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March 04, 2007

The hotel room shortage - and boom - in India

Businessworld has an interesting article on the opportunity and challenges facing the Indian hotel industry - including the current acute shortage of rooms, the supply rush to fill the gap, the real estate connection

..there is a big supply rush coming. Many real estate developers and funds have rushed in to fill the supply gap. However, the hotel opportunity is not simply lying there for investors to pick up. Real estate prices are exorbitantly high, regulations for hotel construction are restrictive and there is acute shortage of good staff, with most flocking towards other sectors such as aviation. All these paint a not so rosy picture.

...Among homegrown hoteliers, Indian Hotels is showing the most appetite for rapid expansion in the utilitarian hotels segment. Roots Corporation is targeting 100 hotels over the next decade, of which 10 will become operational this year. It is also bidding for upgrading and taking over the operations of the existing Yatri Niwas hotels of the Indian Railways and also set up similar hotels at 11 locations on a build, operate, transfer (BOT) basis. Patu Keswani, former COO (business group hotels), Taj group, is also in the game. Propped up by Rs 330 crore in private equity from Warburg Pincus and Kotak, he already operates Lemon Tree hotels in Gurgaon, Pune, and Goa and, plans to have 19 budget and mid-range properties with 2,400 rooms operating across the country. Five-star hotels are also coming up in significant numbers, but of the new supply, nearly half the rooms will be in budget and mid-range hotels compared to about 23 per cent for five-stars.

...Given the steep land costs, restrictive government rules and regulations, and rising wage costs, at least half the promised 100,000-plus rooms may not be built, not in the current wave at least, according to Keswani. And some hotel projects may not be carried through once room rates begin to soften with increase in supply. Also, many may be rendered very risky because of high costs especially if mainly financed by debt. He predicts a 15-20 per cent correction in room rates across the board as a big lump of room supply comes to the market during 2008-09.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.