Jaideep Dang, managing director - Hotels & Hospitality Group, JLL talks about how business cities and lesiure markets will drive demand
For the hospitality sector, we observe that RevPAR has grown by 2.6% over the last year
After the global slowdown in 2008-09, while the world around us was recovering slowly, the Indian economy was suffering from a policy paralysis under the second UPA regime. Around the same time, the hotel industry, too, was going through a low phase. RevPAR (Revenue per available room) witnessed a negative growth rate of -6.7%. In 2014, with a new majority government under NDA, the economy began displaying signs of recovery with an increasing GDP growth rate and an increasing rate of inflation, implying growth in consumer demand. The hospitality industry also entered a recovery phase at around the same time, on the back of growing demand and declining growth in new hotel supply.
Between 2014 and 2016, the economy grew by an 8% GDP and the hospitality industry enjoyed a RevPAR growth of 5.5%. Towards the end of 2016, post demonetisation, the economy started showing signs of a slowdown, with a drop in GDP growth rate brought about by contraction in domestic and foreign consumption. The under-stress NBFC banking and agriculture sectors further decelerated growth. The impact was very visible in the hospitality sector. RevPAR growth dropped from 5.5% in 2016 to 1.9% in 2018.
The issue the industry has been dealing with in the past three years is rather double-edged. On one hand, consumer demand dropped and on the other, supply continued to grow. It outpaced demand, at least in a few markets such as Pune and Ahmedabad. It is important to note that although supply growth affected the hospitality industry during this time, it also displayed a positive investment sentiment, which existed for this asset class. I would attribute the sentiment to the optimistic growth in the services sector in major business cities of the country.
The economic scenario in 2019 has further declined, with the GDP growth rate reaching its all-time low of 5 per cent in the first quarter (Q1, April-June) of the fiscal year 2019-20. Inflation levels have also dropped in Q1 2019-20 when compared with Q1 2018-19, which indicates slow consumer demand. For the hospitality sector, we observe that RevPAR has grown by 2.6% over the last year. This deviation from economic behaviour can be attributed to the commercial real estate market, which has witnessed a 20% growth in office stock absorption and 1% decline in vacancy rates across the top seven business cities in India. It offers the hotel industry hope in 2019 moving into 2020, so long as the services sector continues to drive growth in the commercial office market in major cities.
The positive outlook of the Indian government on the revival of GDP growth and maintaining inflation at a targeted level, offers the economy as well as the hospitality industry a ray of hope. The reduction of GST from 28% to 18% applicable on room rates above INR 7,500 per night will provide a great fillip to the premium and luxury hotel segments. Also, significant reduction in corporate tax will strengthen investor sentiment. We believe that the economic environment is becoming more conducive for growth in the long term. Room night demand will grow in major business cities as well as in the leisure destinations, and this demand will drive the growth in the hospitality industry.