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Hotel Development Cost Trends in India
The article provides development costs of hotels that opened in India in the past two years, along with their construction tenures, and highlights the emerging trends in hotel development in India.
India - with a large domestic consumer base, a significant increase expected in foreign tourist arrivals (FTA) and an overall healthy economic growth - is attracting several globally renowned hotel brands to set up shop in the country. While the Luxury and Upscale players started eyeing the Indian landscape during the mid-90s, Mid-Market and Budget brands like the Courtyard by Marriott, Hilton Garden Inn, Four Points by Sheraton, Novotel, Aloft, Premiere Inn and Ibis have strategically entered the market in the last two to three years. As the Indian hospitality sector gears up for stiff competition across the positioning spectrum, it is interesting to take note of the development costs associated with these assets. As most brands have an international presence, are the development costs and construction tenures of their India projects in line with their own international benchmarks?
Over the past two years, HVS has been collating data to shortlist hotels for the 'New Hotels of the Year Award' at HICSA [Hotel Investment Conference - South Asia]. This has enabled HVS to maintain its own repository of all the new hotel developments in the country. The two fundamental questions we ask are, 'How much does it cost to build these hotels?' and 'What is the average time taken to complete these projects?'
Construction Cost Index
The last two years have seen building and material costs escalate, owing partially to the rising inflation. According to the Construction Cost Indices for Buildings released every month by the Construction Industry Development Council (CIDC), the material costs witnessed a steep increase in early-2008, then remained relatively stable for the remainder of that year as well as most of 2009, but have now seen a jump in 2010 again. Exhibit 1 displays the Construction Cost Indices for Buildings for six major cities in India.
Development Costs Survey
HVS examined the recent trends in development costs of branded hotels that opened across the country in the past 24 months. Our survey sample included data for over 9,000 hotel rooms from 70 hotels, across five levels of positioning: Luxury, Upscale, Mid Market, Budget, and Serviced Apartments.
Construction Tenure Survey
HVS also analyzed the construction tenure for the same hotels that opened in the past 24 months. Exhibit 3 illustrates that the average time for building a hotel was approximately 39 months in the Luxury segment and 30 months for both the Upscale and the Mid-market segments. It took approximately 23 months on an average to construct Budget hotels and 34 months for the development of Branded Serviced Apartments. While the average construction tenure across different positioning was expectedly varied, an interesting outcome of this exercise was that the longest time taken to build a hotel across most of the researched positioning was approximately four years. This could be attributed to the fact that the actual time taken to gather the required licenses, permissions and funding ends up delaying projects, irrespective of their positioning. HVS research1 reveals that a full service hotel requires over 120 licenses from multiple state and central agencies (as many as 40 depending upon the state) before it can open and operate. This process can take multiple years, especially if the developer is new to the system.
Other Emerging Trends
Most internationally branded hotels that opened over the last two years have provided extended and varied food and beverage (F&B) options. A typical Mid-Market hotel in the United States for instance, would offer no more than one F&B outlet and negligible meeting space, if any. However, the same brand is offering two to three F&B options and substantial meeting space in India. F&B is a significant contributor to the top line, especially in Tier II and III locations, such as Bhubaneswar, Raipur, Chandigarh, etc.
As the Indian hospitality sector grows, it will begin to see more differentiation in the presently hazy hotel positioning. While it is fair to assert that hotels in India are currently witnessing several overlaps between the Budget and Mid-Market segments and then again between the Mid-Market and Upscale segments, it is likely that the picture will become clearer with time. We anticipate that as the industry matures, each segment will carve its niche in terms of the product as well as service deliverables and there will thus be a rationalisation of development costs, which will be in line with their respective market positioning.
1 Manav Thadani and Saurabh Gupta. Critical Issues Facing Indian Hospitality - An HVS Whitepaper, January 2009.
About the authors
About Inshita Wij
Inshita Wij joined HVS New Delhi in August 2009 as a Consulting & Valuation Analyst. Inshita holds a B.Sc. in Hotel Administration from Cornell University, Ithaca and a Diploma in Hotel Management from Les Roches School of Hotel Management, Switzerland.
About Achin Khanna
Achin began his career with Hilton Hotels in Philadelphia, PA in 1999. He moved to Homestead Studio Suites - an extended stay chain of hotels in the United States as Assistant General Manager - Operations in 2000. He further moved to Cendant Corporation and worked at their corporate offices as a Franchise Services Manager from 2002 onwards. In 2004, when Cendant Corp. transformed to Wyndham Worldwide, Achin assumed the role of Regional Director for Business Development. While with Wyndham, Achin successfully supervised the revenue management & quality management operations for a portfolio of 140 franchised budget hotels. He joined HVS India in August 2007 as a Senior Associate and is now an Associate Director in the consulting side of the business.
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