Hospitality majors who won in the recent auction of hotel sites in the NCR at astronomical rates are now concerned about the financial viability of building budget hotels there.

The recent Budget had announced a five year tax holiday to build budget hotels in the NCR. Sources say hotel majors had planned to build premium hotels in the region. Developers have made financial bids that will make it practically impossible for these budget hotels to generate profits due to high real estate costs. Each of the nodal development authorities had auctioned sites in an effort to increase hotel room supply.

The recent income-tax benefit would expedite ongoing projects in the budget and the mid-market segments. However, post 2010 the Delhi market will see a oversupply of rooms, says Manav Thadani, managing director of HVS International, a global hospitality tracking firm.

Consequently, more budget hotels (2,3,4 star)and convention centres are now expected to come up in the NCR of Delhi which will take the pressure off room tariffs following the five year tax holiday. Most of the development is in Gurgaon and neighbouring Noida, much of this is owing to the Commonwealth Games to be held in NCR in 2010.

Around 70-odd hotel projects are in various stages of development in the NCR, involving creation of 20,000 more rooms. Of these, around 40% fall under the two to four-star categories the rest being the premium categories. The NCR currently has around 7,030 rooms.

The new hotel projects are expected to be completed by April 2010. As the demand and supply mismatch continues, occupancies and room rates will see an upward trend till new room supply falls into place, industry sources said.

Many hotel companies are also taking a re-look at their strategies and announcing growth plans. Carlson Hospitality EVP (Asia Pacific) KB Kachru said, Hotel developers and operators will expedite setting up of economy hotels. We will have a re-look at our strategy and emphasise on further development of our Country Inns & Suites, Park Plaza and Park Inn brands in the NCR. We already have three hotels under development in the NCR.

Tourism has been given an impetus with an increased allocation to Rs 520 crore. While emphasising that the recent Budget did not give any tax relief to the premium hotel category, Mumbai as a financial capital will attract more tourists said Leelaventure VC Vivek Nair.
 
Among the tourism destination countries in the region, China has over 9 lakh hotel rooms, Thailand 2.2 lakh rooms while Indonesia 2.5 lakh. While growth will continue to come from the major metros, the tier II and tier III markets of Pune, Hyderabad, Bangalore, Nashik are expected to contribute to growth in a big way.

Large amounts of venture capital funds are also expected to be pumped into the hotel-cum-convention centres as it will enjoy the pass through facility and pay no income tax, a provision that was enjoyed real estate sector. Says Thomas Cook India MD Madhavan Menon, Venture capital participation in development of hotels & convention centres would help meet the room shortage in the hospitality industry.