April 11, 2011--Nearly 50% rooms branded hotels plan to add in the next five years will be in the mid-market and budget segments, a trend somewhat similar to what is seen in the Indian airline industry.

Investors are comfortable in putting in money in budget hotels and many leading international brands are planning to enter this space in India. At least for some, no-frills hotels will be a new market altogether.

"India has a huge market for budget and mid-market hotels. We are comfortable with investing in mid-market hotels in India," said Ashish Jakhanwalal, managing director and chief executive officer at Samhi Hotels Pvt. Ltd, a hotel investment and development company. "We are raising $100 million ('440.6 crore today) for investing in hotel properties and this will be largely in mid-market hotels."

Indian hoteliers, too, are excited by the prospects of mid-market and budget hotels.

Hotel Leelaventure Ltd, that runs The Leela Palaces Hotels and Resorts, and has only luxury properties, is now planning to launch its mid-market brand by the end of this fiscal year.

"There is a market for such hotels. We were focused on launching our world-class luxury properties, but now we are ready to bring the next brand in the market," said Rajiv Kaul, president at Hotel Leelaventure.

Indian Hotels Co. Ltd, that runs the Taj chain, is also looking at another mid-scale hotel brand. Taj represents the luxury segment while Vivanta is branded as the upper-upscale category.

It has two more brands--Gateway Hotels for upscale and Ginger Hotels for budget segment.

"We do not have a mid-scale brand right now, but we would be looking at launching in the next few years," said Raymond Bickson, managing director and chief executive officer of Indian Hotels.

Some international hoteliers are also joining the bandwagon.

Luxury hotel chain company InterContinental Hotels Group has signed a joint venture partnership with Duet India Hotels Group to develop its mid-market brand Holiday Inn Express in the Indian market.

InterContinental will make a multi-year investment of $30 million in the joint venture, in which it would have a 24% equity stake, to develop 19 new Holiday Inn Express hotels across India.

Another international hotelier Marriott International Inc. has signed a preliminary agreement to form a joint venture with Samhi Hotels, a hotel and investment company based in New Delhi, to launch a mid-market brand Fairfield by Marriott.

Simon F. Cooper, president and managing director (Asia-Pacific) at Marriot, said his company is convinced about India's long-term growth and is targeting business travellers.

"They are looking for clean and crispy hotels; not always looking for luxury hotels," Cooper said. "So, you could see Marriot building more Fairfield hotels than other brands."

Meanwhile, Indian firms that have been in the budget hotel space are building more. A budget hotel firm, Peppermint Hospitality India Pvt. Ltd, has announced 10 hotels for this fiscal year and another 10 for the next, while the Ginger brand will be adding more, though details are not available.

According to Jay H. Shah, chief executive officer at Hersha Hospitality Trust, a Philadelphia-based self-advised Real Estate Investment Trust that owns interests in 76 hotels, India offers the greatest opportunities for unit growth in the mid-market and two-to-four star properties.

"I think investors sometimes are more comfortable investing in mid-market and select service assets because the execution of development and operations risk is more modest," Shah said.

He said the capital required for the development of mid-market hotels are far more limited than they are for larger full-service star hotels, allowing more developers and investors to participate in the business.

"Because of the smaller investment, an investor can own a portfolio of hotels balancing risk by controlling exposure to various markets--each with their unique operating and return fundamentals," Shah said.

Currently, India has around 66,000 branded hotel rooms. The domestic and global hotel brands will add 60,000 rooms in the next five years, investing an estimated $10.3 billion, according to consulting firm HVS.

"India is a mature market. The growth will be largely in mid-market and budget hotel segment as in the case of a matured market," Manav Thadani, chairman of HVS, said.

Going by a recent study of HVS, mid-market and budget hotels accounts to 47% of the total proposed hotels in India by branded companies.

Low-fare airlines of India have a market share of 56%.

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