STR Analysis: Good Tidings For The Mid-scale and Economy Segments

As occupancy rates grow, the hotels in the Mid-scale and Economy segments experience the highest ADR growth in the Indian hospitality industry.

STR Analysis, Economy, ADR growth, Indian hospitality, GST

The Indian hospitality segment reported growth in all Key Performance Indicators (KPIs) in year-to-date (YTD) October 2018, according to recent data from STR, a source for all premium global data benchmarking, analytics and marketplace insight for the hospitality industry. Occupancy has risen to 64.9% (+1.4%), ADR has reached Rs 5,698.10 (+1.5%), and RevPAR growth has seen it hit Rs 3,698.05. While supply has remained stable at 3.0% for this period, demand has outpaced supply growth by 4.4%.

Despite this seeming positive on the surface, growth rates have remained generally slow for the Indian hotel industry as it struggles to reach pre-global financial crisis levels. ADR growth rate declined in consecutive years between 2009 and 2015, with a CAGR of -6.5%. Slight improvements have been noted since 2016, but we are still far from the 2008 rates.

STR analysts cite 2009 to 2017 supply growth as a likely reason for India’s sluggish ADR growth, as hotel supply saw a Compound Annual Growth Rate (CAGR) of 3.7%. Increased competition has seen hotels struggle to manage their occupancy, resulting in marginal ADR growth.

New Goods and Services Tax (GST) regulations in India have also reduced hoteliers’ power in pushing ADR growth, with transactions over Rs 999 facing GST charged as a percentage of total value. A 12% rate is applied for tariffs of INR 1,000 to INR 2,499, INR 2,500 to INR 7,499 transactions face 18% GST, and a rate of 28% is applied to those above INR 7,500.

Non-affiliated and branded hotel performance
Despite positive country-level performance in YTD October 2018, non-affiliated hotels experienced a 4.3% decrease in ADR. It is likely that the rate performance of these standalone properties is linked to their positioning against branded properties, as they’re often unable to afford the demanding costs.

As they are able to leverage their association with a brand, chain hotels can position themselves more effectively. With more freedom to increase their rates, branded properties experienced a 2.1% increase in ADR.

Flexibility in increasing rates also effects hotel class performance and the branded chains within these. Chains within the midscale and economy classes are able to increase their rates more drastically, with these properties posting a 6.6% ADR increase – the fastest ADR growth in the Indian hospitality sector.

By comparison, luxury and upper upscale hotel chains saw marginal growth of 0.9% and 0.4%, respectively. It is likely that GST regulation updates have limited potential ADR growth for hotels within these classes, while new supply is another factor to consider. In the 12 months ending October 2018, 1,100 rooms were added to this segment and, with more than 15,000 in the under-contract pipeline, ADR growth will continue to be a challenge.

Upscale and upper midscale hotel chains experienced moderate growth of 2.2% and 2.4% ADR growth, respectively. This is the result of rising room demand in YTD October 2018, with upscale hotel chains recording a 9.9% increase and upper midscale experiencing 8.4% growth.

Midscale and economy hotel chain supply has grown considerably in the past three years and, with a growing middle class in India, may remain the key focus for hotel developers. Chains such as Oyo and Treebo are driving change, offering travellers greater options at more affordable prices. With corporate visitors choosing midmarket hotels for business travel, upscale and luxury properties in India are now seen as a choice for leisure travel and holidays.

Properties in the midscale and economy segments are able to introduce higher ADR during event days and peak seasons, as there is enough room supply to enable pricing increases as compared to competitor segments.

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