The Supreme Court’s (SC’s) order to ban liquor sales from hotels and restaurants that fall within 500 metres from national and state highways, last week, has come as a big dampener for an industry that started to see some revival in occupancy and average daily rate (ADR) only in 2015 after having seen a decline in both the occupancy and ADRs since the onset of the global financial crisis in 2008.
Even as several states are working on steps that may help the hotels and restaurants adjacent to highways at the periphery of cities to bypass the order, industry insiders are concerned over the added stress on existing inventory on account of uncertainty in regulations that comes on top of the challenges faced on account of seasonality of business, high dependence on economic growth, high fixed cost and flow of tourists in the country.
Hotel operators are ruing about the decision and are seeing themselves as a collateral damage of the verdict relating to drunk driving and accidents on highways. “In many cases, the land is allotted by the government to set up hotels and it is not the hotels that decide on the same and now the industry is getting impacted by the SC order simply on account of their proximity to the national or state highway. I think that there should be a more integrated approach between the government and the judiciary and it is something that the government needs to take up.This judgment will impact the overall hospitality industry and its existing large inventory that gets impacted by this judgment,” said a top executive with a leading hotel chain who did not wish to be identified.
Founder of a leading hotel and resorts chain said that while hotels alongside highways have a higher fixed cost as they pay a premium for the land purchased, he said that he is more concerned about the number of job losses, as there will be a decline in occupancy across the affected hotels. “A customer walks into a hotel thinking he will get all the facilities but once he knows that a particular facility is not available at the hotel, he looks for other options. This may hurt the occupancy of the affected hotels and may also impact jobs at such hotels,” he said.
Questions are also being raised over the larger issue of whether roads within municipal boundaries should be notified as highways or they should be city roads. City planning experts feel that while highways cross villages and cities, there should be a thought to redefine what is a highway, otherwise the decision will impact not only the hotels situated on the highways but also the ones within the city limits. “Ideally, this rule should apply to national and state highways outside the municipal boundaries and NHAI (the National Highways Authority of India) and the state government’s need to work on that,” said P S N Rao, chairman, Delhi Urban Art Commission.
This, however, seems to be the work in progress across several states, and many of them have already de-notified highways. Some states have also approached the Ministry of Road Transport and Highways to convert national highways as district roads. There are some like Goa and Kerala that are contemplating approaching the SC for exemption or seeking additional time to implement the order banning the sale of liquor along highways.
The hospitality industry is also concerned about a drop in occupancy and, thereby, the daily rates on account of their inability to serve liquor to their guests.
As per a report on the hospitality sector by JLL, a real estate consulting firm, the hotel industry in India has gone through a full economic cycle over the last 15 years. While the industry “witnessed strong growth in trading performance, propelling large scale development of new hotel rooms in the country, and establishing an overall bullish approach of investors towards the sector” in the period between 2004 and 2008, the sector saw some challenging times with the onset of the global financial crisis in 2008, followed by concerns emerging from the domestic political and economic climate of the country. “Combined with the large hotel room supply increase, the impact on the sector was extremely severe. From 2009 onwards to end of 2014, hotel markets witnessed a decline in both hotel Occupancy and ADR (“Average Daily Rate”), despite demand growing at a rate of 7.8 per cent in the same period,” said the report.
While there have been signs of a recovery from 2015 onwards, with demand growing at a robust pace and supply additions slowing, the SC order now has the potential to derail the growth within the sector.
If the industry saw a substantial increase in the revenue per available room (RevPAR) in the 11 major markets along with double-digit demand growth, the report points that RevPAR and demand grew at rates faster than the supply for the first time since 2008. The recovery may, however, not be sustainable if the occupancy of hotels is impacted by the SC order. Experts say that the order has emerged as a concern in addition to the existing challenges of high development costs for investors, prolonged development periods, increasing land prices and a long list of regulatory sanctions of approvals. These have a significant impact on the ability of investors to develop projects with suitable investment returns.
The top official of a five-star hotel said that the judgment will impact the huge installed capacity for no fault of theirs. “We are running a legal business with proper due-diligence. This will hurt the occupancy in hotels that get impacted by the judgment,” he said.