The growth in room rates and occupancy is driven by high demand from both business and leisure travellers. While demand has grown rapidly, supply has not been able to keep pace. Hotel rooms in India’s leading cities today are among the most expensive in the world.

According to Manav Thadani, MD, HVS Hospitality Services, “If rates continue to grow at this pace, they will become a deterrent to business and tourist travel. In the long term, inflated room rates will also have a severe negative effect on potential demand. The effects are already noticeable in most markets. For the first time in four years, markets such as Bangalore, Chennai, Delhi, and Hyderabad have seen a decline in occupancy rates.” In Bangalore, where room rates are among the highest in the country, occupancy level has declined for the second consecutive year.

Another consequence of the exorbitant rates in branded hotels is the emergence of a segment comprising unregulated and unorganised hotels and guest houses. This segment is booming in Bangalore, Delhi, and Pune. Bangalore, especially, has 2,000 rooms in the unbranded segment, which exceeds the supply in the branded category. With rates in the branded category so high, unbranded hotels and guest houses are also able to command a good price. In Bangalore, their rates range from Rs 3,000-7,000 per night.

The all-India average occupancy level touching 72 per cent is significant. Said Thadani: “When the average touches the 70-72 per cent mark, it indicates substantial unaccommodated demand.” That’s because of the cyclical nature of demand in the hotel industry: demand is higher during weekends, and again, high during the peak season.

Added Thadani: “The high room rates also mean that the correction in rentals, when supply catches up, will be sharp.” According to an HVS report, Bangalore, Pune and Hyderabad could see correction in rental rates in the short term. In other cities, it will be 3-4 years before supply catches up and rentals rationalise.

The answer to escalating rentals, of course, lies in developing more rooms and at a faster pace. But as Rajendra Thakre, MD of Singapore-based Meuse Hotel and Hospitality, which aims to invest $200 million in India by March 2008 said: “The run up in real estate prices has made it tough to develop hotels here.”