Here's why hotel room rates in India may double in the next 3 to 4 years

• Indian hotels have had a long down cycle and it is now turning around, says Patanjali Keswani, founder of Lemon Tree Hotels.
• Demand is growing faster than supply of new hotel rooms after a decade, according to analysts.
• The changing dynamic in demand and supply may lead to a spike in hotel room rates.

The wave is turning for India's hoteliers after a decade of anguish. The number of travellers seeking accommodation is growing faster than the rise in new hotel rooms for the first time since the global financial crisis struck a lethal blow. And Patanjali Keswani, the founder and chairman of Lemon Tree Hotels, believes the turnaround may be so strong that hotel rooms rates may double in the next three years.

"My expectation is from October this year, for the next two years -- because it takes about five years for new supply to come in-- prices will keep going up. Then,the returns (on capital) will improve and new guys will plan their supply because then it will be a business worth investing in. But it will take a few years for that supply to come in. I guess, just like how it was the longest bottom-up cycle for hotels in India -- from 2009 to 2017-18 -- it will be a long top-up cycle because people who invested in hotels in India in the last 10 years have been so badly burnt, you will need a very brave guy to take a counter view. So my guess is, if you ask me what the room rates will be three to four years out, I will say it may be double of what they are today," Keswani said in an interview with Business Insider.

Industry watchers agree with Keswani. Demand is expected to grow at a compounded annual rate of 6% until financial year 2022, that's one and a half times the 4% growth expected in new hotel rooms, according to advisors at Nirmal Bang Institutional Equities.

Even now, average hotel room rates in India are still 30% below what they were at the end of March 2008, according to Axis Capital, which also sees definite signs of a turnaoround. Hotels raise prices when the occupancy rates cross 70% and the industry-wide rate last year was already at 68%, Keswani explained.

Lemon Tree Hotels has an average occupancy of close to 80%, according to Keswani. The company has already hiked prices twice in the last two years. "In October 2017, we got a 13% price hike (in average room rate) and in October 2018 we got a 8.5% on a higher base. We are expecting similar, if not higher, price hike going forward because now, there is clearly a shortage of supply," he added.



What will drive the demand?

Aside from the slowdown in addition of new hotel rooms, Keswani projects a sharp spike in demand triggered by economic growth.

"There are 3 parts of India. Half of India is earning less than $500 per capita- these are people who consume roti (bread), kapda (clothes), makaan (shelter), and mobile. Next 40% of India's population earns upto $2000 per capita. These are people who consume healthcare and education, which are non-discretionary to them, and some minor discretionary items- could be entertainment, leisure and a little bit of retail. The last 10% of India is upto $7000 per capita. This is the real consuming population of India, about 30 million households," Keswani explains, adding that when the economy grows there will be an exponential growth in the consuming population.

According to him, if the per capita income grows 50% in the next seven years, the size of the big consuming segment will be thrice its current size. And that is the boom that the hoteliers like Keswani are waiting for.

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