India's hotel demand outpaces supply, boosting hospitality sector: Rating agency ICRA

New Delhi [India], November 10 (ANI): Demand for hotels in India is expected to continue to outpace the supply addition, at least over the next three years, rating agency ICRA said Monday, inferring that the demand-supply mismatch augurs well for the pricing environment and occupancies for the key hospitality space.

With three years of double-digit revenue expansion from 2022-23 to 2024-25, and the growth momentum continuing in the current fiscal year, the Indian hospitality industry has fared well in recent years.

Rating agency ICRA forecasts a compound annual growth rate (CAGR) of 5-6 per cent in premium hotel room additions between 2024-25 and 2027-28, based on its proprietary inventory database.

In comparison, demand is expected to grow at a faster pace of 8-10 per cent.

As a result, occupancies across premium hotels are projected to improve by 200 bps to 72-74 per cent, and average room rents (ARRs) to Rs 8,200-8,500 in 2025-26, 3-6 per cent higher over the previous year.

The rating agency added that premium hotel key additions are democratised in this cycle, across Tier-I and Tier-II/III cities, given the increased acceptance of the latter among travellers, and space and land constraints in the former.

Buoyed by the strong demand sentiments and the improved earnings profile of hospitality players, the sector continues to see investments for supply additions and room upgradations, to encash on the opportunities.

Srikumar Krishnamurthy, Senior Vice President and Co-Group Head - Corporate Ratings, ICRA Limited, said: "India's annual premium hotel room inventory across 12 major cities crossed the 1 lakh mark in 2022-23, and is slated to cross 1.2 lakh keys in the next fiscal. However, demand growth is expected to continue to outpace the supply addition, at least over the next three years."

The addition of premium hotel keys in the current cycle reveals interesting trends, with Tier-II and Tier-III cities showing equal interest alongside the major Tier-I cities.

The former has been gaining increasing acceptance as travellers venture into less-explored territories for leisure pursuits, and spiritual travel trends gather prominence.

Furthermore, supply additions in Tier-I cities are constrained by limited land availability and high land prices, resulting in a focus on alternative markets and the suburbs of Tier-I cities.

ICRA believes that this widespread trend of supply additions across markets reduces the risk of concentrated supply additions and surplus supply in select markets. It augurs well for holding up the ongoing upcycle in the sector, as the supply addition in Tier-I cities is unlikely to satiate the increasing demand, while Tier-II and IIIs remain relatively underpenetrated markets for the premium hoteliers even with the proposed supply pipeline.

Certain pockets within the hospitality segment, such as airport hotels and spiritual tourism, have garnered significant interest over recent years, with 2,000-2,500 premium keys in the pipeline in each of these segments, which is estimated to be around 10-15 per cent of the total premium supply pipeline.

While the airport hotels are primarily located in the gateway cities of Delhi and Mumbai, the interest in spiritual tourism is a pan-India phenomenon, with locations like Ayodhya, Varanasi, Tirupati, Bodh Gaya, Rishikesh, Prayagraj, etc., attracting traffic from all over the country, ICRA said.

Growing disposable incomes and an increasing number of travellers seeking premium travel experience have been increasing demand for more organised hotels, restaurants and other infrastructure in these spiritual sites, and accordingly, larger hotel chains are adding premium hotel inventory at these places, the rating agency added.

ICRA maintains a Stable outlook on the Indian hospitality industry.

ICRA forecasts hotel companies to report operating margins of 34-36 per cent for 2025-26, similar to 35.8 per cent in 2024-25, with focus on costs and asset-light expansions continuing to support the margin profile. (ANI)

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