MUMBAI: Rising demand, despite an increase in the average cost of room rentals, is going to outstrip hotel room supplies, which are on course to increase by 5-6% annually through fiscal 2028, says a report.
Meanwhile, premium hotel occupancies are likely to improve by 200 bps to 72-74%, and average room rates by 3-6% to Rs 8,200-8,500 this fiscal, according to a report by Icra Ratings. This will see hotel companies reporting operating margins of 34-36% this fiscal, similar to 35.8% last fiscal.
The agency forecasts a compound annual growth of 5-6% in premium hotel room additions between FY25 and FY28. In comparison, demand is expected to grow at a faster pace of 8-10%. As a result, occupancies across premium hotels are projected to improve by 200 bps to 72-74%, and average room rentals (ARRs) to Rs 8,200-8,500 in FY26, 3-6% higher over the previous year.
The report also says premium hotel key additions are democratised in this cycle, across tier-I and II/III cities, given the increased acceptance of the latter among travellers, and space and land constraints in the former.
With three years of double-digit revenue expansion between FY23 and FY25, and the growth momentum continuing in the current fiscal, the hospitality industry has fared well in recent years.
Buoyed by the strong demand and improved earnings profile of hospitality players, the sector continues to see investments for supply additions and room upgrades. The room addition trends reflect both optimism and the industry’s response to evolving travel patterns, regional growth, and investor confidence.
According to Srikumar Krishnamurthy, a senior vice-president at the agency, annual premium hotel room inventory across 12 major cities crossed the 1-lakh mark in FY23, and is slated to cross 1.2 lakh keys in the next fiscal. However, demand growth is expected to continue to outpace supply, at least over the next three years.
The agency expects the premium room inventory across these cities to grow 5-6% annually during FY25-28, while demand growth is expected to be in the range of 8-10% during this period. The mismatch augurs well for the pricing environment and occupancies, and accordingly, he expects premium hotel occupancy to improve to 72-74% this fiscal from 70-72% in FY24 and FY25. Hence the average rentals would go up to Rs 8,200-8,500 in FY26, from Rs 8,000-8,200 in FY25.
The premium hotel key additions in the current cycle show interesting trends, with tier-II and III cities commanding equal interest as tier-I cities. The former has been gaining increasing acceptance as travellers venture into less-explored territories for leisure travel, and spiritual travel trends gather prominence.
Further, supply additions in tier-I cities are constrained by limited land availability and high land prices, leading to focus on alternative markets, and suburbs.
The agency believes this widespread supply addition across markets reduces the risk of concentration and surplus supply in select markets. It augurs well for holding up the ongoing upcycle as the supply addition in tier-I cities is unlikely to satiate the increasing demand, while tier-II and III cities remain relatively underpenetrated for premium hoteliers.
Certain pockets within the hospitality segment such as airport hotels and spiritual tourism have garnered healthy interest over recent years, with 2,000-2,500 premium keys in the pipeline in each of these segments, which is around 10-15% of the total premium supply pipeline.
While the airport hotels are primarily located in the gateway cities of Delhi and Mumbai, the interest in spiritual tourism has seen locations like Ayodhya, Varanasi, Tirupati, Bodh Gaya, Rishikesh and Prayagraj attracting heavy traffic from all over the country.
“A large part of the new supply is through management contracts and operating leases as large operators are going asset-light and investing only in select locations. Furthermore, construction costs for hotels have been on an increasing trend, estimated to have increased by 20-25% over the past five years, which is further exacerbated in major cities due to land availability issues.
The agency has a stable outlook on the industry. After three years of strong demand, driven by favourable domestic leisure travel, demand from meetings, incentives, conferences and exhibitions including weddings, and business travel, the revenue growth in the sector is continuing in the current fiscal.