Hotel rates to fall a fifth as room supply overtakes demand

Hotel room rates are set to decline by 5-10% in 2011 and 13-18% in 2012 as a deluge of rooms hits the market.

Average room rates will decline across cities like National Capital Region (NCR), Bangalore, Hyderabad, Chennai, Pune, Jaipur, Kolkata and Ahmedabad, said a study conducted  by Knight Frank, the hospitality and realty consultant.

Samantak Das, national head-research, Knight Frank, said demand won’t keep pace with supply.

“Many new hotels that were planned during the boom of 2007 will release inventories between 2011 and 2013. This will drive down the occupancy rates (percentage of rooms occupied) of hotels in most cities,” he said.

But business in Mumbai and Goa is expected to grow because of high demand and low incremental supply.

The room-rate decline will be felt more in upscale hotels, the report said.

Oversupply hasn’t kicked in yet, though.

Rasika Singh, director, sales and marketing, Shangri-La Hotel in New Delhi said till that happens, existing upscale hotels will do good business.

“But as oversupply becomes a reality going forward, it will be dealt with differently by individual hotels depending on the season,” Singh said.

The NCR market is expected to have fresh supplies of 8,727 rooms across upscale, midscale and economy hotels between 2010 and 2013.

Occupancies in Bangalore are expected to fall from 61% now to 51% in 2011 and 44% in 2013.

Room rates will slip from Rs9,386 to Rs8,718 in 2011 and Rs7,620 the year after, the report said.

Zia Shiekh, CEO & CMD of Svenska Hotel, feels the trends could be different even within cities with certain areas showing oversupply and others paucity.

Svenksa recently debuted in the Mumbai suburb of Andheri West with a Swedish designer boutique hotel.

“If you look at markets within a city, the situation is different. While reports cite pressure in Bangalore, our soon-to-launch hotel in Electronics City is still a very under-served pocket. Our analysis is that hotels with really large guestroom inventories will feel the heat of oversupply,” Shiekh said.

“At Svenska we typically have inventories of 30-100 rooms and focus heavily on the food and beverage (F&B) and banqueting business. And demand already exists for such niche products,” he said.

That’s a strategy increasingly being adopted by others too.

Bangalore entities such as Chancery Hotels and Ista have started focusing on food and beverage business which is contributing significantly to their overall revenues.

“There has been a hike in our F&B revenue. We are capturing both local and outside visitors. With an increase in nuclear families it’s more feasible for them to dine out. So this compensates for the revenue lost in lower room tariffs,” said the Chancery spokesperson, requesting anonymity.

Vijay Nayar, head of sales and marketing at Ista Bangalore said its strong business client base gives ‘significant conferences and seminars businesses which generate steady rvenues’.

Among other key markets to feel the oversupply heat include cities like Hyderabad and Chennai, While Hyderabad will witness 4,764 new hotel rooms coming up by 2013, more than 3,000 hotel rooms will get added to the existing supply of around 4,500 hotel rooms Chennai.

“As far as Chennai is concerned, we estimate occupancy rates to decline to 48% in 2011 from around 55% by end of 2010. It will touch 45% in 2012 and rebound a bit to 48% in 2013. Room rates will slip to Rs4,248 in 2011 from Rs4,983 now and to Rs 3,946 in 2012,” Das said.

Some hoteliers said supply and demand cycles keep occurring. “If oversupply continues for long, existing hotels will have to cut rates. However, the situation evens out in the long run and hospitality is a long-term business,” said the top offical from a leading international chain operating in the southern region, not wishing to be named.