The domestic hotels and tourism industry is set for buoyant growth

Jul 19, 2012 (LBT) – Sri Lanka’s tourist arrivals in June were at 65,245 (up 21.6% YoY). As of YTD June, tourist arrivals increased 18.7% to452,867. With the end of the civil war, nearly two-thirds of the coastal/beach areas have become accessible and open for development. The demand for beachfront land for hotel development has increased. The existing hoteliers have started expansion projects, and a number of international operators (such as Shangri-La, Sheraton and Marriott) have shown strong interest to build hotels in Sri Lanka.

Given the growing interest in the hotel industry, we believe the sector is set for buoyant growth underpinned by increased tourist influx and capacity expansion. Until winter 2009, hotel occupancy levels were low; occupancy rates in city hotels averaged ~50% compared with 40% in resorts. A room in a 5-star hotel was typically available for US$60 per night as against US$35 per night for a resort room. Currently, occupancy levels in city hotels have increased to an average 70% and occupancy levels in resorts have also increased to 65%. Average room rates (ARR) have doubled since 2009; a room in a 5-star hotel in Colombo city is currently at US$130 per night (minimum rate of US$120) and that in a 4-star hotel is at US$90 per night.

Sri Lankan government targets 1m tourist arrivals in 2012. The domestic hotels and tourism industry is set for buoyant growth. The government has a target of 2.5m tourist arrivals annually by 2016. The government expects nearly 1m visitors in 2012. The sharp growth in tourist arrivals in Cambodia and Vietnam after the end of the conflict is an indicator to the potential for post-war Sri Lanka International hotel operators show strong interest in Sri Lanka Local conglomerates, such as John Keells Holdings (currently controls 40% of the room supply in 5-star city hotels and 800 resort rooms), Aitken Spence, and Hemas Holdings, have recently refurbished and increased room capacity. Hemas Holdings, for instance, has tied up with Thailand’s Minor International to develop the “Anantara” brand in Sri Lanka. Hemas also has its own portfolio of hotels. Shangri-La (a leisure group based in Hong Kong) recently acquired 10 acres of government property near the Galle Face Green promenade for US$125m. Shangri-La plans to invest US$500m in building a 7-star hotel with 500 rooms, which is likely to be complete by 2015. Further, international hotel chains, such as the 200-room Marriott (with Nahil Wijesuriya of East West Properties), Six Senses (with Aitken Spence), Movenpick (with Softlogic), Minor International of Thailand (with Hemas Holdings) and the 306-room Sheraton (owned by Starwood Hotels and Resorts), have also shown interest in setting up shop in Sri Lanka. Other international groups, such as Hilton and Taj, already have a presence in Sri Lanka.

Opportunities outweigh challenges. Future growth in tourism will hinge on development of infrastructure and accommodation capacity. In 2011, the country had around 14,653 graded rooms (total current capacity is ~21k), of which Colombo accounted for 5,659 rooms. Hence, incumbent hoteliers would benefit from a spike in tourist arrivals in the short to medium term; these hoteliers should see strong margin expansion. We believe that the industry would require an addition of 22,500 rooms during the next five years to achieve the target of 2.5m tourist arrivals by 2016. Against this backdrop, a number of foreign hotel chains, existing hoteliers and companies have aggressively started to look for new hotel ventures. New capacity would take at least 24-36 months to come on stream.



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