% and 11.7%, respectively.
Mumbai, though continues to be the most expensive commercial and hotel market in the country, grew at a more moderate 3.8% RevPAR growth last year, with occupancy levels remaining in the high 70’s. As a positive indicator for the hospitality sector, India’s office markets witnessed a record 40% growth in net absorption to 46.5 mn sq ft in 2019, with an additional supply of 51.6 mn sq ft during the year. Even with the quantum of new completions, vacancy rate across major commercial markets dropped from 13.5% in 2018 to 13% in 2019.
HOTEL BRAND SIGNINGS
The growth was fuelled by the slower addition of fresh inventory in the markets and consistent demand growth. High absorption of commercial stock in key markets was observed along with growing FTAs and domestic tourists.
In 2016, JLL tracked 170 hotel brand signings amounting to just over 16,000 keys. However, over three years-span, the number of signings has increased to 208 with 19,400 keys at a compound annual growth rate of 7%. The signings increased by 13% over last year.
One in every four hotels signed in 2019 is a converted hotel
Hotel conversions have nearly doubled from 33 in 2016 to 65 in 2019. Conversions are offering a quick and essential boost to independent or regional branded hotels, with the increasing relevance of international brands in the Indian hotel landscape.
Domestic hotel chains are leading in conversions with a 65:35 ratio, displaying more flexibility than international brands in terms of the hotel size.
Developers bounce back with impressive portfolio developments
2019 also saw the revival of portfolio deals with developers such as Prestige and K Raheja Group announcing expansion across key corporate markets in India in partnership with Marriott and Hyatt.
Prestige group announced a robust portfolio signing of six hotels across approximately 1,000 keys with Marriott International, while K Raheja Group’s Chalet Hospitality announced signings with Marriott and Hyatt in Hyderabad and Mumbai.
Breaking up the signings for the year, domestic chains signed a higher number of hotels while international chains saw a higher volume of rooms with larger inventory hotels being signed. The average number of keys per hotel signed by a domestic operator was 68, while international operators averaged 140 keys. Domestic hotel brands had consistently increased their share of signings from 46% in 2016 to 65% in 2019.
Traction spreads to tier 2 and tier 3 cities
In line with a growing trend, Tier 3 cities have seen the maximum number of brand signings. The average keys signed per hotel are 131, 92 and 74 in tier 1, 2 and 3 cities, respectively. Across both domestic and international operators, tier 3 cities signings formed the highest pie of their geographical preference.
The general bias of domestic chains dominating Tier 2 and 3 cities no longer exists. International chains have gained enough mind share across Indian markets, with a more focused and flexible product offering to cater to the specific requirements of such markets. This has often meant a more flexible approach on minimum key counts as well as a more tailor-made approach to F&B.
Commercial destinations dominate signings, while leisure destinations have seen strong traction
Commercial destinations dominated hotel brand signings constituting approximately 61% of the total signings, with new hotels now being signed in secondary and peripheral business districts. Leisure destinations comprised 29% of the total signings in 2019, with a significant increase over the previous year.
It is unfortunate that the strong momentum of 2019 due to some policy decisions and demand, has come
to a halt caused by the coronavirus pandemic worldwide.
Sadly, 2020 could not pick up from the optimism of 2019 due to the global outbreak of novel coronavirus (COVID-19). As we write this report, the third week of March has witnessed a decline of 67% in occupancy levels as compared to the same period of the previous year across hotels in India. Furthermore industry estimates indicate that the annual revenue of both branded and organized hotels in India is c.US$ 5bn. We estimate that at least 30% of this revenue could be impacted if situation doesn’t improve by end of June 2020. More than 60% of organised hotels in India are already shut and several others are operational with single digit occupancies.
The drive uphill is not going to be easy. Working capital of hotels will be stressed in this year. Cost optimisation will be the key. Furniture, fittings and equipment (FF&E) reserves would need to be cautiously utilised. Operators would need to support the hotel owners more than ever.
Hotels like any other businesses, would need to be nimble in devising their revival strategy:
- Sales and marketing strategies need to be programmed around the domestic traveller because domestic demand will open up first and drive growth in the short term.
- Focus on the staycation demand.
- Special focus on guest health and safety parameters.
- F&B should be re-aligned – such as operating only one restaurant with optimum staff. Menus could be restrictive for cost effectiveness.
- Put a hold on to room rates. Discounting room rates will draw out the recovery period further.
- Growth and development are likely to slow down in the next two years. Projects under development will likely get delayed and raising development finance will also become more challenging.
- On the other hand, cost of construction will likely come down as demand for construction material will fall. Therefore developers, who have cash reserves, could develop projects at a discount of 15-20% of project cost.
Instinctively, the next two years could be an opportunist time to buy and build essentially with indigenous building materials. Imports will become expensive because of the rising foreign exchange rate. Developers could focus on locally available products to optimise project costs. Investors, led by private equity funds, will be looking out for stressed assets. Cracks will emerge from over leveraged assets and hotel companies. Cash will be king! Depending upon an early containment of the pandemic, green shoots on transaction activity will likely appear towards Q3 2020.
Over the last 17 years, Indian hotel industry has seen two massive downturns —SARS in 2002-03 and GFC in 2008-09. On both occasions, hotel demand recovered within two to three years and that too amidst additional supply.
This time, there isn’t too much new supply coming up. And given our large domestic demand, recovery
might just be faster. In that hope, let’s get back to the drawing boards and restart the journey. 2020 will be a year full of new learnings and a year of change. The ones who embrace the change and adapt to the new world order shall emerge out faster and stronger.