New hotel openings in Sri Lanka set to boost tourism revenue

 

A thriving tourism sector is feeding expansion in Sri Lanka’s real estate industry and the pace is not expected to slow in the near term. Indeed, the government’s tourism strategy aims to make Sri Lanka Asia’s most sought-after destination, and a wide array of new hotels will be needed to accommodate the increase in visitors expected to the island. This development is underpinned by current and planned infrastructure, which is expected to open up new activities and destinations for real estate investment beyond traditional areas like Colombo and the south-west coastal area. Meanwhile, Pasikudah and Kalpitiya have already been identified as planned tourism development hotspots, while port and trade activities are bringing increasing numbers of businesspeople to Trincomalee.

Growth In Numbers

In the first nine months of 2016 Sri Lanka’s hotels registered a 15% increase in average daily rate (ADR) compared with the same period in 2015, reaching LKR15,806 ($108). This was despite a fairly level 66% occupancy rate, which resulted in revenue per available room spiking by almost 15% to LKR10,495 ($72). Global research group STR also identified a strong upward trend in ADR with Sri Lanka’s hotels recording a overall growth through September 2016. The island received just over 2m visitors, bumping its arrival numbers up 14% compared with the same period in 2015. The country is aiming to hit an annual target of 4m visitors by 2020. With the average length of stay at almost 10 nights in 2014 and more than half of the visitors staying between four and 14 nights, the demand for hotel room remains steady. “The market for hotel accommodation in Sri Lanka is decidedly healthy, with double-digit growth in occupancy from 2013 to 2016, with 2016 seeing an uptick in ADR as well,” Jesper Palmqvist, director at STR in the Asia-Pacific region, told OBG.

Rooms Needed

Recent trends have seen the country’s hotel room supply expand at the same pace as demand with both increasing 4% as of September 2016, according to STR. With more than 4300 rooms in the pipeline, analysts expect supply to continue to rise. Yet, if Sri Lanka is to provide lodgings for its growing number of visitors, a significant increase of quality branded hotels and resorts will be required, according to stakeholders at the 2016 Tourism, Hotel Investment and Networking Conference in Sri Lanka.

New Entrants

The list of hotels set on opening their doors in the near future is a long one, stretching over a large area of the island, as the beaches in the east and parts of the north that were out of bounds during the civil war are now welcoming new arrivals. Many of these hotels will be catering to the affluent luxury traveller – more than 3600 of the 4300 hotel rooms in the country’s pipeline are categorised as luxury or upscale. Adding to the upmarket trend, four Sri Lankan properties – Anantara Peace Haven Tangalle Resort, Chena Huts, KK Beach, and the Santani Wellness Resort and Spa – beat out 675 global properties to make the Condé Nast Traveller 2017 Hot List, marking the country’s ascendancy into the upscale tourism segment.

However, opening upmarket properties has not been without its challenges. Expected to be the best hotel in Sri Lanka when it eventually opens, Hong Kong-based Shangri-La Group’s One Galle Face complex has still not opened its doors six years after ground was first broken on the site. Its inaugural date is now set for mid-2017 – three years late. Similarly, the Grand Hyatt Tower remains under construction a full nine years after it started construction, reportedly due to financing difficulties that have landed it in the hands of assorted government institutions.

The Price Is Right

Also proving challenging is the minimum pricing structure for all two - five-star hotels in Colombo. Implemented in 2009, its intention was to prevent price wars and ensure a base amount of profit for a majority of operators, preventing them from closing. Current rules mandate that five-star hotels charge a minimum of $125 per night plus taxes, and three-star hotel rates are set at a minimum $80 per night plus taxes. The system has remained in place against the wishes of many operators, who argue that Colombo’s hotel prices hobble its ability to compete against other cheaper and more established destinations in Asia. In July 2016 the government announced it would abolish these rates by the end of March 2017, only to change course a few months later. In October the minister of tourism, John Amaratunga, announced that the change had been pushed back, potentially happening in two years time.

Although the removal of the mandatory price bottoms has not been popular with all sector players, with smaller hotels protesting that free pricing would mean five-star properties would be able to match their rates and price them out of the market. That being said, any eventual changes made to the pricing structure will have a knock-on effect on the entire industry as well as for the price of commercial real estate in Colombo, as a removal of the price cap will likely make four and five-star hotels more competitive, profitable, and their real estate more valuable.

Global Brands

However, such issues are not holding back other international hotel chains from expanding their presence across Sri Lanka. The Hilton Group, for instance, has signalled it is ready to expand significantly in the country. Currently, the Colombo Hilton and the Jaic Hilton are managed by Hilton itself, but in early April 2017 the group announced it had signed a deal with Sri Lanka’s Melwa Hotels and Resorts to manage six new properties, investing around $100m. The properties are scheduled to open their doors between 2020 and 2021 and are aiming to attract both leisure and domestic travellers, and meetings, incentives, conferences, and exhibitions travellers, which are known to be big revenue generators. The Melwa-managed Hilton properties will include the 300-room DoubleTree by Hilton Colombo International Airport; the 250-room Hilton Kosgoda Resort, the 180-room Hilton Kandy Resort; the 106-room DoubleTree by Hilton Negombo; and the Hilton Yala Resort and Spa and the DoubleTree by Hilton Nuwara-Eliya, with 96 rooms each. Following on the heels of Hilton’s announcement in mid-April 2017, the global hotel chain InterContinental Hotels Group announced it was planning to further develop its hotel portfolio in several Asian countries, including Sri Lanka. Setting a timeline of between 10 and 15 years, company executives announced that the majority of new hotels would be Holiday Inn branded, with a focus on Crowne Plaza and InterContinental Hotels and Resorts.

International chains will be riding on the back of a trend that many in Sri Lanka hope is just the beginning – that the country becomes one of Asia’s most sought-after destinations in its own right and not just a stop on the itinerary of South Asia travellers. If that does become the case, the island’s real estate sector can look forward to increasing its portfolio of international hotel offerings in the coming years.

 

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The Report: Sri Lanka 2017

Construction & Real Estate chapter from The Report: Sri Lanka 2017