REPORT FROM SRI LANKA—Nearly three years after Sri Lanka’s 30-year civil war came to an end, the country is ramping up efforts to recapture its status as one of Asia’s most popular holiday destinations.
The efforts begin with new development. Sri Lanka, a country of approximately 20 million, has fewer than 15,000 registered hotel rooms, according to the Sri Lanka Tourism Development Authority. The government wants to add 35,000 rooms within the next four years to meet the projected demand of 2.5 million foreign visitors.
But is that number attainable? And if it is, will it satisfy projected demand?
Growth during the past three years has been promising. The SLTDA estimates there were 850,000 foreign arrivals in 2011, which is 30% above the 2010 numbers. During the first full year of peace in 2010, arrivals increased 50%.
The major hurdle to growth could be visas, said HVS India associate Kaushik Vardharajan. While Sri Lanka issued tourist visas on arrival in the country through 2011, the government dropped that policy in January of this year. Most foreigners, with the exception of those from the Maldives and Singapore, must now apply and buy visas online.
Meeting visitor targets also will depend on whether the country’s new international airport in Hambantota, financed and constructed by China, is completed as projected by the end of the year, said Bill Barnett, managing director of Phuket-based C9 Hotelworks. Hambantota is located in a rural area on the southeastern coast that is a constituency of President Mahinda Rajapaksa.
The government also must increase the number of flights and airlines allowed to serve the country, Barnett and HVS associate Inshita Wij said.
Wij said increasing the number of flights from India is crucial because Indians are the largest group of visitors, making up nearly 20% of all arrivals in recent years. Visitors from Britain follow, comprising 16% of all foreign visitors during 2010. Visitors from the Maldives and Middle East together made up about 12%.
If everything goes according to plan, however, Sri Lanka still might experience a hotel shortage. HVS India, which issued a report on Sri Lanka’s tourism and hotel prospects last summer, estimated that more than 41,000 new rooms would be needed by that date.
Not that registered and classified hotels reflect the whole accommodation story, according to statistics from the SLTDA. The proprietors of 36% of registered rooms chose not to be classified at all. For the year 2010, SLTDA estimated that close to 6,000 additional rooms were in non-registered, informal “supplementary establishments.” These include inns, guesthouses, youth hostels and homestays. Almost 20% of room nights were spent in these informal lodgings during 2010.
Wildlife, surfing and ancient cities
For tourism appeal, Sir Lanka boasts considerable natural and cultural assets. With 1,340 kilometers of coastline, the island country is dotted with beaches with potential for scuba diving, surfing and whale-watching. It has nine well-protected national parks and seven bird sanctuaries.
Running up from the center-south to the center of the nation is a series of pilgrimage sites for Buddhists and Hindus. The trail culminates north of the city Kandy in the “cultural triangle” containing extensive remains of the three ancient cities of Anuradhapura, Sigiriya and Polonnaruwa. Founded as the capital in the fourth century B.C., Anuradhapura was the capital for nearly 15 centuries. East of here was the site of most battles with the Tamils.
Yet accommodation is overwhelmingly concentrated in Colombo, the country’s largest city, and along the 125 kilometers of southwestern coastline that runs from Colombo to the old Dutch colonial outpost of Galle. In between are the beaches of Kalutara, Beruwala, Bentota, Ahungalla and Hikkaduwa. Almost 35% of the registered rooms in 2010 were along the southern coast and almost 40% were in Colombo or the surrounding area, according to SLTDA. It is these areas where most renovations and new hotels are planned.
To encourage renovation and refurbishment, in 2010 the government set minimum rates for the classified hotels in Colombo. A room at a 5-star hotel that in 2008 was charging between $35 and $50 per night was required to charge at least $75 in 2010. The minimum rate is now $125 gross, but rates of $200 per night are becoming common in Colombo.
Although the higher rates are only required in the capital area, many of the large hotels in resort areas have followed suit—regardless of whether the product has been renovated. Many online guest reviews, as a result, cite a disparity between star rating and quality of service and facility.
“It’s a rough period,” said HVS’s Kaushik Vardharajan. “Hotels are having a hard time, but it’s having an impact. The crappy hotels are trying to renovate to keep up. Every hotel is trying to renovate. The profile of guests is changing. It has raised the profile of Sri Lanka.”
Most of the new hotels and relaunches are in the 4- and 5-star range. Often they intend to appeal to European or Australian tourists, even though the share of these traditional source markets is shrinking. The share of visitors from Germany, Australia and France continued to be in the single digits in 2010, according to the SLTDA.
Incentives, partnerships spur development
The government’s Board of Investment is offering concessions to foreigners and locals for investment in renovations or new builds. A mid-scale project, one with an investment of 50 million rupees ($400,000), entitles the investor to a one-year tax holiday and to import raw materials duty-free, said Dilip Samarasinghe, the BOI’s director of media and public relations. A very large-scale project with an investment of more than 300 million rupees ($2.4 million) would merit a tax holiday of six to 12 years, he added.
The country’s development landscape is dominated by Sri Lankan players. LINK TO SIDEBAR The two largest in terms of room numbers, Aitken Spence Hotels and John Keells Hotels Group, are divisions of large, diversified conglomerates of the same names. Both have engaged in major renovations and refurbishments during the past two years.
Jetwing, a Colombo-based hotel and tour company with 12 properties in its portfolio, is looking to make a splash with an $18-million investment to build six hotels in the country by 2014, according to Jetwing Chairman Hiran Cooray.
Also, the diversified Sri Lankan business group, Hayleys, which owns or manages 350 rooms, has plans to add 400 more rooms via ground-up construction and expansion. Two other local diversified business groups, Finco Group and Softlogic Holdings PLC, are new entrants in the hotel industry.
Finco launched its UGA Resorts in 2010 with the Ulagalla Resort in the ancient cities district. Softlogic last year bought the Ceysands Hotel on Bentota Beach for $7.2 million and will build a 220-room business hotel with Swiss-based Mövenpick Hotels & Resorts in Colombo.
Foreign companies and individuals can own property outright in Sri Lanka. Singapore’s Aman Resorts already owns and operates two hotels. Newcomer Shangri-La Hotels and Resorts bought the land for the “6-star,” 500-room hotel it is building in Colombo.
On the other hand, Taj Hotels Resorts & Palaces and Hilton Worldwide operate a total of five hotels but don’t own any. Many investors view 99-year leases a better choice because of fewer duties, the BOI’s Samarsinghe said.
From what little information can be gleaned, foreign newcomers so far are opting to partner Sri Lankan developers and investors.
Besides the Mövenpick-Softlogic joint venture, Thailand’s Minor Hotel Group Limited has partnered with local Serendib Leisure to renovate and manage two of Serendib’s hotels on the Bentota-Kalutara strip. Bangkok-based Six Senses Spas, which already operated spas in two of Aitken Spence’s Heritance hotels, is now building a spa and additions on a third Heritance property on Bentota Beach. The properties will be operated by Pegasus Capital Advisors LP, which on Tuesday announced it had entered into a binding agreement to acquire all of the Six Senses branded resort and spa management contracts and related intellectual property rights and operate them under a new company managed by Pegasus and its affiliates.
Four tourism development zones
The government has designated four areas throughout the country as special resort development zones. Only the 1,800-acre Dedduwa, east of Bentota, is in the accessible, developed southwestern coast. On the northwest coast is the Kalpitiya Resort Development zone. According to HVS’s report last year, the government envisioned the area would host 17 hotels with 5,000 rooms and perhaps a golf course, a water park or a race course.
BOI’s Samarsinghe said, however, there had been “some talk” about such specifications, as well as casinos, but no final decisions have been made. Nor did he know if the other three zones would have special purposes or incentives.
The government is also offering long-term leases for tourism purposes on approximately 20 islands off Kalpitiya’s 13-kilometer-long shoreline, Samarsinghe said. Two foreign companies, Sun Resort Investment Lanka and Qube Lanka Leisure Properties, each have leased offshore islands, according to HVS.
In the far northeast, the 500-acre Kuchchaveli zone is bordered on the south by Nilaveli, a traditional beach resort, and the harbor town of Trincomalee, potentially a cruise ship port. Challenges arise farther island, where the roads are still poor and large areas are still controlled by the military.
Midway down the eastern coast, the 150-acre Passikudah zone is also in a long-isolated area. Uga Resorts is already renovating an old hotel there and relaunching it this summer with 50 3-star Mediterranean villas starting at $50 per night.