Pricing power persists in Sri Lankan hotel industry
 
Pricing power persists in Sri Lankan hotel industry
26 APRIL 2018 8:24 AM

While hotel occupancy has declined in Sri Lanka since January 2017, Sri Lankan hoteliers continue to hold pricing power as ADR performance has stayed positive.

SINGAPORE and HENDERSONVILLE, Tennessee—The Sri Lankan hotel industry reported mixed results in 2017 as the country saw record room demand and average daily rate but a decline in occupancy as new supply growth accelerated.

According to the STR census database, the island had 146 hotels comprising 14,800 rooms, which offered just under 5.2 million roomnights available in 2017. More than 3.3 million of those were sold. STR now reports on close to 50% of the available rooms, and 2017 occupancy was 64.8% with the average cost of a room at 16,891 Sri Lankan rupees ($107.71). (STR is the parent company of Hotel News Now.)

Sri Lanka has been very attractive to developers over the last few years, and supply growth has been steadily accelerating since 2014. At the same time, demand growth has slowed. The chart below shows the interplay between supply and demand comparisons since 2015.

In 2017, supply growth of 6.8% outpaced demand growth, which was basically flat when compared with 2016 (+0.1%). As a result, occupancy declined. Moving forward, country officials and hoteliers will need to resort to impactful marketing campaigns to increase room demand at an increasing pace to avoid a continued occupancy slide.

Occupancy and ADR impact
On an annualized basis, occupancy has declined since January of 2017. As the chart below shows, occupancy growth was very healthy and peaked in 2015. The absolute occupancy peaked at 70.2% in May of 2016, which means that hoteliers sold seven out of 10 rooms for one full year running—a remarkable performance. Annualized ADR declines that were prevalent in 2015 and in early 2016 reversed in April 2016, and ADR has been positive ever since.

It will be interesting to observe the continued pricing power of Sri Lankan hoteliers as new supply enters the island and new competitors open in the major markets.

The Colombo skyline in particular continues to be busy with construction cranes, and particularly in the luxury and upper-upscale segments, we foresee some interesting dynamics ahead that will put pressure on the incoming demand growth. With the Taj Samudra and the Hilton refurbished, we have already seen Shangri-La (550 rooms) open its oceanside property, with the ITC Colombo One (350 rooms) and the Grand Hyatt (458 rooms) in the same area nearing completion. After that, the planning continues for the megaproject Port City, with the intention of several large high-end properties in the future, along with other developments across the city, including Radisson (300 rooms), Ritz-Carlton (200 rooms) and NEXT (200 rooms)—to name a few.

While rates have grown steadily across all weekdays, occupancy has risen slightly better during the weekends in the last 12 months compared to 12 months prior. Given that the weekend generally sees lower occupancy, this has been a welcome padding for leisure bookings, as midweek business dropped from the low 70s to high 60s.

When combining the monthly ADR and occupancy change into the RevPAR percent change, the following picture emerges: While 2017 monthly data shows that RevPAR declined five of 12 months, RevPAR comparisons were positive for the first three months of 2018.

Also during the first quarter, ADR increased to its highest absolute level for any first quarter in STR’s Sri Lanka database. In addition, the slight year-over-year drop in occupancy in March (-2.7%) is probably more a result of the aforementioned supply increase, rather than an impact of cancellations due to the protests in Kandy, which occurred in early March and garnered international attention.

Foreign exchange rate influence
According to the WTTC, Sri Lanka is dependent on tourism spending. In fact, 11.6% of the country’s 2017 GDP and 11% of total 2017 employment can be directly or indirectly related to tourism. As such, it is insightful to look at ADR changes in multiple currencies.

Room rates in local currency and the U.S. dollar have been moving in lockstep over time. Most recently, rooms when denominated in Indian rupees have gotten more expensive after a period of declines. Visitors paying in British pounds have seen more of a bargain as ADR in pounds has declined for about a year.

Seasonality remains very strong in Sri Lanka, with May through June the typical low season, when RevPAR can be as much as 50% lower compared with peak season during December through February. More than 2.1 million international visitor arrivals in 2017 represented a marginal 3.2% increase from 2016. As the country looks to diversify its source markets, even India, Sri Lanka’s largest source market, remains a large opportunity for growth for Sri Lanka as a tourism destination.

The average length of stay, which sits slightly above 10 nights, is generally considered to be bolstered by Sri Lankan nationals returning home from living abroad, often in India, the United Kingdom and Germany.

China remains a very important trading partner to Sri Lanka, especially given the development in the last few years as it has grown its investment and presence along the ‘string of pearls’ in the Indian Ocean as part of the One Belt One Road Initiative, including the recent signing of a 99-year lease with a Chinese state-owned company for the Hambantota port.

Pipeline snapshot
The strong influx of new rooms to the island shows no sign of slowing down. Below are STR pipeline records as of 10 April 2018.

The total room count of the pipeline is 5,357 rooms, which equates to a roughly 36% supply increase. Of course, not all these rooms will open at once, and it is probably fair to assume they will open over the next three to four years. That said, even over four years, this would still mean that supply grows by roughly 9% per year, a substantial growth rate that will take some concerted effort to absorb with new demand.

Summary
The hotel industry in Sri Lanka is a developer favorite, and new supply will affect property performances for the foreseeable future. At the same time, we are seeing local groups, like Cinnamon and Jetwing, working to upgrade and refurbish older product to compete with the new supply. So far, hoteliers have been able to increase ADR to counter the declines in occupancy. It will be quite important for hoteliers to watch the occupancy and ADR changes in the future to react prudently and keep RevPAR comparisons in positive territory.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.

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