RevPAR to ride high in 2025

The Indian hospitality sector stands at a significant stage in 2025, riding on the wave of evolving market dynamics. A blend of rising domestic tourism, expanding infrastructure, and an increasing preference for experiential travel has positioned India as one of the fastest-growing hospitality markets globally. Yet, as the industry celebrates its successes, it faces critical questions about sustaining this momentum and addressing challenges such as global economic uncertainties, supply constraints, and the evolving preferences of modern travellers.

In this context, ICRA hosted its latest conference, “Hotels 2025: Riding High, But What’s Next?”, bringing together industry stalwarts, analysts, and policymakers to discuss the future trajectory of the Indian hospitality industry. The event provided a platform to share insights to pressing issues, including key operating metrics, demand and supply dynamics, financial performance, and credit rating trends. With insights from industry leaders and data-driven forecasts, the conference painted a comprehensive picture of where the sector is heading and the strategies required to thrive in a rapidly changing landscape.

Recent trends in key operating metrics

The Indian hospitality industry has witnessed a remarkable recovery post covid, with revenue per available room (RevPAR) expected to hit decadal highs in FY2025. Premium hotel occupancy rates are projected to improve from 70-72 per cent in FY2025 to 72-74 per cent in FY2026, driven by sustained domestic tourism and a resurgence in Meetings, Incentives, Conferences, and Exhibitions (MICE) demand, including weddings and business travel. Average room rates (ARR) for premium hotels are anticipated to rise by 8 per cent year-on-year, reaching Rs 7,800- Rs 8,000 for FY2025, with further growth to Rs 8,000-Rs 8,400 in FY2026.

Despite the positive outlook, foreign tourist arrivals (FTA) have yet to recover to pre covid levels. The improvement is tied closely to global macroeconomic conditions. However, domestic travel continues to be the primary driver of demand, bolstered by increased infrastructure and air connectivity, along with favourable demographics.

Demand and supply dynamics

India’s supply of hotel rooms is expected to grow at a compound annual growth rate (CAGR) of 4.5-5 per cent over the medium term, lagging behind demand. This favourable demand-supply gap supports a revenue upcycle. The addition of premium hotel inventory is largely concentrated in suburban areas and Tier-II cities, facilitated by management contracts and operating leases. Land availability challenges in metro cities have limited the scope for new greenfield projects, pushing developers towards rebranding and upgradation.

Notably, Tier-II and spiritual tourism destinations are emerging as key growth drivers, contributing significantly to demand. The industry also anticipates growth from large-scale MICE events, supported by the opening of new convention centres and other infrastructural improvements.

Vinutaa S, Vice President and Sector Head, Corporate Ratings, ICRA Limited, said: “Demand is expected to remain strong across markets in Q4 FY2025 and FY2026 as underlying drivers remain healthy. Hotel-specific metrics would, however, depend on location, competition and other property-related dynamics. Further, domestic tourism would be the prime driver, with FTA improvement depending on the global macro-economic environment. Mumbai and NCR, being gateway cities, are likely to report occupancy north of 75 per cent for full-year FY2025 and FY2026, benefitting from transient passengers, business travellers and MICE events. The ARRs are likely to witness healthy YoY increase in FY2025 and FY2026 across markets. This sharp rise in ARRs of premium hotels will result in spillover of demand to mid-scale hotels.” 

Financial performance and outlook

ICRA projects revenue growth of 7-9 per cent year-on-year in FY2025 and 6-8 per cent in FY2026, building on a high base from FY2024. Margins are expected to remain healthy but flat, with operating margins of 31-33 per cent for FY2025 and FY2026, compared to 33 per cent in FY2024. Larger hotel chains are leveraging asset-light expansions, including management contracts, to maintain profitability. De-leveraging balance sheets and increased adoption of renewable energy are additional factors supporting margins.

Cost pressures from rising employee expenses and ongoing renovations are balanced by sustained cost-rationalisation measures implemented during the COVID-19 pandemic. Staff-to-room ratios remain 15-20 per cent below pre-pandemic levels, reflecting efficiency gains. Additionally, the spillover of demand from premium to mid-scale hotels is creating opportunities for diversification within the sector.

Credit rating trends

The industry’s improved financial health has also positively influenced credit ratings. Asset-light models and strategic expansions have lowered risk profiles for major players. However, land acquisition challenges and the relatively slow pace of new supply additions in premium markets remain constraints. The cautious approach to expansion contrasts sharply with the over-supply issues witnessed during the 2009 downcycle, ensuring a more sustainable growth trajectory this time.

With domestic tourism leading the charge and infrastructure advancements paving the way for future growth, the Indian hospitality industry is poised for sustained momentum. Yet, challenges such as global economic uncertainties and land availability issues necessitate a strategic focus on innovation and adaptability. As the sector enters FY2026, the key to success will lie in balancing expansion with profitability, ensuring long-term resilience amid evolving market dynamics.

“The healthy demand uptick has resulted in a pick-up in supply announcements and commencement of deferred projects in the last 24-30 months. Several global brands have made their entry into India. However, supply, which is expected to grow at a CAGR of 4.5-5 per cent at least until FY2026, would lag demand. Compared to the downcycle in FY2009, which saw untimely supply increases of over 15 per cent of the inventory at the bottom of the cycle during FY 2009-2013, the current low inventory growth is expected to support the upcycle, as demand improves over the medium term. A large part of the new supply is through management contracts and operating leases. Land availability issues currently constrain supply addition in the premium micro-markets in metros and larger cities. The addition to premium hotel supply in these areas is largely on account of rebranding or property upgradation and the greenfield projects are largely in the suburbs.” Vinutaa added.