STR: Charting a course for sustainable growth
This comeback was characterised by a renewed interest in tourism and a discernible shift in guest preferences. India mirrored this trend, with hospitality businesses successfully navigating the challenges of the pandemic and now displaying a renewed vigour in their recovery and expansion efforts. As the industry prepares to embrace the approaching new year, stakeholders find themselves contemplating the most effective strategies to propel further growth and achieve excellence. A thoughtful analysis of the past year, along with an understanding of the key factors that contributed to business growth, is essential for charting the way forward. In this context, who better than STR’s Senior Director for the Asia Pacific region, Jesper Palmqvist, to provide a comprehensive review of the market. Here’s what the man who simplifies the numbers through storytelling for clear decision-making across hospitality and investment companies as well as government branches and academia, has to say...
IF THERE was one word to define global hospitality performance in 2023, it would be “maturation”. After a couple of years of ups and downs and large regional differences, the industry found footing and more stability.
Navigating the intricate tapestry of hospitality performance across the world isn’t an easy one, with many nuances driving performance in different regions. However, globally, occupancy was over 90 per cent recovered to pre-pandemic levels since the beginning of 2023. Average Daily Rate (ADR) was, in most locations, above-inflation-recovered; with ensuant RevPAR over 100 per cent of 2019 levels.
Challenges on flight capacity, especially long-haul, meant that regions more dependent on such airlift, grew slower than others, notable example of this being Southeast Asia which still lacks 1/5th of all international seat capacity. It is moving in the right direction, but for some areas it is still moving quite slowly.
While putting out global numbers gives some perspective, one must realise it’s a blend of many different regions. Take Asia Pacific for example – we track sub-regions as Central and South Asia, North East Asia, Australia and Oceania, and Southeast Asia. Even within these sub-regions, there are major differences in performance with many underlying reasons. In summary for Asia Pacific, we are lagging ~6 per cent occupancy to 2019 levels at a year-to-date period (taking supply growth into account as well) with rates at exactly what they were in 2019 (not inflation adjusted). As flights and Chinese outbound gradually returns, this creates a future buffer of increased demand that helps underpin expected growth ahead.
Growth is ADR led in almost all regions, with Australia and Oceania at 21 per cent, Central and South Asia at 15 per cent and Southeastern Asia at 7 per cent over 2019 levels for the year-to-date period ending November 2023. Northeastern Asia is negative on occupancy and rates primarily due to lower consumption overall.
The Indian hospitality industry has charted nothing short of an impressive trajectory post-pandemic. In this story, let’s look at uncovering what lead to this, how we perceive performance in 2023, major trends and external factors that played a role in the resultant and a sneak peek into what we can expect moving forward.
We’ve spoken a lot about performance during the pandemic, but it is important to set context to what we saw in 2023 and why it played out the way it did. There were more than a few certainties which we knew about, while entering the year. Revenge travel visible in 2022 was tapering off; corporate demand was picking up; groups were at an all-time-high; domestic demand continued to remain resilient; inflation wasn’t that much of a concern domestically, India-outbound was gaining importance; the world had almost fully reopened. Uncertainties were more macro-economic in a recessionary fear and impacts it would have on India; China-outbound (indirect impact); flight capacity (especially long-haul, multi-aisle), geo-political tensions and the buildup of the ongoing Russia-Ukraine war.
In India, if we look at the trend in recovery of occupancy and ADR by collapsed class of hotels as pictured below, you can see that the occupancy recovery trend is quite similar across classes, with the upper midscale and upscale classes outpacing the rest. When it comes to average rates, since April 2022, all classes were above 2019 levels. The higher-class hotels had an edge over the others on rates throughout 2023.
With all this talk about growth & indexing, it is very important to also understand how we look at growth. The reference point can either make growth seem inflated, or realistic – depending on the KPIs.
Many regions across the world didn’t face the same sort of revenge travel in 2022, that India did. This was soon after the Omicron variant surge in Covid-19 cases in the first quarter of 2022. Typically, if you look at historical performance and seasonality in India, the 2nd and 3rd quarters perform relatively lower than the 1st and the 4th. This wasn’t the case in 2022.
The chart below indicates October 2023, year-to-date performance growth over same period in 2019 and 2022.
Occupancy growth is inflated when compared to 2022, because of the Omicron impact in the first quarter that year, as it comes off a lower base. If we compare to 2019, we see negative growth, which is, in fact, more realistic.
Rates, on the other hand, highlight a good story in both cases, but the comparison to 2019 involves three years of inflationary impact that also needs to be considered.
Overall, RevPAR growth in “reality” is a comparison to 2019, as long as you take into consideration inflationary impact as well.
There are regional differences, and events was a big driver
When we look at RevPAR growth by major markets/cities that we track and do the same comparison, it’s quite interesting to see the results. The leisure markets that witnessed benefits of revenge travel in 2022 show a slowdown in growth compared to other cities like Coimbatore, Bengaluru, Kolkata, Lucknow, etc – which show higher growth.
Another major driver of performance across the year in different pockets were events.
Group rates were at documented highs when we came into 2023. Historically, and otherwise, one would assume group business comes in at lower rates than transient business. That wasn’t the case with India in 2022, and in 2023. Average rates for group business have consistently been higher than that of transient across all months since Nov 2021, and that has a lot to do with the type of group business as well. Weddings of course play a large role in contributing to rate growth in the group segment, especially with the pace with which hotels were soon booked out, entirely in many cases, by delayed weddings from the pandemic. India was also blessed to have large scale events such as the Aero India 2023, the small, medium and large events stemming from India’s G20 presidency, and the ICC Cricket World Cup (albeit not the most favourable end-result for the country), to name a few.
Presented below is a look into how a few of these events panned out for hotels:
Aero India 2023
Bengaluru was in the spotlight in February 2023, and the week-long event in the Karnataka capital had hotels preparing for it for a long time, after a long hiatus. There was incoming demand from around a week prior, with preparations underway. Not only did the country witness some of the biggest historical deals being made (congratulations Air India), but we also saw hotels take full advantage of the surge in demand.
Despite good supply in North Bengaluru, hotels were packed. Across the dates of the event (Feb 13-17), the city-wide occupancy was above 75 per cent with rates crossing the INR 11,000 marker.
Luxury and Upper Upscale hotels witnessed good rate increases and that sustained for a while after that, powered by the G20 FMCBG meet as well.
The chart below shows the story by taking rates as an indicator of surge in demand.
ICC Cricket World Cup
The Cricket World Cup proved to be a major demand driver, especially in Ahmedabad which benefitted the most from a couple of great face-offs scheduled there.
Pictured below, is a look at forward booking data as India geared up to face Pakistan in the Narendra Modi Stadium at Ahmedabad. The fans of the game couldn’t seem to keep their calm and neither could the hoteliers.
The forward data for Ahmedabad showed a massive surge in bookings, with almost 70 per cent of the city’s inventory already booked for October 15, 2023 as of June 2023.
As the schedule got announced, there was an immediate surge in bookings, with many hotels increasing rates to above INR 50,000 for a night with over four months to go for the match.
G20 Summit in Delhi
Another bespoke analysis done on the New Delhi market, saw it witnessing average rate premiums the market has almost never seen in the past.
During the G20 Summit’s Delhi Declaration event in the Bharat Mandapam International Exhibition Convention Centre (IECC), Pragati Maidan witnessed the attendance of heads of 20 countries and special invitees and obviously, hotels benefitted.
Occupancy followed normal trend, with a slight pre-shoulder negative impact as market & hotels in vicinity were preparing for the summit, so reduced travel overall. There was a slight bump during the summit, but back to prevailing high levels immediately post G20 event. ADR is where the real positive story lies, as delegates & invitees along with their entourage occupied full hotels at premium rates. New Delhi Centre (around the diplomatic enclave) submarket witnessed the biggest jump. If we looked at just the select hotels that had delegates staying, the rate premiums are double of what you see in the chart.
All in all, it’s clearly visible from the above, the (mostly) positive impact of events in the country, and the need to promote development of infrastructure to support such massive events, both from a hotel supply side and an event infrastructure perspective.
Looking ahead, Balancing profitability expectations
In terms of the future of Indian hospitality, sustainable growth is not merely a destination; it’s a journey that requires meticulous planning, strategic vision, and a commitment to excellence. As the Indian hospitality industry gears up for the future, the blueprint for sustainable growth extends beyond mere financial metrics. At CoStar, we look at performance metrics, historical trends, forward booking data and trends therein, pipeline that’s under construction or planning phases, and our forecasts that we regularly conduct for the Mumbai market in India.
As we close 2023 and enter the final fiscal Indian quarter, it remains important to have balanced view of expected profitability growth in the hospitality sector. In the last couple of years hotel operators have been forced to manage cost more diligently than ever before, and this has been particularly challenging across labour and utilities expenses. As India not only recovered rate but also occupancy, while ensuring cost growth was kept lower than that of revenues, flow-through and gross operating profits (GOP) have improved vastly during 2023. As an example, this has led to a market like New Delhi grow GOP margins by as much as 10 percentage points when compared to 2019, now well above 45 per cent.
This raises an important point also seen elsewhere across Asia, where the relationship between owners and operators will play an important part. As rate growth stabilises, and if cost control remains solid, we cannot expect the same GOP margin growth moving forward, and one would assume budgeting as taken that into account.
A combination of the above factors makes us believe that the industry is poised to continue growing in the short to medium term. If we look at historical trends, there’s been consistent demand drivers and rate growth over the recovery period from the pandemic. Business on books compared to same time last year shows trends of lead-times slowly increasing. Every month in the next four-five month period has over 2-4 per cent overall occupancy as compared to same time last year, for the country.
When looking beyond 2024, where we expect lower but stable growth in many places if cost side of business can be managed, as source markets and seasonality continues to balance out; it remains important for owners and operators to have an agile approach and an open mind to change. We can expect demand headwinds to come back at some stage, alongside changes in customer behaviour, with for instance an increased focus and request for hotels to embrace an environmental mindset when building and managing lodging, both in urban and resort locations.
With an abundance of data intelligence at everyone’s fingertips and the advent of more accessible machine learning and AI tools to simplify tasks, it raises valid points for all stakeholders to revisit workflows and consider adjusting methods used for a long time. The success of the future hoteliers will depend highly on their adapability and willingness to consider change.
Pipeline addition has been consistent with demand growth. Over the past decade, barring 2020, India has added approximately between 10,000 to 15,000 rooms into the organised sector. This is either as a result of new hotels, or existing expansions. This looks like it would continue into the next two-three years that we can see, without much of a change to the norm. Of course, some locations may see more variations to the others, but at a macro level this shouldn’t impact performance any more than what has been the case all these years. On top of that, we are also in a cycle of more refurbishment, leading to a more up to date landscape of hotels overall.
Strategic expansion requires a nuanced understanding of geographical dynamics. Tier II and Tier III cities still present untapped potential, while popular tourist destinations demand sustainable practices to balance tourism influx. The global trend of the fast-growing development and branding of select-service upper midscale hotels looks to continue.
It’s also been encouraging to see that sustainability in hotel financing, development and operations is growing in awareness also in India.
Connectivity-wise, the pipeline of incoming or enhanced airports, with consolidation in some major players in the industry is positive overall, to demand growth and increase in domestic connectivity. A contributing factor that can prove quite valuable moving forward, is how India recovered beyond 2019 levels in seat capacity in long-haul flights faster than any other Asian country, and in doing so set itself up for a stronger contender in global hub & spoke airlift flows.
The macro environment is the only overall stabilizing factor which still holds some uncertainty, but given where India is positioned, headwind is limited.
