India’s hotel boom shifts gears to Tier-II, Tier-III cities

The hotel industry in 2026 is witnessing strong growth, led by a rebound in global travel, particularly across the Asia-Pacific region. Expansion is being driven not just by Tier-I cities but increasingly by Tier-II and Tier-III markets.

In India, demand is expected to significantly outpace supply, with demand growth of 8–10% compared with supply growth of 5–6%. This imbalance is supporting high occupancies of 72–74% and steadily rising average room rates (ARR).

Supported by MICE (Meetings, Incentives, Conferences and Exhibitions), weddings and tourism, premium hotel occupancies in India are projected to remain in the 72–74% range in FY2026, while ARRs are expected to rise to ₹8,200–8,500.

Demand growth (8–10% annually) is likely to continue outstripping supply through at least 2028, sustaining strong pricing power for hoteliers. Nearly two-thirds of upcoming branded hotel room additions are concentrated in Tier-II and Tier-III cities, driven by rising leisure, spiritual and business travel.

While leisure demand has shown some cooling in select global markets, overall hotel performance is expected to improve moderately, with revenue growth driven more by higher average daily rates (ADR) than occupancy gains.

By 2026, digital operations such as mobile bookings and digital check-ins are expected to become standard. The sector is also moving into a “growth to judgment” phase, where success will hinge on sharper revenue management and more personalised guest experiences.

Branded hotels are expected to add nearly 20,000 rooms over the current and next fiscal years, around a 20% increase in supply, following additions of 16,500 rooms over the previous two fiscals. Despite this expansion, occupancies are expected to remain stable, while ARRs should inch higher as demand continues to outpace supply across most markets.

Around 80–85% of these additions will be undertaken by developers operating their own brands, primarily through asset-light management contracts. As brand owners earn management fees rather than owning assets, their revenue growth is expected to moderate by 150–250 basis points from the robust 15% growth recorded last fiscal. The remaining additions will be by asset owners operating under external brands, who are expected to maintain growth momentum of 13–14% next fiscal. Healthy cash flows, lower capital requirements and equity infusions are expected to support stable credit profiles.

Branded hotels, both own-brand and externally branded, account for nearly half of India’s total room inventory and are typically operated by large hospitality groups. These hotels offer consistent experiences across price points and formats. The analysis covers 55 entities operating about 48% of the country’s branded rooms.

Rising travel aspirations, coupled with improved air and road connectivity, are driving domestic tourism growth of 15–16% annually over the past two years. With this trend set to continue, hotel players are increasingly focusing on leisure and spiritual destinations such as Ayodhya, Lucknow, Udaipur, Jaipur, Amritsar and Gwalior. Nearly two-thirds of the upcoming 20,000 rooms are coming up in Tier-II and Tier-III locations, including around 20% through acquisitions. The balance will be spread across six metros that serve as MICE hubs and are witnessing commercial expansion.

With supply additions well diversified across leisure and spiritual destinations, occupancies are expected to remain stable at 74–75%. In fact, occupancies in several of these locations have exceeded 85–90% during peak seasons, underscoring strong underlying demand. ARRs are expected to rise by 5–7% over the next two fiscals as demand continues to outpace supply. Notably, despite a nearly 19% increase in room supply between FY2023 and FY2025, occupancies improved by around 600 basis points to 74%, while ARRs rose by nearly 30%, albeit from a lower base.

As a result, debt-to-EBITDA levels for asset-owning hotel companies are expected to improve to below 3.3x next fiscal from about 4x earlier. For brand-owning companies pursuing asset-light expansion, debt-to-EBITDA is projected to decline to below 1.4x from around 2x.

Looking ahead, any slowdown in economic activity affecting business travel, or prolonged flight disruptions impacting leisure travel, will remain key risks to watch.

The current cycle of premium hotel additions also highlights an interesting shift, with Tier-II and Tier-III cities attracting as much interest as Tier-I markets. This reflects growing acceptance among travellers exploring less-discovered destinations for leisure and the rising importance of spiritual tourism. In contrast, supply additions in Tier-I cities remain constrained due to limited land availability and high land prices.