Commercial real estate drives Mumbai hospitality sector

Commercial real estate development has played a pivotal role in shaping Mumbai’s lodging markets, according to Jones Lang LaSalle. “Mumbai leads all metropolitan cities in India with a total Grade A office stock of 7.9 million square meters as of December 31, 2012. The city has witnessed a Compounded Annual Growth Rate (CAGR) of 21.7% over the last five years in terms of incremental office stock,” says Sudeep Jain, Executive VP – Jones Lang LaSalle Hotels (India).

 
Meetings, incentives, conventions and exhibitions (MICE) demand is typically generated from a number of large conventions organised in Mumbai in the form of smaller meetings and conferences held by local companies. Some of the major events to be organised in Mumbai during 2013 include ChemPetro World Expo, Pharma World Expo, Plastivision India and India Steel Event. Additionally, Mumbai’s importance as the financial capital of the country results in a large number of events, related to financial, economic affairs and trade, being organised in the city.

Leisure segment

Due to the city’s predominantly commercial profile, the leisure segment contributes a relatively smaller percentage of room demand. For foreign tourists, Mumbai serves mainly as an entry

point into India for connectivity to other destinations in Maharashtra and other parts of India. Demand from the leisure segment is mostly concentrated around the South Mumbai area.

Based on JLL research, Mumbai has 45 operational hotels, with an inventory of 10,537 rooms spread across six categories. Prominent operators with a presence in Mumbai include Hyatt, Marriott, IHG, Starwood, Four Seasons, East India Hotels (Oberoi & Trident) and Indian Hotels Company Ltd. (Taj).

Luxury and upper upscale hotels dominate the total supply with 69% contribution to the overall inventory. The upscale segment contributes 14% followed by the midscale segment with an 8% contribution. Domestic and internationally branded economy and budget hotels in Mumbai currently represent 5% of the total supply. Serviced apartments in Mumbai are presently offered by four properties in the branded segment, namely Marriott, Oakwood, Grand Hyatt and Taj, collectively contributing 4% of the total inventory.

There are 13 hotels currently under construction in Mumbai across different categories with a total inventory of 3,394 rooms. Once operational, the total room inventory of Mumbai will go up by almost 32% from the existing supply. Some of the prominent international operators like Jumeirah and MGM have also announced their plans to enter Mumbai’s hospitality space in the coming future.

MIAL boosts the demand

MIAL, a joint venture between GVK led consortium and Airports Authority of India was awarded a mandate to modernise and upgrade Mumbai’s CSIA. Apart from the expansion of existing airport and development of a new terminal, MIAL will also auction land parcels on lease for commercial and hotel development. The auction process is expected to start during the second half of 2013. This move is expected to further augment the hotel supply in the city.

Lodging Market Performance

Over the three year period from 2009-10 through to 2011-12, Mumbai witnessed a marginal increase of 4% in Revenue per Available Room (RevPAR) as a result of a 1% increase in occupancy levels accompanied by a 2% growth in Average Daily Rate (ADR).

FY 2010-11 saw an increase of about 2.5% in occupancy and 5% in ADR after witnessing a steep decline from 2007-08 to 2009-10 due to global economic turmoil and the terrorist attacks at two prominent hotels in Mumbai. In 2010-11 occupancy levels averaged at 63% and ADR at around INR 9,500. Hotels in South Mumbai have been the worst affected in terms of performance post terrorist strikes at Trident and Taj Mahal Hotels followed by a bomb blast at Zaveri Bazaar in 2011.

Furthermore, the corporate movement from traditional CBD to Central and North Mumbai, due to availability of office stock at cheaper rentals, has also affected hotels in South Mumbai adversely.

Trading performance has seen a drop of 2% in RevPAR during the last 11 months, in comparison to 2011-12, in the light of a decline of 8% in ADR to INR 8,450. Occupancy on the other hand strengthened to 64% during YTD 2012-13 from 60% in the previous year.

Overall, the Mumbai lodging market has seen fairly stable demand levels over the past four years, along with a decline in average rates, primarily due to recent regular supply additions in the form of Shangri-La, Sofitel and Ibis.