What is the real investment in the hotel plant in Sri Lanka?

The tourism industry has been referred to as a ‘thrust industry’ and ‘engine of growth’ by the State ad nauseam, while in reality the industry is paid only lip service. The immense benefits both direct and indirect often go unnoticed. 

Today the industry earns Rs. 3.5 b in foreign exchange earnings (the third largest in 2017) and provides employment to some 300,000 persons. It is a well-known fact that the trickle-down and multiplier effects in the tourism sector is quite large. It is estimated that in the Asian region for every 1 dollar spent in the formal sector there is 2.0-2.5 dollars spent in the informal sector. Similarly, for every direct employment, there could be an equal number employed in the informal sector. 

One other important factor of how the tourism industry drives the economy is the magnitude of investments in the hotel plant. Hotel construction and commissioning is quite a heavy capital investment. More importantly, this investment is almost totally from the private sector, both locally and from abroad. 

However there is no available data or information of what the total investment in Sri Lanka’s hotel plant is., and it was felt worthwhile to undertake a study to make an assessment of this. 

Assessment of the investments in hotels 

Room strength and class: The first step in this exercise would be to collate and assess the total room strength, and of what star category they are. From the SLTDA statistics it is recorded that there are 23,354 rooms in 398 hotels in the formal (registered) sector as at April 2018. It would be quite impossible to assess the large number of small unregistered units that have cropped up all over the island although this is said to be a significant number (some researchers estimate this to be as large as the formal sector). 

However for this study it is proposed to deal with real verified numbers, and hence the informal accommodation sector is left out of this exercise (in any event the investment in these units is only a small fraction of the larger hotels).

From the SLTDA statistics for these 23,354, the different star class standards are also available, which range from the highest of the 5-star category down to 1-star, and also the boutique hotel category. 

Per room building cost: A usual benchmark used by hoteliers to very approximately assess the overall construction cost of a hotel project, is to work on a per room cost (per key costs). This is computed by dividing the total project cost for all the work, including public areas fit outs, swimming pools, landscaping, etc., (but excluding land cost) and dividing this by the room strength. It is said that due to the high cost of construction in Sri Lanka, this index is high. However there are many new hotels that have been built recently which would give realistic figures.  Based on current industry figures these very conservative per key costs are assumed (see table). 

Unclassified hotels: There are a large number of ‘unclassified’ hotels under the SLTDA and it is only recently that classification has been mandated. Most of this category is found to be in the 3/2-star category and hence an average figure of Rs. 15 m per key has been used.

Computation of value of existing hotel plant: It is now a simple arithmetic calculation to arrive at an estimated replacement value for the existing hotel plant in the country.  

New hotels being built: There several new hotels, for which approval has been granted by the SLTDA, that are in various stages construction/completion. Accordingly there is a total estimated 246 units in the pipeline, which will add 16,883 rooms in various star class level (as at April 2018).

It is a simple process to apply the same assumptions of per key cost to these rooms, to arrive at an approximate value of these hotels that are being built.

Total estimated replacement value of existing and new hotel plants: This indicates that in the next two years, once the 246 new hotels also come on stream, the total current replacement value of the hotel plant in Sri Lanka will be almost Rs. 662 b, which at Rs. 150 to the dollar works out to $ 4.4 b.

Conclusion

This evaluation errors on the conservative side, as most of the assumptions applied are on the low side. It should also be highlighted again that this does not take into consideration the value of the land which could be sizeable. Hence, if any, the figures will be underestimated 

However this basic analysis and study should indicate, in no uncertain terms, how valuable the hotel industry is to the economy, with such large investment portfolio, led completely by the private sector. 

To put things in proper perspective some comparisons were done as seen in the table. 

Hence this should be an eye-opener for all stakeholders and the Government to realise the true value of tourism, and that it should be given its due place as one of the most important industries in Sri Lanka.