Readjust to realities

Wednesday, 10 February 2016 00:00 - - {{hitsCtrl.values.hits}}

Dilemmas come to all industries and tourism is facing one. The number of tourists is still increasing but earning profits, especially in Colombo, could become more challenging as the industry grapples to adjust its prices along fresh challenges.

Following a lacklustre winter the sun dawned bright in January with arrival numbers rising 24.3% year-on-year (YoY) to 194,280, led by sustained Indian and Chinese tourists. In fact the Chinese market closed the gap on their Indian counterparts and continued to redefine expansion to new markets. But earnings from the tourism sector are starting to decline with companies, including larger operators, feeling the pinch despite higher numbers.

Industry analysts have repeatedly pointed out that Sri Lanka’s tourism product is overpriced when compared with its competitors and the cover provided by the end of the war will fade in time. This eventuality could be upon the industry. The glut in luxury apartments and the unregulated hospitality sector could cost the regulated hotels by as much as $ 480 million by 2018, as the apartment units could be rented out at a fraction of the cost charged by the graded hotels, according to an independent research house.

The research arm of Capital Alliance Partners Ltd. (CAL Partners) has pointed out Sri Lanka’s star -graded city hotels fetch rates 15% higher than the regional peers which have caused a shift towards unregulated segments. Sri Lankan resorts sector witnessed an increase in average room rates further in 2015.

According to the data, in 2014 the unregulated market has accounted for 36% of room nights which has cost the regulated sector by as much as $97 million and the fallout could get worse.

CAL Research expects 3,000 new luxury units to hit the Colombo city market by 2018. The majority of new units will be bought for investment purposes as the average unit price of $ 850,000 (Rs. 125 million) is beyond the means of an average household to bear. As a result, a majority of the new units are likely to be rented out. A family of four could save on average $ 311 a night by staying at a luxury apartment in Colombo, CAL Research measures, all of which is bad news for the formal tourism industry.

A stay at a three bedroom apartment is $ 180 and food and beverage costs can be reduced to $ 35/day if regular delivery services or non-hotel restaurants are frequented. Further, the grocery bill may amount to $ 70/week, the report added. This is much lower than the $ 422 average rate per night for two standard rooms in a graded hotel. An additional $ 90 a day for meals alone is also tacked to the cost.

The overpricing of Lankan hotels as also noted by real estate company Jones Lang LaSalle (JLL), which earlier this year advocated a removal of the minimum room rate for Colombo hospitals and allow the markets to decide prices.

At the moment the industry is sticking to their guns and maintaining the floor rates but being immune to supply and demand in the market is impossible for any industry long term. Readjusting to realities when the going is still good might be the best bet for sustainable growth.