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Hotel Development Cost Trends in India

The article provides development costs of hotels that opened in India in the past two years, along with their construction tenures, and highlights the emerging trends in hotel development in India.
Achin Khanna

India − with a large domestic consumer base, a significant increase expected in foreign tourist arrivals (FTA) and an overall healthy economic growth − is attracting several globally renowned hotel brands to set up shop in the country. While the Luxury and Upscale players started eyeing the Indian landscape during the mid-90s, Mid-Market and Budget brands like the Courtyard by Marriott, Hilton Garden Inn, Four Points by Sheraton, Novotel, Aloft, Premiere Inn and Ibis have strategically entered the market in the last two to three years. As the Indian hospitality sector gears up for stiff competition across the positioning spectrum, it is interesting to take note of the development costs associated with these assets. As most brands have an international presence, are the development costs and construction tenures of their India projects in line with their own international benchmarks?

Over the past two years, HVS has been collating data to shortlist hotels for the ’New Hotels of the Year Award’ at HICSA [Hotel Investment Conference - South Asia]. This has enabled HVS to maintain its own repository of all the new hotel developments in the country. The two fundamental questions we ask are, 'How much does it cost to build these hotels?' and 'What is the average time taken to complete these projects?'

This article aims to answer these questions by presenting development costs and construction tenures of branded hotels across all positioning that have recently entered the Indian market.

Construction Cost Index

The last two years have seen building and material costs escalate, owing partially to the rising inflation. According to the Construction Cost Indices for Buildings released every month by the Construction Industry Development Council (CIDC), the material costs witnessed a steep increase in early-2008, then remained relatively stable for the remainder of that year as well as most of 2009, but have now seen a jump in 2010 again. Exhibit 1 displays the Construction Cost Indices for Buildings for six major cities in India.

Exhibit 1: Construction Cost Indices for Buildings*



Development Costs Survey

HVS examined the recent trends in development costs of branded hotels that opened across the country in the past 24 months. Our survey sample included data for over 9,000 hotel rooms from 70 hotels, across five levels of positioning: Luxury, Upscale, Mid Market, Budget, and Serviced Apartments.

Exhibit 2 presents an average of the development costs incurred by these hotels (excluding land cost), per key in US dollars. As expected, the Luxury segment had the highest average development cost per key, followed by Upscale, Mid Market, and the Budget positioning. Branded Serviced Apartments incurred development expenses similar to that of the Upscale segment.

It is interesting to note that there was a significant variance between development costs within the same positioning, across all segments. For instance, the lowest development cost per key was almost a third of the maximum development cost per key within the Luxury segment. Although such a variance can be partially attributed to factors such as diverse hotel design elements, size and scale of public areas, varied brand standards as well as the experience (or lack thereof) of the developer, this huge gap across the same positioning also highlights an obvious lack of standardisation. This frequent deviation from brand standards is a result of several hotel developers merging their business plans with their personal aspirations in their quest for developing unique, landmark projects instead of constructing efficient products that maximize the return on investment. The international brands have set standards that they practice globally. However, they too are in the process of re-inventing their brand standards for India so as to effectively penetrate the Indian hospitality sector; thus, they are yet to establish firm guidelines that would ensure a consistent brand and product delivery, irrespective of the location of the hotel. It is, thus, no surprise that the same brand may offer two or more widely varied products across different cities in India.

Exhibit 2: Development Cost per Key (USD - 000’s)



Construction Tenure Survey

HVS also analyzed the construction tenure for the same hotels that opened in the past 24 months. Exhibit 3 illustrates that the average time for building a hotel was approximately 39 months in the Luxury segment and 30 months for both the Upscale and the Mid-market segments. It took approximately 23 months on an average to construct Budget hotels and 34 months for the development of Branded Serviced Apartments. While the average construction tenure across different positioning was expectedly varied, an interesting outcome of this exercise was that the longest time taken to build a hotel across most of the researched positioning was approximately four years. This could be attributed to the fact that the actual time taken to gather the required licenses, permissions and funding ends up delaying projects, irrespective of their positioning. HVS research1 reveals that a full service hotel requires over 120 licenses from multiple state and central agencies (as many as 40 depending upon the state) before it can open and operate. This process can take multiple years, especially if the developer is new to the system.

Exhibit 3: Construction Tenure (Months)



Other Emerging Trends

Most internationally branded hotels that opened over the last two years have provided extended and varied food and beverage (F&B) options. A typical Mid-Market hotel in the United States for instance, would offer no more than one F&B outlet and negligible meeting space, if any. However, the same brand is offering two to three F&B options and substantial meeting space in India. F&B is a significant contributor to the top line, especially in Tier II and III locations, such as Bhubaneswar, Raipur, Chandigarh, etc.

Also, the availability of relatively inexpensive manpower as compared to that in North America and Europe has given these brands an opportunity to develop full service hotels, even in the Budget and Mid-Market space. Another emerging trend in the Budget space is the outsourcing of F&B facilities on a revenue-share model to brands such as Café Coffee Day and Barista. Laundry and housekeeping services are also increasingly being outsourced with the expansion of facilities management companies such as Aramark entering India. Outsourcing allows the hotels to reduce fixed costs and thus enables even stronger bottom lines.

In Closing

As the Indian hospitality sector grows, it will begin to see more differentiation in the presently hazy hotel positioning. While it is fair to assert that hotels in India are currently witnessing several overlaps between the Budget and Mid-Market segments and then again between the Mid-Market and Upscale segments, it is likely that the picture will become clearer with time. We anticipate that as the industry matures, each segment will carve its niche in terms of the product as well as service deliverables and there will thus be a rationalisation of development costs, which will be in line with their respective market positioning.


1 Manav Thadani and Saurabh Gupta. Critical Issues Facing Indian Hospitality – An HVS Whitepaper, January 2009.

About Achin Khanna

Achin Khanna is the Managing Director of Consulting and Valuation at HVS South Asia. He is a Member of the Royal Institution of Chartered Surveyors (MRICS). Over the past nine years at HVS, Achin has directed a large number of assignments, performed economic feasibility analyses and large scale portfolio valuations, successfully conducted operator searches and management contract negotiations. He has extensive experience in conducting hotel valuations, both in India and internationally. Prior to joining HVS, Achin spent ten years in the United States working across various roles in hotel operations, revenue management, franchise relations and business development. Achin holds a Bachelor of Science in Hospitality Management from Widener University, Chester, PA, and a MBA from the University of Phoenix, Arizona, USA. Contact Achin at akhanna@hvs.com

26 Comments

  1. SoumyajitNov 22, 2010

    Very nice and informative article. It would be great if the classification of the star category in Indian hospitality can be briefed in this website. Thanks Soumyajit Mishra

  2. Vinit ShahNov 23, 2010

    Do the development costs include land value? it might be skewing the numbers on to the higher side. I would have expected development costs in India to be at least lower than international costs. Thanks Vinit

  3. deepak PatankarNov 23, 2010

    Excellent and informative. I would however desire to have development cost per key further split cost head-wise, e.g. civil, machineries, equipments etc.

  4. Rudra SinghNov 23, 2010

    Great article. Very impressed. Thank you very much. When looked at properties in the same market segment, do the trends map closer to each other in the same segment?

  5. Pranav AggarwalNov 25, 2010

    I am curious on equity debt component across various formats...

  6. SmitanondaNov 25, 2010

    Interesting but showing chennai costs on the higher end and Bangalore at lower end seem not correct. Ofcourse land cost cannot be shown or even known as one has to do a lot of wheeling dealing especially in india. In reality it could be 40 % less, as there has never been a proper BoQ done / verified / let alone peer reviewed.

  7. Ashok BansalNov 26, 2010

    The differentiation between upscale and Luxury gets blurred in India, especially in the context of the Owner owned, operator run model. Each Operator would like to define and insist on the best specs, citing the same to be "Brand guidelines" to the gullible owners many of whom are first time developers in the Hospitality domain. An article or research on the same would lead to an interesting research paper - how the Indian brand specs are different from the international specs, across the Operators.

  8. Gaurav DhingraDec 1, 2010

    Very useful article from Inshita and Achin. I will like understand more on exact triggers considered for calculating construction period i.e. for start time it can be the time when construction starts or land acquisition date or from date of approving arcitectural plan etc. and for end date it can be date of handing over from construction team to operations team or date of opening or date of obtaining completion certificates etc. The query is because these different trigger points, when accumulated, can make a lot of difference in ascertaining total construction time.

  9. I am interested in understanding the development cost/index for Kitchen infrastructure (both Back of House and Front of House) for each segment of the industry Any trends in the type of consultants, contractors and equipments selected across these segments in India

  10. Very useful article. I have the following queries.The CCI for 2010 (provisional) shows an index of 115.04 against buildings in Mumbai. What does this mean?/how to read CCI? What is the right side scale stands for? Is it a multiplication factor to convert to cost/sq.ft? An earliest reply will be sincerely appreciated. Thanks

  11. Govinder KapoorFeb 17, 2011

    The article is great. Thanks (and congratulations). I am interested in knowing the source of the 'per key' development cost for hotels shown at Exhibit 2. If it cannot be made available, is it possible to know the total cost, with as much break-up as possible (without land and other non-capitalizable costs), for a few 5-star hotels constructed in Delhi in the last few years?

  12. Sudhir GudalFeb 20, 2011

    I am a licensed valuer. Your article "Hotel Development Cost Trends in India" was very interesting to read. I would like to understand, what in your opinion, comprises of, the "Development Cost per Key" of USD 194, 000 for Minimum Exp. Luxury Hotels, USD 317,000 for Medium Exp. Luxury Hotels and USD 532,000 for Maximum Exp. Luxury Hotel. Whether, it includes Pre-operative Costs and such cost should be considered for valuation of Hotels, which are under rehabilitation.

  13. Chandrashekhar ChincholkarFeb 25, 2011

    What would be the furnishing cost per key for a 3 star hotel in a 3 tier cities like Nagpur , Raipur , Bhopal ? What would typically one invest in totality per key considering the above 3 tier cities ?

  14. r k guptaJul 28, 2011

    In your cost survey PER key cost includes land cost or no and what should be the cost per key for a 4 star hotel like four point in a city like vizag or nellore in andhra pradesh. thanking you v much r k gupta 9848114627

  15. monu kumarOct 28, 2011

    from where n how can we get finannce for openanig of hotel

  16. C. LeibenguthDec 19, 2011

    Dear Mrs. Wij, I have been looking through the publication “EMEA Hotels Monitor” from C&W dated July 2009 and was wondering if you have similar up to date data for India. We are looking for 5 star hotel construction cost for India, do you have some up to date statistics / cost breakdown? Thank you for answering. Sincerely

    • Dear Mr. Leibenguth, Thank you for your comments. In this article we have provided the construction costs from our survey sample in Exhibit 2. You could refer to the development cost per key for the upscale and luxury hotels for getting an idea of the total development cost for a 5 star hotel.

  17. SivanandJan 10, 2012

    I would like to understand what are the auxiliary facilities considered (i.e. convention center, gym, pool etc) while estimating the average cost for development of upscale or luxury hotel. Is there any standardized benchmark for assuming specific auxiliary facilities? Thanks

  18. PrabhmeetJan 24, 2012

    What would be the present development cost per key (including land cost) for a budget hotel being developed in Delhi NCR ?

    • Hi Prabhmeet, Due to the varied land costs in different project, we will not be able to provide a benchmark for costs including the land cost component.

  19. Aseem MadanFeb 7, 2012

    Please clarify what are the different components of Development Cost Per Key for a budget hotel? From the above, I know it does not include land cost. Thanks, Aseem

    • It includes the building costs, FF&E, interest costs, professional and legal fees, project management fees and pre-opening costs.

  20. aakash deepFeb 10, 2012

    Dear mam, I m planning to setup a budget hotel(3*) category do you help in setting up the hotel if yes then what is your consultation fee. i m keen in getting associated with renowned hotel chains because marketin ll not be a problem then.

  21. DNYANESHWARMar 9, 2012

    I would like to know, how much land is required to construct a 5 Star Hotel. To whom should I approach to obtain necessary permission for establishing Star Hotel in anywhere in India.

  22. Dear Inshita, I enjoyed reading the article regarding hotel development costs in India. We are an FDI investment and development specialist active in real estate development, including the hospitality sector. Our USP for developments is that we bring exclusive brand licences to India. Do you advise on private members clubs as a separate sector to hotels in India? Kind regards, Simon

  23. Dear Ishita I have really enjoyed the above article on Hotel development cost in India. The segment wise differentation of the cost involved has clearly shown the trend. However, FSI(floor space index), which is the most sensitive area for the development of the hotels is untouched in the above article. Though it is not directly associated with the development cost trend, however it is the major contributor to it.

  24. dhaliwalMay 8, 2012

    p;ease can you guide me but is the price for built 5* hotel in punjab per sq mt if you give me littel idea then i can talk to you further thanks

  25. CK Sasidharan NairJul 5, 2012

    Hi , I am in Hotel projects and Engineering for more than 30 + years currently runs a PMC for Hotels projects The Costs more or less are fine In tenure you have shown Mid Market hotel min tenure as 17 months , Budget Hotel as 12 months Serviced appartment as 24 months . Will you please send me details of these hotels you surveyed ,I want to study them to understand how they made it possible in India . Regards CK Sasidharan Nair MD-Pedestal Projects Management Private Limited Email :- cks@pedestalprojects.in Mob 9930313121

  26. uday madanAug 12, 2012

    Hi, I wanted to know the costs of setting up a 5 star hotel in delhi, costs of AC, furniture fittings, kitchen and other major expenditures Please could y ou give an idea of the above Thank you

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