HOSPITALITY INDUSTRY ANALYSIS
The travel and hospitality industry continues to be the sector, which has largely profited from the
fast growing economy of India. This has largely been due to the 5.2 m tourist arrivals in FY08
(11% growth) over the previous period. In the last five years, growth stood at 17% per annum.
The hotel industry went through a rough patch between FY00 to FY04 owing to factors like the
Asian financial crisis, Afghan war, Middle East unrest, September 11 attacks, SARS and
India occupies forty-sixth position among the sixty tourist destinations in the world. A
flourishing economy helped boost demand for the industry. To encourage the tourism sector, the
government is planning to propose a conditional 10-year tax holiday for all tourism projects in
the country. Companies will enjoy full tax exemption up to 50% of profits, but will qualify for
tax benefits for the remaining amount only if they re-invest it in tourism projects. The Centre and
States are also working out a PPP (Public-Private-Partnership) model to increase hotel capacity.
Efforts to diversify tourist attractions by offering new products such as wellness tourism, medical
tourism and golf tourism are expected to have a positive effect on both foreign tourist arrivals
and domestic tourism.
The outlook for India's tourism industry is upbeat. Key factors driving the tourism boom include
India's sustained economic growth, strong foreign direct investment inflows, increased air
networks, the availability of cheaper air travel, a strong domestic market and aggressive
marketing campaigns. Challenges relating to inadequate tourism infrastructure still remain, but
are not enough to dampen the bullish outlook for the Indian hotel market.
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Table 1 Key stats
Source: World Trade Tourism Council
Encouraged by this optimistic tourism outlook, many developers, investors and international
hotel management companies are jumping onto the India hotel bandwagon. A number of the
Indian real estate players view hotels as a natural extension and synergy to their growth real
estate portfolios. The major cities that are the hub of economic and real estate development in
India are: Bangalore, Chennai, National Capital Region/Delhi (comprising the capital city Delhi
and suburbs of Noida, Gurgaon, Faridabad, Ghaziabad and Greater Noida), Hyderabad, Kolkata,
Mumbai and Pune.
India has become a favoured destination for global investors and multinational corporations ever
since it opened its economy in the early nineties.
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Tourism market overview
1. Key trends and demand drivers
India, which ranks after China (PRC) as the world's second-most populous country, has
experienced a tourism boom in recent years. Bolstered by a multi-faceted tourism product
that ranges from 27 world heritage sites to religious relics, spa/mountain resorts and
wildlife parks, India has much to offer leisure travellers. Figure 1 Shows the Customer
profile that visited the hotels in the year 2008.
Customer Profile in FY 2008
37% Domestic Leisure
Figure 1 Customer profile
The growing Indian economy will spur business travel. The strong performance of the
corporate sector and the growth in the economy has led to an unprecedented surge in
business travel. GDP grew at a robust 9.4 per cent in 2006-2007 and is expected to grow
by another 8.5 per cent in 2007-2008. Tourism’s contribution to the GDP is shown in
Figure 2. Furthermore, the industrial and services sectors have recorded double-digit
growth rates. These figures will undoubtedly continue to raise the level of business travel
in the country. In keeping with the current growth rate, India's hospitality industry is
anticipated to grow at 8 per cent per annum between 2007 and 2016 .
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Figure 2 T&T Contribution
The liberalisation of the airline industry will promote increased travel by both
international and domestic travellers, further fuelling growth in the hotel sector. Open
skies policies and direct international flights to the US and Europe have increased the
country's accessibility, raising international traveller flows. In addition, increased
frequency of existing routes and the introduction of additional routes by low cost carriers
(LCC) such as Indigo, Spice Air, Jet Lite and Go Air will enhance domestic travel flows.
Recognising the importance of the tourism industry, the government has made large
strides in marketing India internationally. Building on the success of the Incredible India
campaign in previous years, the Ministry of Tourism has launched an integrated
international media campaign to promote India as 'must-see' year-round destination, with
a focus on both generic and niche areas. "Chasing the Monsoon" is the new theme for the
west Asian market.
"The government has also introduced initiatives to spur growth in the hospitality sector. Tax
holidays for two, three and four-star hotels established in specified districts that have UNESCO
World Heritage Sites and convention centres with large seating capacities in the National Capital
Territory of Delhi and in the adjacent urban areas of Faridabad, Gurgaon, Ghaziabad or Gautam
Budh Nagar, have been announced to foster development prior to the Commonwealth Games in
2010. In addition, there are proposals to improve the tourism infrastructure that will lead to
increased travel. These proposals include constructing 33,000 kms of the National Highway in
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the Golden Quadrilateral, North-South and East-West Corridor areas, improving identified ports
to facilitate cruise tourism and evaluating public-private partnerships to connect identified
circuits and destinations by rail.
"Medical tourism will also result in additional demand for hotel rooms. This sector has gained
momentum in the past few years, given the cost advantage and emergence of high quality
healthcare services in India where a choice of airlines, hotels, transportation, food and
sightseeing is offered along with medical treatment in the form of packages. The country's
medical tourism industry is thriving, encouraged by the introduction of a medical visa. In
addition, the Indian government has announced plans to promote medical tourism with an
investment of Rs 260 billion for funding relevant infrastructure including affordable hospitals
and budget hotels for patients and their relatives. Due to the lack of a 'single window' clearance
system, foreign investors have faced problems investing in this sector, and the Indian
government is looking at ways to improve the system.
Table 2 Key points
Supply is catching pace. Metros will witness an oversupply
Supply situation after four to five years.
Largely depends on business travellers but tourist traffic is also on
Demand the rise. Demand normally spurts in the peak season between
November and March.
High capital costs, poor infrastructure facilities and scarcity of
Barriers to entry land especially in the metros.
Limited due to higher competition, especially in the metros.
Bargaining power of
Higher in metro cities due to increasing room supply.
Bargaining power of
Intense in metro cities, slowly picking up in secondary cities.
Competition Competition has picked up due to the entry of foreign hotel
2. International visitor arrivals
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India has set a tourism target of 10 million international tourist arrivals by 2010, the year
of the Commonwealth Games in Delhi.
Preliminary statistics from the Ministry of Tourism indicate that inbound tourist arrivals
had already reached a 10-year high of approximately five million in 2007. This represents
a 13 per cent growth over the previous year and the fourth consecutive year of positive
growth in inbound foreign travellers. Compared with the 2.4 million international arrivals
in 2002, the number of foreign visitors to India has increased by an impressive 86 per
In tandem with the increase in foreign arrivals, foreign exchange earnings soared by 34
per cent over 2006 values to Rs 480 billion in 2007 shown by figure 3.
Figure 3 Foreign tourists arrivals
Leisure travel (96.6 per cent) remains the primary reason for travel to India, followed by
business (2.8 per cent), according to statistics sourced from Ministry of Tourism. While
the overall trend is expected to remain unchanged over the next few years, the proportion
of business travellers could increase with the rise in foreign investments to India.
3. Major international source markets
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All major source markets recorded positive growth in 2006, with the UK and the US
maintaining their positions as India's two largest foreign source markets, according to
latest available statistics from the Ministry of Tourism.
Nepal, Sri Lanka, Japan and Malaysia were the major source markets. Notably, the
number of arrivals from Nepal showed the highest year-on-year increase among top
Asian markets in 2006.
While the UK and the US are expected to remain India's two largest foreign source
markets, arrivals from Asia are expected to rise with the availability of more flights to
In January 2007 India-based Jet Airways launched direct daily flights from Delhi and
Kolkata to Bangkok. The same year also saw the airline serving the New Delhi - Toronto
and Mumbai-Newark route via their European hub, Brussels.
Reflecting strong travel demand for India, Singapore Airlines now operates six flights a
week to Bangalore while Japan Airlines started daily flights between Tokyo and New
Delhi in October 2007 to meet the business demand on that route. Other cities such as
Kolkata, Hyderabad and Chennai are also served by direct international flights from
major source markets.
4. Domestic tourism
India's domestic tourism market is significant and growing. According to the Ministry of
Tourism, the number of domestic travellers has increased steadily from 140 million in
1996 to 391 million in 2005 (latest available statistics), a year-on-year increase of seven
per cent. The growth in domestic tourism is attributable to the increasingly affluent and
growing population, strong economic indicators, expanded air networks and the
liberalisation of services.
Pending the release of official data, this growth is expected to have continued into 2006
with indicative statistics from the Ministry of Tourism suggesting that it might have
crossed the 460-million mark.
Hotel market overview
Financial Year '08
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India continued to witness cheering trends in the tourism sector in 2007 with 5.2 m
tourists visiting the country, registering a growth of 11% YoY. The Indian hospitality
sector continued to be the forerunner of India's economic growth with support from the
government. In the Budget 2007, five-year tax holidays for new star-category hotels and
convention halls coming up in the National Capital Region by 2010 were announced. The
Ministry has sanctioned 225 projects and utilised Rs.4.6 bn for upgradation of
infrastructure facilities at important tourist destinations. Even public-private partnership
is being planned to develop infrastructure projects. As a result of the high room rates in
branded hotels, unregulated, unorganised hotels and guesthouse segments have emerged.
Even the existing hotel players entered new segments like budget hotel and service
However, in the beginning of the year, the global crisis, slowdown in corporate earnings
and rising air fares affected the hotel sector to a certain extent. Occupancy levels at hotels
catering to business travellers have dropped 5% to 10% since the end of January. With
the dip in occupancy levels and new supply coming in certain destinations, the room rates
witnessed a marginal increase, which was much slower than what was witnessed last
year. Further, with hotel rooms in India being relatively more expensive (last year was
unusual when tariffs rose by 25%), a slowdown was inevitable. Average room rates
(ARRs) in the branded hotel category in India have increased 280% in the past three
years, as per HVS International. Bangalore saw a decline in room rates, while Mumbai
and Delhi witnessed a 15% to 18% increase as compared to more than 30% hikes
witnessed in FY07. Going forward, the prices will soften by the end of the year as the
supplies would start coming in from FY09, which would bring tariffs to a more realistic
The Planning Commission's High Level Group on services sector has pegged the room
shortage in the country at 150,000 rooms by 2010, out of which more than 100,000 will
be in the budget category. Not only the Indian hotel majors, but even international players
have lined up huge capex plans. Investments of US$ 11 bn over the next 2 years are
expected to be earmarked for the hotel industry in India. Further, new segments like
budget hotels, service apartments and management contracts are witnessing increasing
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Based on the facilities and services provided, the Ministry of Tourism approves and
classifies hotels in India into eight categories, namely five-star deluxe, five-star, four-star,
three-star, two-star, one-star, heritage and classification-awaited hotels.
As at the end of 2006, India had an estimated 1,169 approved hotels accounting for
75,787 rooms. The majority of this supply was located in Delhi, Mumbai, Bengaluru,
Chennai and Hyderabad.
Historically, the high land prices in many of the key cities have resulted in hotels being
developed in the upper tier categories, causing a scarcity of supply in the lower
categories. In its recent budget, the government has provided tax incentives to develop
one, two and three-star hotels in and around Delhi.
Aggressive growth in revenue per available room (RevPAR) has been recorded in the
three key Indian cities of Delhi/NCR, Mumbai and Bengaluru over the past five financial
years. In FY2006-2007, the five-star deluxe and five-star hotel segment in Delhi/NCR
and Mumbai reported growth in average room rates (ARR) of about 40 per cent over the
previous year, while Bengaluru reported almost 20 per cent ADR growth over the same
period. In comparison, the occupancy growth has been less aggressive and in certain
markets such as Bengaluru, occupancies have stagnated and even declined.
Demand for rooms in India particularly in the key cities (e.g. Delhi/NCR, Mumbai and
Bengaluru) is exceeding supply. This has fuelled the aggressive growth in room rates and
prompted the entry of new players. To address the huge demand-supply imbalance,
efforts will be directed towards building 150,000 hotel rooms in the next four years, in
addition to the launch of a new 'Bed and Breakfast' scheme to meet the requirements.
The proposed known additions to supply are expected to be rapidly absorbed as they
come on line over the next two to three years. After that room rates are expected to adjust
to more realistic levels. Markets such as Bengaluru - which generates one of the highest
ARRs in India - are expected to experience a substantial rate correction by the end of the
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Figure 4 ARR
Additions to supply
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Table 3 City Study
Source: Cushman & Wakefield Research
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According to research, the six major markets have approximately 28,000 new rooms
planned by 2011: Bengaluru, Hyderabad and Pune will be most significantly impacted as
room supply is forecasted to increase almost 250 per cent by 2011; in Delhi/NCR, the
majority of supply is being developed in Gurgaon and nearby Noida with almost 100 per
cent rooms expected to be completed by 2011, while Mumbai and Chennai are expected
to record growth rates of 35 per cent and 55 per cent respectively.
Chennai has established itself as a preferred destination for the IT/ITeS (Information
Technology/Information Technology enabled services) industry. The major brands
expected to enter into the market in 2009 such as Hilton, Hyatt and JW Marriott will raise
the standard of accommodation. Hyderabad has very few rooms compared with Delhi and
Mumbai. Most hotels are now concentrated in the central business district (CBD) and
upcoming markets of IT/ITeS. The Taj Group's hotels are expected to commence
operations in 2008.
It is difficult to get accurate information on future developments in India, including
hotels. There is an unusually long approved process which delays projects and presents
significant barriers to entry, particularly for foreigners. Land is very expensive
everywhere and quality sites for hotels are even harder to locate. In some cases, part of
this delay is caused by the amalgamation of land which is time-consuming as it entails
purchasing land from different owners.
The investment market
In November 2007 DLF announced its equal partnership with Aman Resorts to enter into
definitive agreements to acquire a controlling interest in the group. The entire transaction,
when completed, is estimated to be valued at Rs 16 billion, with an assumed debt of
approximately Rs six billion. In addition to expanding its resort locations, Aman Resorts
is developing projects in key gateway cities around the world, the first of which is
scheduled to open in New Delhi in 2008.
US hospitality major Carlson is taking a 25 per cent stake in a new venture with the
United Group to introduce the Regent Hospitality brand in India. The joint venture will
develop a luxury hotel property located at Greater Noida with an estimated investment of
Rs 4.5 billion.
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Domestic mid to economy-segment group Lemon Tree Hotels has announced that Kotak
Mahindra Realty Fund has invested Rs 320 million in the company. In a related
development, Kotak Mahindra Realty Fund is investing about Rs 20 million in Red Fox
Hotels which proposes to open limited-service economy hotels in the price range of Rs
800-2,000 per night.
Credit Suisse, one of the world's top investment banks, launched its domestic brokerage
operations in India earlier this year and recently obtained its Indian merchant banking
licence. Credit Suisse's real estate fund will acquire 10-15 per cent in a hotel chain in a
structured deal. This is Credit Suisse's second investment in the real estate sector, the first
being its acquisition of 75 per cent of a Rs 3 billion Info Tech park and five-star hotel
project from Pune-based developer, Vascon Engineers.
The Orchid Group of Hotels is planning to invest over Rs 10 billion to set up seven five-
star properties in key centres across the country as it mulls an international foray with
properties in China (PRC) and South Africa. It is also planning to add nearly 2,000 rooms
at seven locations across the country. The company has entered into management
contracts for 10 hotels set to open across the country over the next two years.
Milan-based Domina Hotel Group announced in November 2007 that it would develop
25 hotels through a joint venture and invest Rs 24 billion. In India, its first hotel is
already under construction and will be marketed under the new brand Vedic Domina
Hotels & Resorts. Another four are expected to be built within five years.
It was announced in December 2007 that Kamat Hotels had bought a 60 per cent stake in
Concept Hospitality for Rs 127 per share. The key hotels Concept will manage include
Seasons in Pune, Wall Street in Jaipur and Manor Floatel in Delhi. All of these now fall
under the management of Kamat Hotels. A total of 650 rooms will be under the listed
Kamat Hotels entity which currently operates about 600 rooms.
Kotak India Real Estate Fund has just acquired an approximate 11.11 per cent stake in the
Mumbai-based The Price Group of Hotels at a cost of Rs 450 million. The group, which
currently operates four five-star hotels, has announced a Rs 3.50 billion expansion and
renovation plan which includes setting up five-star hotels in Mumbai, Goa, Bengaluru
and Hyderabad in addition to a resort hotel and spa in Alibaug. The management
envisages an overall inventory of 1,150 rooms in key cities by end 2009.
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Dubai Ventures, the private equity arm of Dubai Investment Group, has bought a five per
cent stake in Delhi-based Bharat Hotels for Rs 1.6 billion - the deal values the company
at Rs 32 billion. The hospitality chain plans to raise up to Rs 10 billion for the expansion
of six properties under construction and has recently announced an international foray
through a joint venture with the Dubai-based Nakheel Group - Grand Fort Dubai is set to
open in 2009. Other hotels that are under construction and scheduled to open over the
next two years including The Grand Jaipur, The Grand Resort Bekal, The Grand
Ahmedabad, The Grand Chandigarh and The Grand Noida.
DB Realty, a domestic real estate fund, is investing about Rs 3.2 billion in a 320-room
five-star property in Goa. Hyatt International will manage and market the property. The
project is likely to be completed by the second quarter of 2009.
Financial services giant Morgan Stanley is close to picking up a 15-20 per cent stake in
the Institute of Human Health Research Hospitality, owners of the Ananda and Ista
brands of spas and hotels, for Rs 1.4 to 1.6 billion. Morgan Stanley will have a seat on the
board of the hospitality company which is in the process of expanding its footprint in
Delhi, Hyderabad, Pune and Ahmedabad. It plans to have nine properties under the Ista
brand over the next three years.
Oberoi Hotels is fast expanding in India, Abu Dhabi, the Maldives, Cambodia and Dubai,
partly through management contracts and also through investing about Rs five billion of
its own funds. The Group has hired Kotak Mahindra to help raise Rs four billion via debt
and new equity.
India's Parsvnath Developers has signed an agreement with conglomerate ITC's Fortune
Park Hotels to manage 50 hotels comprising 4,100 rooms for Parsvnath Hotels, a
subsidiary of Parsvnath. Parsvnath Hotels is expected to invest approximately Rs 25.4
billion to develop and own 50 hotels in India which will comprised 20 five-star hotels, 20
four-star hotels and 10 three-star and budget hotels between 2011 and 2013. The hotels
will fall under the brands of Fortune Select, which are likely to have at least 100 rooms
each; Fortune Park, which is expected to have 75 or more rooms, and other brands such
as Fortune Inn and Fortune Faith, which are likely to have at least 50 rooms. Faith, which
is likely to have at least 50 rooms. Parsvnath plans to eventually develop 75 to 100 hotels
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across India, especially in the second and third-tier cities, as well as in other major
Choice Hotels India (CHI) has announced a Rs 7.6 billion franchise and management
plan to partner with various investors to develop 20 new hotels with approximately 2,000
guestrooms in India's major, tier-one and tier-two cities by 2010. CHI is also planning to
introduce India's first all-suite hotel, Clarion Ludhiana, in Ludhiana, Punjab by the end of
2008. The 120-suite Clarion Ludhiana Hotel aims to target non-resident Indians (NRIs).
In addition, CHI has also linked up with Royal Indian Raj International Corporation
which is expected to invest approximately Rs 160 billion from 2008 to 2012 to
develop15,000 budget guestrooms across India under CHI's hotel brand such as Clarion,
Comfort Inn, Quality Inn and Sleep Inn.
India's real estate fund, Yatra Capital, has entered into a joint venture with Atlas
Hospitality Company (AHPL), a subsidiary of Ruia Group, to develop a luxury hotel and
serviced apartments in Pune. Yatra is expected to hold a 20 per cent stake in the Rs 286.4
billion venture, which also marks its entry into India's hospitality industry. Scheduled to
be completed in late 2009, the 26,900 square metre project is likely to comprise 319 hotel
rooms and 96 serviced apartments. The project is expected to cater to business travellers
in the area.
Rakeen India Operations Company (Rakindo) has announced the signing of a
Memorandum of Understanding (MoU) with Lotus Hotel Investment Fund (Lotus) to
develop business hotels in Asia, particularly in India. According to the MoU, a joint
venture company will be formed to invest in three-star and four-star hotels in Asia, with
six major cities in South India being the initial focus.
Real estate developer, Royal Palms India (RPI), has announced its plans to invest Rs 15.3
billion in the next three years to develop a 8 million square feet development in suburban
Goregaon. The development is expected to comprise three-star to five-star hotels, IT
offices, residences, villas and a retail mall.
ITC has announced that through its subsidiary, Fortune Park Hotels, plans are underway
to add 100 hotels in rural India to leverage the growing corporate demand as well as
reach out to approximately 792 million (72 per cent of the 1.1 billion population) people
living in the rural areas. Fortune Park Hotels is expected to expand hotels and inns with
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as few as 200 rooms each in the smaller towns of India by 2012, adding 3,000 rooms
under its brand.
Indian real estate developer DLF will open a Four Seasons Hotels in Gurgaon at a cost of
Rs 5.9 billion. Part of DLF's ambition to become India's largest hotel group, the 250-
room hotel will be developed on a 10-acre site at DLF Golf Link and is expected to open
before the Commonwealth Games in 2010. The developer has also secured links with
Hilton Hotels to construct over 25,000 hotel rooms on 40 parcels of land in 71 cities in
the country by 2010. The cities include Delhi, Mumbai, Chennai, Kolkata, Bengaluru,
Hyderabad, Pune, Chhattisgarh, Amritsar and Ludhiana.
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Kolkata, the capital of West Bengal, is the commercial capital of the north-eastern region.
Most companies have their regional offices in the city which acts as a major demand
driver for the hospitality sector. Kolkata is also a major commercial and military port,
being the only city in the region to have an international airport besides having good port
infrastructure. It is also the headquarters of Indian corporations like ITC Ltd, Birla
Corporation, RPG Ltd, Peerless Industries, etc. Many global and domestic software
companies have set foot in the city and the gradually growing IT/ ITeS sector is expected
to drive the development of the hospitality sector in the city. Constructions of various
flyovers, up-gradation of the international airport and extension of METRO have been a
few of the initiatives taken to improve infrastructure and to keep pace with all the
development activities. Kolkata has also gained significance as a MICE destination with
large number of conferences held at the city.
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Figure 5 Kolkata Map
Source: Cushman & Wakefield Research
The existing room inventory consists of 2,300 – 2,500 rooms spread across 23
Approximately 64% of this room inventory consists of up-scale hotels,
primarily located along Salt Lake City, Park Street, Jawaharlal Nehru Road
and AJC Bose Road.
The remaining existing room inventory is divided into mid-scale and budget
hotels each constituting approximately 18%.
Kolkata City Map
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Figure 6 ARR vs Occupancy
Source: CRISILAverage Room Rate Vs. Occupancy -
ARR increased by 25% from INR 5,500 in 2006-07 to INR 6,860 in 2007-08 due to
increasing demand for room nights in areas like Salt Lake, Rajarhat, Kariadanga,
Dankuni etc. Similarly the occupancy rate witnessed a marginal increase from 75% in
2006-07 to 76% in 2007-08.
Similar to other metros, Kolkata is no exception to the business/ corporate travellers
being the major occupants (63%) in the hotels under consideration.
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Figure 7 Upcoming supply
New supply of approximately 2,400 - 2,600 rooms is expected to come up in the city over
the next three years, spread across 11 new hotel developments. Majority of these rooms
will be in up-scale category constituting approximately 82% of the total expected room
supply, with the remaining 18% in the mid-scale category. Additional supply is expected
to be concentrated along the EM Bypass, Salt Lake Sector V and New Town.
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