High interest rates hit budget hotels' expansion plans

MUMBAI: Robust real estate prices and rising interest rates could make life difficult for India’s budget hotel industry forcing them to either increase prices or face a margin squeeze.

Over 40 budget hotels with around 4,000-5,000 rooms are likely to come up in the next two years. These budget hotels, with a room rate of around Rs 1,700-1,800 per day, are primarily targeting tier-II cities and some of the metros as well, industry sources said.

“Budget hotels may find it financially unviable with capital cost going up. But most of the hotel chains planning budget hotels will go ahead with their plans. There is a huge demand-supply gap that needs to be filled,” says Chender Baljee, chairman and managing director of Royal Orchid.

Several deluxe hotel chains are looking at the budget segment in the next two-three years. It includes Golden Tulip, Sarovar Group, Radisson chain’s Country Inn & Suites, Accor’s Ibis, Ginger, Lemon Tree and ITC’s Fortune Park. The Indian Railways is also planning to build around 10 budget hotels across the country over the next three years to meet the tourism boom.

Hotel industry officials indicate that the main road block for the hotel industry is funding. With interest and land prices going up, banks should be allowed to extend the term loan tenure for funding these capital intensive projects from the current 10 years to 20 years, says Manav Thadani, MD, HVS International, a global hospitality consulting firm.

This would really help the new hotel projects, he said. Budget hotels have a high proportion of domestic travellers, unlike deluxe or five-star hotels with a large proportion of well-heeled foreign travellers.

With a number of low-cost airlines being launched in India, and a spurt in leisure travel by the country’s burgeoning middle class, budget hotels are likely to come up at a faster rate.

But if real estate prices continue to rise and interest rates also remain firm, some of the budget hotel companies may have to rethink their plans. An important factor in their favour is that budget hotels can operate at 50% occupancy and still make profits.

They have lower fixed costs compared with a deluxe or a mid-segment hotel. Also, budget hotel room rates would not see a sharp rise owing to competitive, industry sources said.