Despite all odds, the budget and mid-market hotels flourish in India

With the rise in domestic tourism visits and soaring demand for pocket-friendly rooms, the hotel industry is expected to witness a big boost at the lower-end of the market. Nearly two-third of the fresh additions in the hotel room inventory over the next five years is expected to be in the budget and mid-market categories, says a recent report by CARE Ratings. According to the ratings agency, India would see over 50,000 branded hotel rooms being added between 2018/19 and 2023/24, and out of which, about 34,000 would be mid-market and budget categories.

Among all categories of hotel rooms, the biggest influx would be in the mid-market segment (49.5 per cent) followed by upscale (21.9 per cent), budget (18.1 per cent) and luxury (10.5 per cent). This is rather surprising that most inventory is coming up in the lower segment since the economies are tilted in favour of the upper end of the market. How? One of the most common grudges of hotel companies, particularly the mid-market and budget operators, is that the land and construction costs are too high in India to justify building mid-market hotels.

For instance, the typical land cost is 40-50 per cent of the total hotel project cost in India as against 15-20 per cent in mature markets such as the US and Europe. That questions the viability of the budget and mid-market hotels.

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For the same reason, the branded hotel portfolio in India was largely skewed towards luxury hotels. There were a few mid-market rooms available (about 4,000-5,000) but those were operated by the small chains and standalone owners.

"Some 15 years ago, if India had over 25,000 branded rooms, almost 80 per cent of them were five-star and above. Imagine 80 per cent of the airline seats in India are business class. It was an inverted pyramid," says Patu Keswani, chairman and managing director at homegrown Lemon Tree Hotels.

The black money and bloated ego of the owners titled the scales further in favour of luxury hotels. "Who built hotels in India in those days? Other than Taj Hotels, Oberoi Hotels and ITC Hotels, people with black money used to build hotels. The black money has a negative return and it's high risk. If the black money gets converted into an asset (hotel), then the returns turn positive. That was the situation," says an industry expert.

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But a lot has changed since then. At the moment, over 55 per cent of the branded hotels (1.35 lakh rooms) in India are between one-star and four-star categories, primarily driven by the demand from value-conscious consumers. The other key reasons that brought the change in the market were the policy changes and the focus on hotel companies on the mid-market segment.

The high land cost was annulled by designing the hotels in an economical way. For instance, even if the room size in a luxury hotel would generally be 400 sq ft when other areas are included - lobbies, restaurants, corridors, empty space - the per room size would be about 1,000 sq ft. In a mid-market hotel, per room size has gone down to 500 sq ft (300 sq ft of room size; 200 sq ft of other areas) because of the smaller lobbies, fewer restaurants, and less spacious banquets.

Let's understand with an example. If a luxury 300-room hotel has 12,000 sq ft of lobby (or a lobby size of 40 sq ft per room), then a mid-market hotel would build about 1,800 sq ft of lobby (6 sq ft per room), which would save over 10,000 sq ft of area, require much less land and bring down the construction cost. If a mid-market hotel chain can replicate this model across its 100 hotels, it could build a profitable brand.

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Also, the change in the RBI (Reserve Bank of India) rules some years ago helped the mid-market and budget brands because they could get loans for a long-term and at reasonable interest rates (8.75-9.25 per cent). In the past, these hotel sector loans were treated like loans extended to the real estate sector which are short-term in nature and come at a high cost (12-14 per cent).

However, experts say that more needs to be done. Sudhir Sinha, chief operating officer at the US-based G6 Hotels, says that even if the mid-market and budget hotels have emerged as a big category, there's still no allocation of land by the government for these categories of hotels. "It doesn't make sense for the government to run hotels. They should rather facilitate what's happening in the industry. If possible, allocate some land in the mid-market segment where the land pricing is quite high so that it would make sense to build hotels," he says.