Five Key Takeaways Tourism, Hotel Investment & Networking Conference (THINC) Sri Lanka 2016

Hosted by HVS, the inaugural Tourism, Hotel Investment & Networking Conference (THINC) Sri Lanka, concluded successfully on 11 February 2016. It attracted more than 175 delegates from across 14 countries, comprising an interesting mix of prominent regional and global industry players. The Conference kick started the year with insights into the country’s

changing tourism and hospitality landscape and also identified opportunities for future investment and development by key industry stakeholders. We have provided a brief summary of the economic and tourism growth over the last five years along with the major infrastructure developments undertaken and planned. This is followed by the main takeaways from THINC Sri Lanka 2016.

Background

Economic Outlook and Infrastructure Development – On the Crest of a Wave The overall health of a country’s economy and infrastructure development heavily influence the prosperity of its hotel market and pave the path for its success.

Sri Lanka’s economy has been among the most rapidly developing economies in Asia in recent years. The country’s GDP is forecasted to grow at 6.0% in 2016 and thereafter expand at a healthy average of 6.2%1 annually for the period 2017-20.

Private consumption expenditure, which contributed to about 65% of the nominal GDP in 2014, is likely to remain the main engine of growth.

Inflation, measured as Colombo Consumer Price Index (CCPI), is anticipated to average 3.7%2 annually between 2016 and 2020.

In the last two years, not only has Sri Lanka risen six ranks in ‘Ease of Doing Business’3, it has also been placed third on a comparative economies scale ahead of countries such as the Maldives and India, with a score higher than the Regional Average.

The services sector is the most active part of the economy and also the largest contributor (over 60% of the GDP4) propelled by growth in tourism, telecommunication and financial services.

The Sri Lankan government, fully cognizant that good infrastructure is necessary for the country to achieve its forecasted economic and tourism growth, has constantly focused on bringing foreign aid into the country to build infrastructure projects. The past six-year period has seen massive infrastructure development in the form of roads, railways, bridges, ports, and a second international airport.

1 Country Report December 2015, Economist Intelligence Unit 2 Country Report December 2015, Economist Intelligence Unit 3 Doing Business 2016 Measuring Regulatory Quality & Efficiency – The World Bank 4 EIU dataservices

Sri Lanka Tourism – Charting the Course Given the country’s rich natural and cultural heritage, tourism was identified as a chief propellant of economic growth. The highlights include: Contribution to Economy: Tourism steadily improved its ranking

from the fifth-largest contributor to total Foreign Exchange Earnings (FEE) in 2010 to the third-largest source as per the Sri Lanka Tourism Development Authority (SLTDA). The CAGR of its contribution to FEE recorded during the period 2010-14 has been a whopping 43.3%. The hotel sector, too, has clocked a double-digit growth annually from 2009 till 2014.

Contribution to Employment Generation: In the tourism sector, employment has also shown a sturdy growth of 11.0% in 2014 over 2013 generating nearly 300,000 jobs.

Capital Investment: As per the World Travel & Tourism Council (WTTC) Economic Impact Report 2015, Travel & Tourism sector attracted LKR115.7bn as capital investment in 2014, which is anticipated to rise by 8.3% in 2015, and further by 5.5% per annum over the next ten years.

Development of Tourism Infrastructure: i. The government has been developing both existing and new

destinations by up-gradation of existing tourist sites and creating investment opportunities for new developments; furthermore, marketing and promotion of these diversified destinations has also been done.

ii. The government has improved the regulatory framework governing tourism by facilitating the process for ease of investing in Sri Lanka by setting up ‘One Stop Unit (OSU)’, which is a one-stop location for assisting potential investors – for obtaining information, approvals and licences.

iii. Ease of travel to Sri Lanka has also been facilitated by implementing a convenient Electronic Visa Authorisation process.

Tourism Statistics: i. Ever since the time of setting of the target (0.86 million in

2011), tourist arrivals have more than doubled (1.8 million in 2015) and the country is likely to receive about 2.2 million tourists in 2016.

ii. In 2014, the average length of stay was 9.9 nights with over 50% of the travellers staying between 4 to 14 nights.

iii. Contributing to nearly 30% of the total tourist arrivals, India and China are the top source markets for the emerald isle.

Key Takeaways from THINC Sri Lanka 2016 A host of topics related to understanding the evolving tourism landscape, opportunities and challenges of investing in the region, learnings from other island destinations, development and operational challenges and exploring new tourism experiences were tabled during the 1.5-day Conference. We have summarised the focal discussion points below.

Tourism Remains Key Focus Area for Government The government is now targeting for tourism to become the largest contributor to its FEE annually and to double its tourist arrivals by 2020 from that expected in 2016. The new strategy aims to make Sri Lanka the most sought after destination in Asia. Accordingly, the Marketing Strategy is being revamped and budgetary allocations have also been made to propel growth in tourism. Several new incentives such as provision of state land and granting of a 50% tax holiday for ten years in lagging regions; a 50% tax holiday to organisations engaged in MICE markets; regulation of medical and healthcare tourism; and levy of zero import duty on caravans, yachts, surfing equipment and mini cruise boats have been introduced.

Sri Lanka Tourism Offers Potential to Move Full Steam Ahead Most destinations end up being known for delivering a singular experience, for example, Maldives and Mauritius are known predominantly for their beaches and diving. A challenge for such destinations becomes altering the established image. Furthermore, there is also the challenge of increasing the length of stay to augment tourism revenues.

Five Key Takeaways Tourism, Hotel Investment & Networking Conference (THINC) Sri Lanka 2016

Sri Lanka, however, is naturally endowed with a vast set of tourist attractions including pristine sandy beaches, luscious rain forests, archaeological sites, culture and history, national parks and wildlife amongst others. The average length of stay (currently at 9.9 nights) for a tourist is a testament to the strength of the destination and its ability to retain visitors for long durations. The current locales, therefore, provide ample opportunities for hotel development and creation of comprehensive leisure circuits.

Moreover, infrastructure development is expected to open up new destinations for investment in addition to the traditional Colombo and Southwest Coast areas. These include but are not restricted to Arugam Bay and Batticaloa (surfing), Yala (wildlife), Mirissa (whale and dolphin watching), Trincomalee (port and trade), Passikudah and Kalpitiya (planned tourism development hotspots) and Anuradhapura (heritage and culture). Going forth, novel experiences such as cruise tourism, impulse flying, safaris, luxury trains, and wreck diving will offer avenues for investment and growth and will lead to the creation of new destinations in the country. It was discussed that all in all, unlike its island peers in the vicinity Sri Lanka offers the potential to develop into a diverse and captivating destination that can support a sustained growth in tourism and hospitality.

Sri Lanka Hospitality Market – Set to Run at Full Tilt Though tourism destinations, infrastructure and arrivals have grown, hotel supply has not witnessed a quantum change. Over the last few years, Sri Lanka has garnered some attention from global and regional hospitality players. Major projects under development include the Ozo (operational), Shangri La, ITC Colombo One, Sheraton and Mövenpick in Colombo, and the Anantara (recently opened), Marriott, Shangri La, and Aitken Spence-RIU resorts along the Southwest coast. However, to keep pace and further fuel the growth of both foreign and domestic visitors, a significant quantum of quality branded hotels and resorts would be required.

It was discussed that blanket/ad hoc construction of hotels across the island would not be the solution. Instead, a strategy that takes into account the location (city/beach/wildlife, hill country, culture) while planning the most suitable positioning and product mix would be appropriate to facilitate an all-rounded development of the island’s hotel markets. Additionally, a robust hotel supply will also enable a just comparison of the country’s hotel markets with those in the region.

Manpower Requirements to Facilitate New Hotel Development – All Hands on Deck A major issue widely tabled at the Conference was the looming shortage of trained manpower as a result of the rapidly expanding sector. Using current growth estimates, the Ministry of Tourism Development and Christian Religious Affairs has estimated that the present 320,000 personnel employed by the tourism sector will double to 640,000 individuals by 2020. The Sri Lanka Institute of Tourism and Hotel Management is unlikely to be able to cater to this requirement. The government, cognizant of this impending demand-supply imbalance has allocated LKR100 million for training of skilled manpower in its recent budget and announced deductions for establishing training schools by hotels. It has also started a one-month foundation course and opened new schools in Hambantota, Passikudah, Negombo, and Arugam Bay (planned). However, the current efforts will be inadequate to bridge the gap for trained personnel and considerable efforts from both the private and public sectors would be required to cultivate an adequately trained and sizable workforce.

Furthermore, to supplement the growth of its manpower, the country, which had witnessed a severe brain drain of its workforce during the war, will need to implement steps to attract this workforce back onto the island.

Minimum Rates – Time to Change the Course During the war in Sri Lanka, the hotels were facing low occupancies due to decreased visitations to the country, and heavy price wars ensued. Even five-star hotels were selling rooms for as low as US$30 to travel agents and tour operators, and facing losses. The government introduced the Minimum Rate Policy for star-rated hotels in Colombo in 2009. According to this policy, it was made mandatory for star-rated hotels in Colombo to sell rooms at a minimum rate decided by the government. A different rate for each star category helped hotels clarify their positioning and brought up the rates in the entire hotel market of Colombo. Rates were further increased for all segments in January 2011 followed by another hike in April 2011. For the five-star segment, rates were increased by 33% in January 2011 over the previous period and were further increased by 25% in April 2011 over the January 2011 rate. Rates have not witnessed a change since then and most hotels in the city record a performance close to the mandated minimum rate for their category. Industry stalwarts now believe that the policy, much needed in 2009, has perhaps outlived its tenure. In order for the pricing to be considered competitive in the region, as new hotels open and the market matures, this policy will, perhaps, need to give way to free dynamics driven by changes in supply and demand.

Closing Thoughts Overall, the presentations and panel discussions at THINC Sri Lanka 2016 reflected the optimism in the country’s evolving tourism and hospitality sectors. The country is unique and diverse in its tourism offerings and presents a variety of opportunities for major stakeholders. While the landscape has already witnessed considerable change with progressive policies and infrastructure development, addition of new hotel supply, manpower development, and partnerships will sustain further growth.

HVS, the world’s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries celebrated its 35th anniversary last year. Established in 1980, the company performs 4,500+ assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 35 offices and 500 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. HVS.com

Note: The data presented in this article is for informational purposes only and is not meant as a basis for making investment decisions. For more information, contact the author ‘Pooja Goel’, pgoel@hvs.com.

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