Indian hotels added record number of rooms in 2023. Now they need to fill those

India’s organised hotels industry added 14,000 rooms in 2023, its largest addition ever, hospitality consultancy Horwath HTL Consultants said in a new report accessed exclusively by Mint. This year, it’s expected to add even more–23,000 rooms.

Currently, India has about 183,000 branded hotel rooms, which Horwath expects will increase to 250,000 by 2027. These hotels are also charging higher rates, mostly by serving up guests seeking the comforts of upscale and luxury rooms.

There might be a niggle, though. Keeping pace with the room additions.

“We gained a very tangible intangible–recognition and amplification of the sector’s economic relevance and capacity, at the highest levels," said Vijay Thacker, partner and chief executive at Horwath HTL Consultants. “But supply and demand must grow in tandem."

The flow of international travellers–including those who can afford to pay higher room rates thanks to their stronger currencies against the rupee–has remained sluggish. India had only about 6.19 million international tourists in 2022, down from the peak of about 10 million in 2019, as per the latest data available from the ministry of tourism. Domestic tourists in 2022 were 17.31 million. 

In effect, domestic tourism has emerged as the main engine of hotel demand. But only about 2% of domestic travellers opt for hotels, preferring homestays similar to AirBnBs, guest houses, or standalone, less expensive hotels that aren’t a part of the organised sector.

Overall, the occupancy rate in India’s organised hotels industry improved to 63.6% last year, from 59.6% in 2022 and 43.1% in 2021—both pandemic years. It fell just short of 2019’s 64.5%, the highest occupancy since the pre-recession period of 2007-08.

In the big cities, the picture is less rosy. Occupancy remained below pre-pandemic levels in New Delhi, Bengaluru, Gurugram, Hyderabad, and Pune. 

“We’ve seen 12% growth in our overall topline. Our luxury hotels have grown much more at 15%. Our Corbett, Varanasi, and Rishikesh properties have been performing very well. However, we are cautiously optimistic about FY25," said Vibhas Prasad, director at Leisure Hotels Group, which owns several hotels that The Indian Hotels Company Ltd-owned Taj Hotels runs. “The sheen may be coming off in terms of the consumption story." 

Businesses are also bracing for some drop in room rates due to various factors. Last year, India hosted the G20 summit and the ICC Men’s cricket world cup, both mega events that gave a strong boost to India’s hotels industry. 

“It may change due to elections in the summers and the complete resumption of long-haul international travel," said Prasad. “A lot of supply is coming in and a huge brand conversion movement is happening."

Leisure Hotels Group has slated 10 new hotel openings this year, of which some are brand conversions and others are greenfield projects.

Last year, Mumbai added one of India’s largest hotels—Lemon Tree Hotels’ Aurika Mumbai Skycity with nearly 700 rooms.

Patanjali G. Keswani, chairman and managing director of Lemon Tree Hotels, said the company opened the hotel in October and was able to ramp up business quickly. 

“Normally Dussehra and Diwali are lower periods for the entire industry, but the hotel was net Ebitda positive starting that quarter itself. It will be the most profitable hotel for the group next year," he told Mint.

A luxury boost

The tough task of boosting occupancy is somewhat offset by the higher rates the hotels have been able to charge.

The industry’s average daily rate per room soared to a record ₹7,479, higher than even 2019’s ADR of ₹5,684, as per Horwath’s report, largely benefitting from an increase in the supply of luxury and upscale hotels.

ADR refers to the average amount of money a hotel earns per occupied room per night—a key metric to gauge a hotel’s financial performance. 

Unsurprisingly, 55% of the domestic hotel industry’s overall room revenue share comes from the luxury and so-called ‘upper upscale’ segment. About 34% comes from the upscale and midscale segments, and 11% from the middle and economy segments.

The big tourist markets are also contributing to the higher room rates.

Room revenue share in leisure markets such as Goa, Jaipur, Udaipur, Uttarakhand and Himachal Pradesh almost doubled, from 8.5% in 2019 to 16.9% in 2023.

Hotels in Udaipur commanded an average room rate of ₹15,500 per night, while those at Goa charged ₹10,700. Mumbai, not a leisure market, followed with an average room rate of ₹10,600 a night.
Last year, the leisure segment accounted for over 80% of the additions in the hotel industry, at 12,400 rooms. The leisure segment’s inventory is expected to increase from about 3,000 rooms in 2023 to about 65,000 rooms by 2027, according to Horwath HTL Consultants.

“The domestic sector has solidified its lead role in demand and revenue generation. Only about 2% of domestic visitation uses hotels; if this increases by 0.5% of visitation, it supports another 50,000 rooms and is something that can be achieved with supply extension to Tier 2 and 3 markets and pilgrim centres," Horwath HTL Consultants said in its report titled ‘India Hotel Market Review 2023’.

“Domestic demand growth, augmented by potential inbound travel for business, leisure, [meetings and conferences], and diplomatic purposes,bodes well for long-term demand creation," it said.

Interestingly, about 63% of the rooms in the organised hotels industry are outside the top 10 markets. 

The big cities, however, remain the key drivers of room rates, with Mumbai, New Delhi and Bengaluru, which control 26% of India’s hotel supply, accounting for about 36% of the organised hotel industry’s room revenue.