RAM Ratings says clearer skies for tourism sector

The RAM Ratings Lanka has declared that post-war Sri Lanka’s tourism sector is facing clearer skies. Its assessment is contained in its latest hotel sector report which focuses on opportunities and challenges. Here are excerpts from the summary of the report:

The economic prospects of Sri Lanka’s post-war development hinge primarily on a few key industries; among these, tourism has emerged as a frontrunner. A sector that is positioned to benefit directly from the anticipated boom in tourism is the Sri Lankan hotel industry.

After nearly three decades of operating in an extremely challenging environment amid the military conflict, the outlook on the industry has now completely turned around; and it is expected to play a wider role in Sri Lanka’s future economic development.

According to the Central Bank of Sri Lanka, the hotel industry only contributes around 2% to the country’s Gross Domestic Product at the moment.

The domestic hotel industry comprises tourist hotels that are graded establishments, along with other establishments such as guest houses, inns and youth hostels registered with the Sri Lanka Tourism Development Authority (SLTDA). With tourist arrivals into the country hitting a record high of over 650,000 last year, the hotel sector recorded an average occupancy rate of nearly 70%. During peak periods, occupancy levels exceeded 90%.

Increased demand has enabled hotel operators to elevate their room rates, leading to stronger revenues and broader margins for most establishments. Looking ahead, the sector’s growth prospects appear very promising, particularly in the short to medium term. According to industry experts, the current capacity of approximately 15,000 rooms (from graded hotels) can only cater to around 800,000 guests per annum; this is insufficient given the Sri Lankan Government’s ambitious target of 2.5 million tourist arrivals by 2016.

Industry experts estimate that the current capacity will have to be doubled to accommodate this influx; this is perceived to be unattainable over the medium term due to the long lead time for hotel development.

In view of the above, existing establishments will continue benefiting from the shortage of rooms and rising rates in the interim.

Recent regulations require 5-star hotels to raise their minimum rates from US$ 100 to US$ 125 per night effective 1 April 2011; this also affects those in the lower categories.

The sector’s performance will also be propelled by improved domestic demand against the backdrop of the generally better economic conditions and higher disposable incomes. Moreover, opportunities abound for existing operators to expand to the northern and eastern regions as well as other tourism zones, in turn brightening their growth prospects and financial performance in the long run. That said, we have identified several key challenges that the sector may face when attempting to capitalise on the opportunities presented by the tourism boom. While banks are willing to lend to established hotels that are part of larger diversified groups, stand-alone hotel owners, particularly small and medium-sized establishments, face funding constraints over the construction of new hotels and the refurbishment/upgrading of existing facilities. The banks’ conservative stance on the hotel sector could be due to the latter’s vulnerability to both global and local economic conditions and events.

An additional challenge lies in the area of human resource. Currently, employees in the hotel and tourism sector come up to around 300,000; industry experts estimate that close to 1.5 million employees would be required to cater to the government’s targeted tourist arrivals by 2016. As such, the country needs an integrated framework for HR development in the hotel industry.