Nepal’s luxury hotels are growing but the rooms are empty

High-end hotels might be proliferating across the country but there aren’t enough guests to fill them up, according to the financial reports of Nepal’s three key five-star institutions.

The first quarter financial reports from Taragaon Regency Hotels, Soaltee Hotel and Oriental Hotels, all of which are listed on the Nepal Stock Exchange, showed that profits have taken a nosedive after posting record profits last fiscal year. The first quarter of the fiscal year runs from mid-July to the end of September.

The three hotel groups say that unhealthy competition, like price undercutting, a demand-and-supply gap, and a growing number of backpackers are behind the sharp fall in earnings.

According to its report, Oriental Hotels, which operates Radisson Hotel, recorded a fall in profits by 67.53 percent. The hotel said in its unaudited report that its net profit after tax has fallen to Rs13 million in the first quarter, compared to Rs40 million in the same period last fiscal year. The hotel collected Rs192.8 million as revenue from sales in the first quarter.

Pawan Rajbhandari, director of sales and marketing at Radisson Hotel, told the Post that Nepal is seeing an increasing number of backpackers or budget travelers.

“More visitors are going to homestays,” said Rajbhandari. “Another reason behind the slowed growth is obviously the slowing economy in India.” India’s economic growth hit a six-year low of 5 percent in the first quarter of the current fiscal year.

Taragaon Regency Hotels, which operates Hyatt Regency, also said its profits before taxes in the first quarter dropped sharply by 62.47 percent to Rs14.6 million. In the same period last year, its net profit was Rs39 million. Taragaon’s profits, however, were also affected by a shutdown of all operations in the wake of a tussle between the workers’ union and the management.

The country has seen a large number of hotels being built, and it will be challenging if tourist arrivals do not match the development, Taragaon Regency said in its filing to the stock market.

The unaudited report of Soaltee Hotel shows its net profit dropped 49.20 percent to Rs29.5 million in the first quarter. Last fiscal year, Soaltee’s profit had jumped 28.79 percent to Rs274.2 million.

“Sooner or later, it was bound to happen. Nepal has witnessed overgrowth of hotels,” said Yogendra Sakya, director at ACE Hotels and Resorts. “Nobody knows why luxury hotels are mushrooming.”

According to Sakya, who operates Hotel Ambassador and Club Himalaya Nagarkot, old hotels like Hyatt, Soaltee and Radisson are losing revenue to new properties, many of which are part of global chains.

This year alone, the Tourism Department awarded a five-star rating to four hotels—Soaltee Westend Premier and Hotel Central Plaza in Nepalgunj, and Aloft and Marriott Hotels in Kathmandu—bringing the total number of hotels in the five-star category to 15.

At least a dozen more five-star hotels are under construction across the country, fuelled by the hope that Visit Nepal 2020 will draw two million tourists and that growth will continue in the years ahead. However, analysts say that this number will depend on better connectivity. There are also concerns about the flagship event, given the lack of preparation on the part of government to attract tourists.

Despite high-interest rates, developers are investing in high-end hotels, most of which are planned for Bhairahawa, the city that will soon receive the country’s second international airport.

However, according to Binayak Shah, vice-president of the Hotel Association Nepal, tourist numbers have not grown in line with the existing number of hotels and as a result, hotels are eating into each others’ market shares.

“New hotels are offering introductory prices and old players are feeling the pain,” he said.

Foreign tourist arrivals in Nepal grew 8 percent to 975,557 individuals in the first 10 months of 2019, helped by a sharp rise in arrivals from China, according to the statistics of Nepal Tourism Board. Of the total arrivals, 820,499 international visitors came by air while 155,058 came overland.

According to the Tourism Ministry’s statistics, 169,180 foreign visitors came to Nepal for trekking and mountaineering and are known as the highest spenders, who normally prefer to stay in luxury hotels. Around 700,000 tourists visit Nepal for pleasure and 188,000 come for pilgrimage purposes. This latter group consists of budget travellers.

Similarly, the proliferation of homestays and online marketplace like Airbnb and OYO Rooms, which offer some of the cheapest lodging options for tourists, is changing the dynamics of Nepal’s hospitality sector.

“Hotel prices are not constant. Like airlines tickets, hotel rates also fluctuate. Today, where the online market rules, a hotel cannot say that it can’t go below $100,” said Sakya.

Another reason behind the fall in the earnings of old hotels is the development of four-star hotels, according to Shah of the Hotel Association Nepal.

Two years ago, there were just two four-star hotels in Kathmandu Valley—Hotel Himalaya and Hotel Shanker. Now, there are 13, according to the Tourism Department.

If tourist numbers don’t increase and hotels continue to proliferate, a new kind of business strategy could prevail—putting heads in beds at any cost, say hoteliers.

“Hotels have started undercutting each other. If low occupancy starts to bite big hotels, five-star hotels will start offering massive discounts, which is already visible on online booking platforms,” said Sakya. “The day is not far off when five-star rooms will be available at three-star rates.”

According to industry insiders, more than Rs45 billion has been injected into the hospitality industry.

The hotel building spree has spread concern among existing hoteliers, who not only fear that new entrants will eat into their markets but also create unhealthy competition. The return of chain hotels in Nepal is also a concern for old players.

In 2017, the Hotel Association Nepal had issued a ‘white paper’ urging the government to rein in the expanding hotel sector. The association had asked the government to assess the demand and supply of hotel rooms and raise the criteria for hotel expansion.

“We cannot undermine the newcomers because Nepal is open for all,” said Sakya. “The onus lies on the government to increase the number of tourists because the private sector has invested heavily in the tourism industry and created a large number of highly paid jobs.”

The solution to the problem, according to Sakya and Shah, is to enhance Nepal’s air connectivity and opt for an aggressive marketing campaign to draw visitors.

“If new hotels suffer, it will ultimately affect banks and the financial sector. There are many instances from the past of how reputed hotels went bankrupt on low demand,” said Sakya.

But it is not just the number of tourists. Even if more visitors come, they might end up spending less.

“We cannot say that the rise in backpackers has affected the revenue of luxury hotels, but we cannot deny the fact that Nepal has become one of the cheapest destinations in the world,” said Shah.

According to the Travel and Tourism Competitiveness Index by the World Economic Forum, Nepal ranks 15th among 140 countries in terms of price competitiveness, behind countries like Iran, Egypt, Kazakhstan, as well as neighboring India.

According to statistics from the Tourism Ministry, the average spending per tourist per day dropped to a seven-year low of $44. The average spending was $54 per day in 2017. In 2003, during the height of the Maoist insurgency, per day spending of tourists hit a record $79.1.

The decade-long conflict had a collateral impact on the hospitality sector. Although tourists were not harmed by insurgents, arrivals started to decline. Even five-star rooms were available for less than $50 per night as Nepal was convulsed by a decade-long armed insurgency from 1996-2006.

But the post-conflict scenario was more painful for entrepreneurs, as militant labour unions forced a number of star hotels to shut down.

However, hotels have started to recover since 2011, when demand started to surpass supply. The average tariff of five-star hotels in Nepal presently stands at $100 per night, which is among the cheapest rates in the world.