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HOSPITALITY SECTOR
UPDATE
Indian Hospitality Sector Update
Inside
1. Economy Update
a. Global
b. Domestic
2. Industry Update
a. Global
b. Domestic
a. Domestic
b. Global
ECONOMIC
OVERVIEW
GLOBAL ECONOMY
During the last few quarters, the global
economic activities started gaining some GDP Growth Rate (%)
momentum. As per the World Economic
Outlook released in April 2017 by IMF, world
growth is expected to rise from 3.1% in
2016 to 3.5% in 2017 and to 3.6% in 2018.
After years of diminishing performance, the
developing economies are projected to
show growth for the first time in recent
years. The developed economies are also
expected to show growth after a dip in
performance in 2016.
Despite these increases, it is important to take note of the fact that historically whenever the global economy
has made an upturn, the interest rates have been at a much higher level than the current levels. Low cost of
debt, better economic recovery, growing discretionary spend and increase in business confidence will continue
to support the deal activity and valuations.
HOSPITALITY SECTOR UPDATE
INDIAN ECONOMY
During the year, the Indian economy went
India GDP Growth Rate (%)
through the impact of demonetization, the
economic growth during Q4FY2017 slowed 8.5
7.9
down to 6.1%, a sharp deceleration from 7% 8
7.5 7.2 7.1
growth witnessed in the Q3FY2017. The
7
overall growth for FY2017 was at 7.1%. The 6.5
6.5
major impact was felt by the construction
6
sector while the Banking sector benefitted 5.5
5.5
from increased bank deposits and liquidity in
5
the banking system.
Despite major policy actions taken by the Government, foreign investors faith in Indias strong long term
fundamentals was visible in record foreign inflows. During the year, FDI inflows into India remained on tear, the
reduction in GDP growth notwithstanding. India was among the top ten countries in the world in terms of FDI
inflow.
Further, Indias working age population is on the rise which will lead to increased disposable income, ultimately
increasing the consumption. India is also set to reap benefits from its initiative taken in the form of Make in India
& Digitalization which will bring in more efficiency into the system. The negative impact of demonetization is
also expected to fade away soon.
The demand is expected to be further boosted from the implementation of GST. Although the exact impact of
the implementation of GST from July 1 cannot be ascertained as of now, but it is estimated to have a positive
impact on growth. This is supported in part by the fact that GST will make the Indian products more competitive
in the international market which. It is further expected to improve the efficiency of the system.
HOSPITALITY SECTOR UPDATE
INDUSTRY
OVERVIEW
TRAVEL AND TOURISM
GLOBAL
The hospitality sector is a part of the travel & tourism sector. In 2016, its Business v/s Leisure
total contribution being USD 7.6 trillion and 292 million jobs, which roughly
equates to 10.2% of world GDP and 1/10th of all jobs.
In 2016, 77% of contribution from this sector to the GDP was from leisure
travel while the contribution of business travels being 23%. The outlook for
business and leisure travel in 2017 remains robust. Leisure spending is expected
to continue to have a significantly stronger contribution to the sector as compared
with domestic spending.
The total contribution of Travel & Tourism is expected to grow at 3.5% in Source: WTTCs Global Economic Impact & Issues 2017
2017. South Asia and South East Asia are expected to be the fastest growing world regions at around 6.5-7%.
By 2027, Travel & Tourism is expected to contribute 11.4% of global GDP and support more than 380 million
jobs, i.e., around 1/9th of all jobs.
DOMESTIC
Tourism in India accounts for 9.6 per cent of the GDP and is the Contribution to GDP (USD bn)
third largest foreign exchange earner for the country.
The tourism and hospitality sectors direct contribution
to GDP in 2016 was USD 71.53 billion.
HOTEL INDUSTRY
Hotel industry, a major source of foreign currency exchange is also one of the largest employment
generators. An integral part of the tourism Industry, it is transitioning to a highly modernized industry
due to adoption of major technological innovations.
Global
The hotel industry is broadly divided into independent and branded hotels. The key indicators analyzed in hotel
industry are Revenue Per Available Room (RevPAR), Average Room Rate (ARR), Occupancy Rate and the
rooms supply growth. Hotels operate under different models and can be owned, managed or franchised by
different people. Technology is increasingly changing the way business is conducted in the industry. Other
factors like rising millennial population, safety & security standards, etc. also play an important role.
After a good performance in 2016, which saw an increase in all the key indicators, industry growth is further
expected to increase in 2017. New capacity additions witnessed a slowdown at global level in 2016 and are
expected to remain lukewarm for at least the next couple of years.
The major threat to the sector globally is that of terrorism, particularly in Europe. It has already affected
countries like France, Belgium & UK which have seen a decline in Foreign Tourist Arrivals. However, countries
like Portugal, Spain & Ireland have benefitted from this as they are now preferred destination of the displaced
travelers. Platforms like Airbnb, which are home sharing sites, have taken away business from hotels. These
are likely to impact the budget hotels. Airbnb has served over 30 million people since it was founded in 2008.
They have flooded the marketplace with new inventory. Increasing pressure from such companies is also
pushing the industry into consolidation.
Merger and Acquisition transactions are expected to remain strong in the near future as well. Easy access to
low cost capital, global demand recovery and availability of ready, vantage located premium inventory at a
competitive price will continue to drive global funds/ hospitality players with stronger balance sheet to look for
befitting opportunities. Additionally, M&A opportunities help global players to add locally to their inventories
without taking the risks of actually building them.
The future outlook of the hospitality sector differs from region to region. At a combined global scale, the future
for the hotel industry looks bright. There is a forecast for a strong 2017 and beyond, with demand growth
expected to outpace supply growth through at least 2020.
HOSPITALITY SECTOR UPDATE
1) Expansion The early part of this phase is led by an upswing in the demand momentum while the new
supply comparatively remains constrained. As a result, there is a steep increase in capacity utilization
and subsequently ARR. Though during the latter part of this phase, there is a catch-up and relative
increase in supply. Together these lead to tapering of growth in capacity utilization and peaking of
capacity utilization followed by peaking of ARR.
2) Recession This phase is characterized by declining capacity utilization and subsequently declining
ARR. During the latter part of this phase many planned / under construction projects are deferred
temporarily and at times permanently.
3) Recovery In this phase, the industry starts consolidating, this is marked by stabilization in ARR and
capacity utilization, which see a gradual uptrend. Both demand growth and new supply remains
subdued during this phase.
Over the past one and a half decade, the hotel industry in India has seen a complete business cycle. After
years of downfall, the hotel industry has started consolidation and is ready for an uptrend. Both the key
indicators, which are, ARR and occupancy rate have consolidated akin to FY02-FY03 period. The Current
recovery phase is expected to be followed by expansion as explained in the picture below.
HOSPITALITY SECTOR UPDATE
A) Expansion (2003-2008)
From the fiscal year 2003 onwards, the hotel market saw a terrific growth in performance which lasted till
FY2008. With the new found confidence, we saw an increase in the supply of new hotel rooms during this
period. This was based on the anticipation of increase in demand and positive outlook of the investors. As seen
in the graph above, all the key indicators increased considerably during the expansion phase.
B) Recession (2009-2014)
The global financial crises in 2008 left an immensely negative impact on the booming Hotel industry. The
severity of the crisis increased due to the large supply of hotel rooms that had been created during the
expansion period. Due to this, all the three important indicators, i.e., the Occupancy Rate, ARR & Rev PAR saw
a sharp decline from FY2009 till FY2014. During FY2011 though, supported by global recovery on the back of
coordinated global policy action, the hotel industry witnessed early signs of recovery. However, it turned out to
be a false start and didnt last long .The key indicators continued to recede till early FY2014
C) Recovery (2015-Present)
FY2015 can be marked as a significant year for the Hotel industry. The increasing demand and decreasing
additions in room supply have led to stronger occupancies which have ultimately given the hotel industry the
confidence to increase their ARR. The start of the recovery cycle led to consolidation of all key economic
indicators, which now are showing signs of strengthening. Limitations in additional supply and a better demand
growth have further boosted these indicators. For the first time in recent years, nearly all of the major cities
have shown signs of recovery. Further, early trends of 2017 have shown signs that the recovery is on track and
there is a positive outlook for this market in the future as well.
HOSPITALITY SECTOR UPDATE
Mumbai
Mumbai, being commercial capital of India and a financial hub has a stronger ARR and Occupancy Rate in
comparison to other cities. Hotels in Mumbai earn a good share of revenue from corporates and MICE sector.
Both these factors are expected to increase in CY2017 as the city gets benefitted from the economic upswing.
Land availability and rising land costs have deterred supply additions in the market. New projects have already
started concentrating in the vicinity of the Navi Mumbai International Airport Region. The supply of new
inventory in the market is expected to grow at a slow but steady pace while demand is expected to grow at a
much faster pace, outgrowing supply in the near future.
Pune
Pune is the strongest performing city in the state of Maharashtra after Mumbai. Pune has come a long way from
being viewed as a Tier II city on the back of the development, particularly in the commercial and education
sector. Its proximity to Mumbai has made it emerge as a cost effective alternative to Mumbai. More recently,
Pune has seen the entry of premium global hotel brands in the previous year like Ritz Carlton, Crowne Plaza
Marriott Suites Conrad by Hilton, etc. Its occupancy rate is now higher than the national average. Pune has
recovered well from the extra supply seen a few years ago, positioning itself for a steady growth in rates.
Goa
Goa due to its heritage and location has been a preferred destination for leisure tourists. More recently as well,
the government of Goa has taken several measures to further encourage tourism in the state. Goa has also
emerged as a preferred wedding destination. Goa is probably amongst the cities that were earliest to recover
and has seen a consistent uptrend in occupancy rates and RevPAR overt the last few years. Going ahead as
well, the city is expected to witness growth in both domestic and global tourist arrivals. Helped by this, Goa
hospitality market is expected to continue its strong performance over the next few years.
Prominent cities of NCR include Delhi, Gurgaon & Noida. Delhi is a preferred destination for corporates looking
to establish their headquarters within the country. It is also the largest branded hotel market in the country.
Demand levels for hotels have been strong in Delhi in the past few years. This trend continued in CY2016, as
Delhi continued to see an increase in demand. Meanwhile, Gurgaon has emerged as a growing corporate hub,
particularly in the IT/ITES Sector, witnessing demand growth from the MICE sector. During CY2016, Gurgaon
saw a sharp increase in occupancy rates and RevPAR. Gurgaon is poised for a healthy growth as outlook for
office sector looks strong. Noida hotel market has not seen a good performance in the recent past and the
future growth is also projected to be sluggish. Even though new additions to supply have decreased,
occupancy rates have not increased due to a decrease in demand, especially from the MICE sector.
Jaipur
Jaipur driven by its rich heritage and culture has emerged as a major wedding destination, especially for the
people living in north India. The city saw an uptick in both room revenue and occupancy levels in the first half of
FY2017. Additionally, cities like Jaipur, Udaipur, Jaisalmer and Jodhpur have seen increase in both domestic
and foreign tourist arrivals in Rajasthan, particularly due to the rich culture and heritage. Supply has remained
on the slower side in Jaipur. This should give a further boost to the growing occupancy levels. The ARR is also
expected to rise as the new demand is forecasted to outgrow new supply in the near future as well.
Ahmedabad
Ahmedabad is a major industrial centre of Gujarat. It has strong presence of industries like automobile, textiles,
pharmaceuticals, etc. It has also shown high growth in manufacturing activities. The upcoming GIFT City
between the Ahmedabad - Gandhinagar stretch has already seen various MNCs set up offices in the region.
Ahmedabad saw a decline in ARR in the previous year. In addition to this, huge supply additions have been
estimated in the city. However, helped by gradual upswing in the economy,this is expected to gradually improve
over the next couple of years..
Overall, the major cities in India have seen a better performance in terms of ARR, occupancy rate and RevPAR
in CY2016 as compared to the previous years. The performance is expected to further enhance in CY2017 as
the effect of surplus supply seen in recent years is slowing down. On the other hand demand projections are on
the rise. The Indian hotel RevPAR, as per a recent ICRA report, is projected to increase by 9% in FY2018.
HOSPITALITY SECTOR UPDATE
Source: Reuters
As far as hotel real estate transactions in India go, a major M&A transaction at the beginning of the year
saw domestic hospitality major Sarovar Hotels & Resorts sell about a 75% stake to Europe-based Louvre
Hotels Group, which is part of Chinese Group Jin Jiang International. Sarovar Hotels, which was founded in
1994, has grown to nearly 6,000 rooms in over 50 cities and has a secured pipeline of over 20 hotels.
Louvre Hotels was founded in 1976 by the Taittinger Family as a French business and was acquired by Jin
Jiang in February 2015. Louvre operates 1,233 hotels in 54 countries. It currently manages 22 hotels under
its Golden Tulip umbrella brand in India.
Marigold Capital & Investments, a USA based Private Equity Fund which specializes in buying debt ridden
hotels and turning them around, is in talks to buy Hotel Leelaventures Chennai hotel property, The Leela
Palace, which has 326 rooms.
USA based Goldman Sachs invested INR 441 crore in Samhi Hotels for a significant minority stake. Samhi
hotels are a privately owned hotel asset company that specializes in development, acquisition and
ownership of branded hotels. It operates under well recognized brands such as Courtyard by Marriott,
Sheraton, Hyatt Regency, Hyatt Place, Fairfield by Marriott, Four Points by Sheraton and Formule 1.
HOSPITALITY SECTOR UPDATE
Domestic Transactions
Samhi Hotels acquired Ganesh Meridian hotel, a five star property from Shree Siddhi Group which is
located in Ahmedabad and has 156 rooms. The property was bought by Samhis fully owned subsidiary
Caspia hotels. The hotel was Samhi hotels third property in Ahmedabad, after Four Points by Sheraton and
Formule 1.
Ascent Hotels was acquired by Samhi Hotels. Ascent Hotels owned Hyatt Regency hotel in Pune which is a
five-star property with 222 rooms and 102 fully serviced luxury apartments. Ascent Hotels was a joint
venture between Jatia Group, which held about 81 per cent stake in the venture and Pune based Vascon
Engineers which held a 19 per cent stake.
Aura Grande a 94 room hotel located in Andheri was acquired by Bangalore based MRG Hospitality and
Infrastructure. MRG Hospitality owns a chain of boutique hotels under the Goldfinch brand. Majority of
hotels under the Goldfinch brand have a presence in southern parts of India. Aura Grande was previously
owned by Mumbai based Annakoot Properties.
HOSPITALITY SECTOR UPDATE
Marriott International acquired Starwood Hotels & Resorts Worldwide in a USD 13 billion transaction. With
the addition of Starwoods portfolio, Marriott now has 30 brands with more than 5,700 hotels. That amounts
to 1.1 million rooms in more than 110 countries, making Marriott the largest hotel company in the world. The
combined entity will have the Sheraton, W Hotels and Ritz-Carlton brands amongst other lead brands.
Accor Hotels acquired Canada based hotel management company FRHI Hotels & Resorts, the parent
company that manages Fairmont, Raffles, and Swissotel. These hotel chains together include over 100
hotels and resorts in 30 countries worldwide. The deal is valued around USD 840 million cash payment and
the issuance of 46.7 million Accor Hotel shares in consideration for the contributed FRHI shares. Accor
group is based in France and it owns, operates and franchises 3,700 hotels with several brands from
budget and economy lodgings to five-star hotels. Accor runs hotels in India under the brands Sofitel,
Pullman, Grand Mercure, Novotel, Mercure, Ibis and Formule1.
HNA Tourism Group acquired Carlson Hotels, also making the Beijing-based company a 51% owner of
Carlson's partner, Rezidor Hotel Group. Carlson Hotels has more than 1,100 properties under the
Radisson, Radisson Blu, Radisson Red, Park Plaza, Park Inn, Country Inns & Suites and Quorvus
Collection. HNA Tourism Group Co. is a division of HNA Group Co. Ltd., a Fortune Global 500 company
with operations across aviation, tourism, hospitality, finance, and online services among other sectors.
HNA Tourism Group acquired a 25 per cent stake in Hilton Worldwide Holdings Inc. for a consideration of
USD 6.5 billion from its biggest shareholder Blackstone Group LP. Blackstones stake in Hilton will reduce
to 21 per cent at the close of the deal. Hilton Worldwide's brands include Conrad Hotels & Resorts, Curio
and Double Tree as well as Hilton. As of March 2017, its portfolio included 4,982 properties with 812,341
rooms in 103 countries and territories.
HOSPITALITY SECTOR UPDATE
SELECT
TRANSACTIONS
DOMESTIC
Announce Deal Type Target Country Target Description Acquirer Country
Date
Keys chain of hotel is a part of the
Berggruen Group. It has 21 well-
established hotels with over 1900
Strategic Berggruen
May-17 Keys Hotels India rooms across 17 cities pan India. Its USA
Investment Holdings Inc.
wide range of establishments range
from business hotels to luxury
hotels in India.
GLOBAL
Announce Target Country Target Description Acquirer Country
Date
Xenia Hotels & Resorts Inc. has agreed to sell five
hotels from its portfolio of hotels. These five
properties are the 203-guestroom Courtyard Fort Summit Hotel
Xenia Hotels &
Jun-17 USA Worth, the 123-guestroom Courtyard Kansas City, Properties USA
Resorts Inc.
the 182-guestroom Courtyard Pittsburgh, the 116- Inc.
guestroom Hampton Inn & Suites Baltimore, and the
188-guestroom Residence Inn Baltimore
APPENDIX
IMPACT OF GST ON HOTEL INDUSTRY
Pre GST tax Structure on room tariff charged
For room tariff charged less than or equal to INR 1000 per day
0%
For room tariff charged above INR 1000 up to INR 2500 per day 12%
For room tariff charged above INR 2500 up to INR 7500 per day 18%
For room tariff charged above INR 7500 per day 28%
* Each state in India had the right to charge luxury tax as per their discretion. Hence luxury tax rates vary for
every state. In addition to that, luxury tax rates also vary across the room tariff slab rates.
The impact of GST varies across India depending on the luxury tax rates charged by the state in which the hotel
runs its operations. It also varies across the different room tariff slab rates. Hence, hotels in different states
have been impacted differently by GST.
However, in general, we can conclude that introduction of GST is non-beneficiary for luxury hotels charging
room tariff of more than INR 7500 per day. It has a neutral to marginally positive impact on the room tariffs less
than INR 7500 per day.
HOSPITALITY SECTOR UPDATE
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