Beyond MICE: Diversifying segments enhance returns in Indian hospitality

The Indian hospitality sector has demonstrated remarkable growth, showcasing its resilience and potential amidst evolving market dynamics. In 2023, the sector witnessed a significant surge in its Average Daily Rate (ADR) with an impressive 31.6 per cent increase from Rs 5,684 in 2019 to Rs 7,479 in 20231. This growth was particularly pronounced in the Luxury / Upper-Upscale segment, which saw the highest rise (nearly 50 per cent) in ADR1, underscoring the premium market’s capacity for higher pricing strategies and international competitiveness. The Upscale / Upper-Midscale followed closely, with the Midscale / Economy segments not far behind, reflecting a broad-based recovery and growth across different market tiers. Occupancy rates have also shown a healthy uptrend, with an all-India occupancy increase from 59 per cent in 2019 to 63 per cent in 20231. 

The year also marked a milestone for the industry with its highest supply growth on record – partly aided by the completion of projects stalled during the pandemic – indicative of investor confidence and the sector’s long-term growth prospects.

The international travel segment is showing signs of recovery, with Foreign Tourist Arrivals (FTAs) for January-November 2023 up by 50 per cent over the same period in 20222, although still trailing pre-Covid19 levels. While signs point to a complete revival in foreign arrivals, which would significantly bolster demand in the near future, we believe that foreign leisure guests might still take a while to bounce back, given rising airfares and accommodation rates that make other destinations seem more attractive.

The positive performance in the leisure segment, along with the resurgence of weddings in India, presents lucrative investment opportunities, especially in destinations like Goa, Jaipur, Udaipur, Uttarakhand, Himachal Pradesh etc. With the recent uptick and concurrent increase in supply, leisure continues to hold the most potential with regards to returns. In Tier II and Tier III cities, reasonable land values and the potential to command rates unlike in Tier I cities, where one is largely governed by the hotel’s competitive set, together work to usher in a new era of growth in leisure, which is here to stay. 

Nevertheless, the industry’s over-reliance on weddings raises concerns, not only from a diversification point of view, but also with tailoring the product for specific guests. The Indian FIT customer may find holidaying in a MICE heavy hotel / location a negative, and may look to other destinations (possibly overseas) to satiate their desire for a relaxing vacation; hence the need for additional focus at this customer type.

Pilgrim locations are another trending opportunity today, with a higher frequency of international brands signing new hotels in established pilgrim destinations. While these locations seem to be doing well on the surface, these are typically low-rate markets that need to be studied prior to investing, as some of these markets do not have varied segmentation. However, the demand for branded supply in these locations is growing. It is important to understand the type of demand in such locations, so the hotel can be built in accordance with the same.  

Even though average key counts have been increasing over time, there is still opportunity for investment in larger hotels that can house convention / exhibition space(s). While Government bodies and some private players are focussing on exhibition and convention spaces, hotel rooms have always been a secondary component. An integrated development with rooms and event spaces up to international standards (a la Nita Mukesh Ambani Cultural Centre in Mumbai), which can absorb most of its own generated demand could be a very attractive investment decision. While big cities are able to absorb room demand due to its inventory, Tier II and III cities tend to lose out on larger events, both social and MICE.

Although MICE is a large demand generator, there are several other segments that can have a successful impact on overall returns. Mixed used developments that hold entertainment / amusement areas are an increasingly attractive proposition in nascent locations, since this could provide a critical draw factor to an otherwise unknown location. In more mature markets, commercial and retail also plays an important role in increasing returns on a risk adjusted basis.

Increase in public infrastructure spending has had, and will continue to have a direct positive impact on the hospitality market. The increasing fleet sizes of our domestic airlines will contribute towards lower prices (domestic and international) and improved connectivity to smaller cities and towns. Road and rail connectivity will enhance more frequent trips to locations closer to home. 

While a great opportunity beckons for the industry, it is also important to be responsible in building so as to not damage the ecosystem that has taken many years to foster. The industry is cyclical and there will come a time in the not-so-distant future where the industry will witness a lull. It is, therefore, imperative that we study and choose our markets, products, and standards carefully before making investment decisions to ensure the long-term sustainability of our projects and the industry.

Author Bio: Jehangir Aibara is Director, Mahajan & Aibara 

Sources:

1 STR - Hospitality Performance and Outlook 2023

2 Ministry of Tourism - Monthly Statistics

Mahajan & Aibara Research