Luxury hotels in India are often associated with glamorous establishments located near major airports in cities like Mumbai, Delhi, Chennai, and Bengaluru. But these markets are becoming increasingly saturated, prompting the hospitality industry’s biggest names to shift focus to Tier-2 and Tier-3 cities. A recent study by JLL revealed that nearly 43% of planned hotel projects are being developed in these smaller markets. In the last fiscal year, around 67% of all new hotel openings were in Tier-2 and Tier-3 cities, a number that is expected to increase to 75% next year.
Interestingly, demand for hotels in Tier-2 and Tier-3 cities grew during the pandemic. Unlike urban hotels, hotels located in smaller towns were able to sustain themselves much better due to their less contact-intensive nature of business. Moreover, these hotels did not have to lower their tariff rates. Following the pandemic, demand for hotels was most visible in Tier-2 and Tier-3 towns as their occupancy was much higher than in urban centres. Despite the difference in markets, smaller towns present a growing opportunity for the hospitality industry, and big hotel names do not want to miss out on this potential goldmine.
“The Indian hospitality industry has seen a major shift in the recent past, with hotel giants such as Accor, ITC, IHCL, Radisson, and others expanding their presence in tier 2 and tier 3 cities. This move has been motivated by the tremendous growth potential of these cities and their increasing attractiveness to both business and leisure travellers. “
Recent Developments of Branded Hotels in Tier 2 and Tier 3 Cities
Over the past few years, several major hotel chains have announced new hotel openings in smaller cities across India. For instance, ITC Hotels recently opened its doors in Amritsar, Bhubaneswar, and Coimbatore, while Taj Hotels has launched properties in Agra, Amritsar, and Bekal. Similarly, Radisson has added new hotels in locations such as Amritsar, Jodhpur, and Jalandhar, while Lemon Tree Hotels has opened new hotels in Bhiwadi, Siliguri, and Warangal.
Accor has acknowledged that they plan to take a more aggressive approach to offer franchises for their economy and mid-scale brands, such as Novotel, Mercure, and Ibis. These brands are set to make significant moves into the Tier-2 and Tier-3 segments. Similarly, Indian hotel brands, including Indian Hotels of the Tata Group and the Leela Group, are actively targeting smaller towns, with IHCL already operating its “lean luxe” brand, Ginger, in most Tier-2 and Tier-3 cities and state capitals. Radisson Group has also planned expansion into smaller towns, such as Katra near Jammu and Jalandhar in Punjab. The hotel segment’s foray into smaller towns is partly due to the significant improvement in rail, road, and air connectivity in these areas.
Why New Hotels are Opening in Smaller Cities in India?
The primary reason why hospitality giants are expanding their presence in tier 2 and tier 3 cities is the tremendous growth potential of these regions. As India’s economy continues to grow, these smaller cities are emerging as important economic centres, attracting an increasing number of business travellers. Additionally, there is a growing middle class in these cities, which is fueling the demand for high-quality accommodation and dining options.
The growth of the Indian economy has led to an increase in disposable income for the middle class, which has resulted in higher spending on travel and tourism. According to a report by the World Travel and Tourism Council, the contribution of travel and tourism to India’s GDP is expected to grow by 6.7% per year between 2019 and 2029. This is a significant growth opportunity for the hospitality industry, and tier 2 and tier 3 cities are well-positioned to benefit from this trend.
Growth of Small Towns
Several small towns across India are also experiencing significant growth, which is driving the demand for hotel accommodations. For example, Raipur, the capital of Chhattisgarh, is emerging as a major business and education hub, with several large companies and universities setting up operations in the city. Siliguri, a town located in the foothills of the Himalayas, is attracting an increasing number of tourists, thanks to its proximity to popular destinations such as Darjeeling, Sikkim, and Bhutan.
Ayodhya, a town in Uttar Pradesh, is attracting pilgrims from across the country, thanks to the ongoing construction of the Ram Temple. Similarly, Karjat, a scenic town located in the Western Ghats, is attracting tourists looking to escape the hustle and bustle of Mumbai. Vrindavan, a town in Uttar Pradesh, is a major pilgrimage centre for followers of Lord Krishna and attracts millions of visitors every year.
Investment Opportunities for Hotels in Tier 2 and Tier 3 Cities
The growth potential for the hospitality industry in tier 2 and tier 3 cities is immense. With increasing disposable incomes and a growing middle class, these cities are emerging as important economic centres, attracting both business and leisure travellers. In addition to the growth of small towns, the hospitality industry is also benefiting from the over-saturation of major metro cities. Cities like Mumbai, Delhi, and Bangalore have reached a saturation point with the existing number of hotels, which means that the demand for hotels is shifting to smaller cities.
One of the primary investment opportunities for hotels in tier 2 and tier 3 cities is the lower cost of land and construction. Compared to the metros, the cost of real estate in these cities is significantly lower, which means that investors can build hotels at a lower cost. This also translates into lower operational costs, which can help improve the profitability of hotels in these cities.
Another investment opportunity is the growing demand for quality hotels in these cities. With increasing disposable incomes, people are willing to spend more on quality accommodation and amenities. Moreover, the increasing number of business travellers and the growing popularity of small towns as tourist destinations are fueling the demand for hotels.
Facts and Figures
Let’s take a closer look at some of the numbers that demonstrate the growth potential of these smaller cities. According to a report, the top 10 tier 2 and tier 3 cities in India currently account for approximately 21% of the total branded hotel supply in the country. These cities are expected to see an additional 7,000 rooms added to the market over the next few years, reflecting a compound annual growth rate of approximately 8%. Moreover, the high cost of real estate in these cities has made it difficult for new hotels to enter the market. In contrast, the lower cost of real estate in tier 2 and tier 3 cities make it easier for new hotels to enter the market and compete with existing players.