Indian hotels see varying effects from demonetization
Indian hotels see varying effects from demonetization
24 JANUARY 2017 9:23 AM

India’s switch to cashless, electronic transactions has had a negative impact initially on some hotels, particularly resorts. But sources said there is reason to be optimistic for the future of the industry in India. 

REPORT FROM INDIA—On 8 November 2016, a host of measures forced a shift to cashless, electronic transactions in what may turn out to be a red-letter day for Independent India.

Those measures included cancelling legal tender money and placing restrictions on cash transactions to put an end to black money or the “parallel economy”—essentially, “secret” money that is not reported to authorities, and on which no taxes are paid.

Coming during peak season for the hotel and tourism industry in India, the demonetization has had some impact, sources said, though to varying degrees.

Less impact on city hotels
“In city hotels, 70% of the occupancy is corporate driven; it is cashless travel, which was not that impacted,” said Abhijeet Umathe, associate director of hospitality and leisure at Knight Frank India.

“If there was a cut back, it was due to caution to cut down unnecessary expenditure. There would be a 5% to 8% impact on the city hotels on the room side. The (food and beverage) segment sees heavy spending, and my feel is that it may have been impacted by 15% to 20%.”

Atul Lall, VP of Hospitality and GM of The Claridges in New Delhi, agreed that “on the room side, in the city hotel, there has been zero impact.”

He said that 80% of his hotel’s bookings are made by foreign travel agents, and are credit-card transactions. “The rest is with corporates, which is billed to them,” he said. “So there has been no drastic change there. F&B also does not show much impact. There is a slight change in the banquets for social occasions.”

Rajat Gupta, director of national sales for Best Western Hotels & Resorts, said his company saw an impact of about 25% to 30% in the initial days of demonetization. “This, though, settled down and there has not been much impact,” he said. “The hotels had full bookings on New Year’s Eve.”

More on resorts
The greatest impact may have been felt at resorts, and properties which rely heavily on weddings, banquets and guests who are part of incentive groups.

“A large portion of this is traditionally cash business,” Gupta said. “January to March is the season for incentive group series, and this has been affected. The mood in this category of persons is not upbeat. The impact will be felt for a minimum one year provided the budget does not throw up any more surprises.”

At the Claridges in Nabha, Mussorie, which is a holiday destination, “the premium that we charge during the year-end has been wiped out,” said Lall. But, he added, “it has bounced back and people are comfortable with plastic.”

Projects delayed
Hotel construction in India has also taken a hit, sources said.

“New construction has not begun; the existing ones are held up. Projects will be delayed due to cash crunch,” Gupta said, adding that hotel openings may be delayed by as much as six months to a year.

Lall said his company has no ongoing projects. “However, in the industry on the construction front, there has been trouble because labor is typically paid in cash,” he said. “The scenario is more wait and watch.”

However, there seems to be good news on the availability of land and interest rates—traditionally, some of the biggest problems that face the India hotel industry.

“There is rationalisation of land rates. Land prices are coming down making it attractive to invest,” Umathe said. “More importantly interest rates have come down, thus making the viability of the project much higher.”

Previously, with interest rates at a high of 12.5% to 13.5%, the debt service coverage ratio would not be met, which called into question the viability of projects, he said. “Now, with interest rates hovering around 11% to 11.5%, the projects are attractive. Servicing of the debt will not be an issue,” he added.

Optimism reigns
Umathe cautioned that “going forward, in my opinion, it is too early to see long-term and short-term benefits of the demonetization. Much will depend on the success of the (Goods and Services Tax) rollout and what comes up in the budget. That impact will pave the way to the future.”

Still, he is upbeat about the future.

“At the moment, we are currently assessing seven feasibility studies for new hotel projects with a total of 850 keys,” Umathe said. “These are in the resort upscale, luxury category and spread across the country. It is more business than what I did before demonetization.”

Lall is also optimistic. He said he believes demonetization will lead to more structured hotel operators coming into India. “With transparency and lower land rates, it will make the sector more attractive,” he said.

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