India sees one of the lowest supply of hotels in FY24; average room rates to touch new highs

Hotels in India will continue to see high occupancy but supply will lag demand.

With demand still outpacing supply, Indians will continue to pay more for hotel stays and room rates, in fact, are expected to touch new highs.

The current supply pipeline is lower than post-FY09 global financial crisis period, noted brokerage firm ICRA Limited.

In the last two financial years, while room inventory increased by around 5 percent, demand grew by 8-10 percent, according to ICRA analysis.

A similar trend is expected to continue in FY25 and FY26 with the pace of hotel room supply growing between 4 percent and 5 percent and demand increasing by 8-9 percent.

The boom in travel has been driving demand for rooms among Indians, in turn fuelling the supply growth, said Vinutaa S, vice president and sector head, corporate ratings, ICRA.

“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," she said.

Although supply announcements have picked up in the last 18-24 months, it is expected to lag demand over the next few years, based on the pipeline so far.

"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," she added.

The National Capital Region (NCR) —which encompasses Delhi and its environs—and Mumbai will account for around 42 percent of the supply pipeline until FY26.

In FY23, Mumbai had 14,250 rooms/keys in the premium category, which is estimated to reach 16,300 by FY26. For NCR, rooms in the premium category are projected to increase to 25,100 from 22,450 in FY23. The other major markets of Bengaluru, Chennai and Hyderabad will have 14,750, 9,250 and 7,450 premium rooms, respectively by FY26.

Across India, the supply of premium hotel rooms will reach 1.13 lakh by FY26, up from 1.08 lakh in FY25.

Another key metric, the average room rate (ARR) for premium hotels is projected to rise to Rs 7,800-8,000 for full-year FY25, up 8 percent year-on-year. It will go up further to Rs 8,000-8,400 in FY26. ARRs had hit a peak of Rs 8,200 in FY08.

The pan-India premium hotel RevPAR (revenue per available room) is pegged at Rs 5,500-5,800 in FY25, against Rs 5,000-5,300 in FY24. The RevPAR is expected to increase further to Rs 5,800-6,200 in FY26.

When it comes to occupancy, it is also expected to be a record high in FY26 at 74 percent on average. After a marginal decline in occupancy in Q1FY25 due to the general election, it rose in the next two quarters and for the nine months of FY25, the pan-India premium hotel occupancy stood at 70-72 percent. Pre-covid, the highest occupancy was recorded in FY07 at 72 percent.

The Indian hospitality industry’s total revenue is estimated to grow by 7-9 percent on-year in FY25 and 6-8 percent in FY26, over the high base of FY24, Vinutaa noted.

“Demand is expected to remain strong across markets in Q4FY25 and FY26 as underlying drivers remain healthy. From a demand standpoint, FTAs (foreign tourist arrivals) have not recovered to pre-Covid levels and we don't see them recovering in the near term. Domestic tourism has been the driver and dependence on FTAs has been low. Also, even if we have Indians going out to other countries for tourism, I don't think there is an issue because of supply addition, which is on the lower side versus the demand growth. In addition, business travel is picking up in a big way," Vinutaa told Moneycontrol.

She also said that Mumbai and NCR, being gateway cities, are likely to report occupancy north of 75 percent for FY25 and FY26, benefiting from transit passengers, business travellers and MICE (meetings, incentives, conferences and exhibitions) events. Also, the sharp rise in ARRs of premium hotels will result in spillover of demand to mid-scale hotels.

"In Bengaluru, the occupancy is around 65-67 percent in FY25 and we expect this to be closer to 70 percent in FY26. So, very strong occupancy. ARR in FY25 is between Rs 7,000 and Rs 7,500 and in FY26 it will grow in high single digits. What is helping the demand is the services sector picking up. The most important drivers as part of business travel are the emerging GCCs (global capability centres) that are setting up offices in Bengaluru, which will be key demand drivers," Vinutaa said.