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Growth and development of hotels likely to slow down in the next two years: JLL

India’s hotel and hospitality industry has declined sharply in the first quarter of 2020, as the COVID-19 outbreak impacts various segments of the sector. Coming off a high-performance base in 2019, the COVID-19 outbreak and the containment measures introduced by the Government of India have resulted in a severe drop in foreign and domestic travel, across both the tourism and business traveler segments.

“In the third week of March 2020, at an all India level, the hotels sector witnessed a decline of more than 65 per cent in occupancy levels as compared to the same period of the previous year. As travel restrictions around the world intensified further, Q2 and Q3 of 2020 are likely to be similarly impacted,” says the “India Hospitality Industry Review 2019: “The Show must go on…” released by JLL.

The report estimates that at least 30 per cent of hotel and hospitality industry revenue could be impacted if situation doesn’t improve by the end of June 2020. With more than 60 per cent of organised hotels in India already shut and several others operational with single digit occupancies, a recovery will be gradual.

Industry estimates indicate that in India, branded and organised hotels annual revenue is. INR 38,000 crore (US$ 5 Bn). Corporate businesses will be left with less money to spend on travel, lodging and entertainment. Behavioral changes will lead to reduction in socializing which in turn will impact F&B in hotels. All this will impact GOPs and further reduce yields to hotel owners It is also indicated that the working capital of hotels will be stretched this year. Cost optimization at all operational levels will be the key. “FF&E Reserves would need to be cautiously utilised. Operators would need to support the hotel owners more than ever,” adds the report.

Ramesh Nair, CEO and Country Head, JLL India said, “As the sector navigates turbulent times through the pandemic, growth and development of hotels in India is also likely to be impacted in the next two years. Any dry powder that is available today will focus more on buying operating assets rather than building new ones.”

The report also provides a comprehensive overview of hotel development in India in 2019. Whilst, 2019 witnessed a shifting of concentration to mid-scale and affordable branded hotel segments, more established developers such as Prestige Group, Chalet Hotels and owner operators such as Lemon Tree Hotels activated their existing land banks and announced expansion plans across key corporate markets in India. The report indicates that the strong performance of the office sector was the key to robust hotel market performance across the top 7 business cities of India.

Tourism has always been a significant contributor of employment generation and a massive source of foreign exchange earnings for the country. This sector not only employs workers in cities but also provides livelihood to people across social strata in rural areas.

The sector has also been amongst the most diverse employers in India as it employs significant number of women across hotels and its supporting businesses. “There are several macro factors that play favorably to India’s hotel and hospitality industry. First and foremost, the massive domestic sector, which has also become travel savvy over the years, will likely drive the rebound as travelers extend their average length of stay at a certain destination. Secondly, India may get an increased share of manufacturing and logistics business that may bring back business travelers to the country in the medium term,” said Jaideep Dang, Managing Director Hotels & Hospitality Group, JLL.

JLL advises that the focus on development could shift towards Tier 1 cities, which are fundamentally stronger business-driven markets. On debt side, new hotel development will be impacted as there will be limited lender appetite, particularly in more volatile resort markets. Investors led by private equity funds will be looking out for stressed assets as the working capital pain and reduced revenues will impact yields for existing hotel owners.

‘2020 started with a strong deal pipeline estimated at about US$ 1 billion worth of tradeable assets. Investment action will likely get deferred as the sector rebuilds itself after containment of COVID-19, however, we estimate that more assets may fall in the ring for sale in the latter half of the year”, suggests the report.

Growth and development is likely to slow down in the next two years. Projects under development will likely get delayed and raising development finance will also become more challenging. The report also points out that imports will become expensive because of the rising Foreign Exchange Rate. Developers could focus on locally available products to optimise project costs. On the investment front, cracks will emerge from over leveraged assets and hotel companies.

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