Colombo, Katunayake, Negombo Sri Lanka
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February 2017 MARKET PULSE: COLOMBO, KATUNAYAKE, NEGOMBO SRI LANKA Hemangi Bhandari Senior Associate – Consulting & Valuation Pooja Goel Director – Consulting & Valuation HVS.com HVS India | 2nd Floor, Paras Downtown Centre, Golf Course Road, Sector 53, Gurgaon 122 002 On the eve of the 2nd edition of Tourism, Hotel Investment & Networking Conference (THINC) Sri Lanka, hosted by HVS, this article explores the historical performance and outlook for three key hotel markets, namely Colombo, Katunayake, and Negombo, which are preceded by a snapshot of key macroeconomic and tourism statistics in the country. We also delve into prevalent travel trends and the challenges presented by the hospitality industry in these areas. MACROECONOMIC SNAPSHOT The Sri Lankan economy continues to inspire a fair degree of confidence, fortified by the gradual improvement in the external sector, with growing exports and remittances, and tourist arrivals reaching a record high in 2016. The 2017 budget points towards the persistence of the government’s efforts to establish the country as a regional logistics and trading hub with better synergy with global markets as well as further openness towards foreign investments, particularly in tourism, apparel and information technology. Sri Lanka’s annual GDP growth is estimated at remittances, as well as public investment in 4.6% in 2016, as seen in Figure 1, and is infrastructure. Historically, the Services sector anticipated to increase at an average annual has continued to contribute over 60% to the rate of 5.2% between 2017-21, per the GDP (Figure 2), driven by the strength of the Economist Intelligence Unit (EIU), primarily apparel, tourism and information technology led by private consumption and the inflow of industries. FIGURE 1: SECTORAL GROWTH RATES (2013-2017) 6.5% 5.5% 5.5% 5.3% 5.5% 5.2% 5.1% 5.0% 5.0% 4.5% 4.1% 4.9% 4.9% 4.8% 4.6% 4.6% 3.8% 3.5% 3.5% 3.4% 3.2% 2.5% 3.0% 1.6% 1.5% 0.5% % Real Change per annum per Change Real % -0.5% 2013 2014 2015 2016* 2017** -1.5% -2.5% -2.5% Agriculture Industry Services GDP *EIU Estimates ** EIU Forecasts Source: The Economist Intelligence Unit MARKET PULSE: COLOMBO, KATUNAYAKE, NEGOMBO – SRI LANKA| PAGE 1 The Sri Lankan rupee continues to experience FIGURE 2: SECTORAL CONTRIBUTION TO GDP (2013-2017) downward volatility vis-à-vis the US dollar, 100% averaging at LKR149/US$ in 2016 and this 90% trend is expected to continue over the next 80% 70% 60.5% 60.8% 60.6% 60.9% 61.1% five years, given the substantial trade deficit 60% and inflation differential with the United 50% States. Inflation, as measured by the Colombo 40% 30% consumer price index (CCPI), has averaged 31.3% 30.1% 30.7% 31.0% 31.1% 4.5% in the past five years. 20% Sectoral Contribution to GDP to Contribution Sectoral 10% 8.2% 8.6% 8.7% 8.1% 7.9% 0% To sustain the Services driven economy and 2013 2014 2015 2016* 2017** develop the nation as an integral trading hub, Agriculture Industry Services *EIU Estimates ** EIU Forecasts the Sri Lankan government has undertaken Source: The Economist Intelligence Unit ambitious programmes to modernise the island’s roads, railways, ports and air TOURISM & VISITATION transportation. Coupled with improvements in Tourism is the third largest source of foreign the power and telecom sectors, the exchange earnings in Sri Lanka, accounting for infrastructure developments in the Northern 10.2% of the total in 2015. Total contribution and Eastern provinces as well as around of the Travel & Tourism industry to the Colombo will ensure long term economic country’s GDP was 10.6% in 2015, and is growth. forecasted to increase by 4.5% in 2016, per the World Travel & Tourism Council’s While the Colombo South Port Expansion Economic Impact 2016 report. Furthermore, project and the Hambantota Port development Sri Lanka crossed the two million mark in are already underway, the government is also tourist arrivals, recording a compounded focusing on creating a sustainable road annual growth rate (CAGR) of almost 20% network with projects such as the Outer over the past five years. Figure 3 presents the Circular Highway, Colombo-Kandy Highway figures for tourist arrivals in Sri Lanka for the and the Southern Expressway. Additionally, past ten years. the Terminal 1 at Bandaranaike International Airport is likely to be expanded by 2019 to Not only have the tourist arrivals to the accommodate 15 million passengers annually country witnessed exponential growth, from the existing capacity of six million, earnings from tourism have also witnessed a further to which construction of the second CAGR of 31% over the past five years, totalling terminal with the same capacity will US$3,026.5 million between January and commence. November 2016, according to the Central Bank of Sri Lanka. FIGURE 3: SRI LANKA TOURIST ARRIVALS (2007-2016) 2,500 2,051 2,000 1,798 1,527 1,500 1,275 1,006 1,000 856 654 494 438 448 500 - 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tourist Arrivals (000s) Source: Sri Lanka Tourism Development Authority MARKET PULSE: COLOMBO, KATUNAYAKE, NEGOMBO – SRI LANKA| PAGE 2 Further to presenting the overall economic and continue to form the largest slice of the pie, as tourism overview, we proceed to evaluate the the city acts as a hub for corporates and operating performance over the past three investors. The next largest is the Leisure financial years and provide an outlook for the segment, as Colombo also serves as a gateway branded hotel sector in Colombo, Katunayake city for the rest of the island, and tourists and Negombo. We have considered the major travelling for a holiday tend to stop over in the international and domestic supply as the basis city. Figure 4 presents the market segmentation for the following analysis of these hotel for the Colombo hotels, as of 2016/17. markets, and excluded the smaller boutique or unbranded properties and one to two-star rated FIGURE 4: MAJOR DEMAND SEGMENTS FOR COLOMBO hotels. Moreover, the figures provided for the HOTELS (2016/17) financial year 2016/17 are estimated based on 4% interactions with the hotels’ management and 4% actual operating performance reported till 8% December 2016. We have not accounted for hotels that have been operational for less than six months in 2016/17. 46% COLOMBO 37% Commercial Leisure MICE Extended Stay Airline Source: HVS Research Going forth, we expect Commercial demand to drive business for the branded hotels, given the increased interest in modernisation of the city, the construction of the Port City project, expansion of existing corporates and development of new projects in the country. The commercial capital of the island, Colombo Future supply with large meeting spaces, such is connected by the Colombo-Katunayake as the Shangri-La opening in 2017, bodes well Expressway (E03) to the Bandaranaike for the Meeting and Conference segment. International airport to the north. The city is Additionally, the international brands, backed well connected to other integral destinations by their global sales offices and expected to such as Negombo, the Southwest Coast, Kandy, enter the market over the next two to three Nuwara Eliya, Dambulla, and Anuradhapura by years will most likely drive more business, a network of highways. especially from the Leisure segment. The Extended Stay business is anticipated to The data set presented for the Colombo hotel witness moderate growth over the medium market comprises approximately 3,200 rooms. term, due to the project related business generated by the Port City. However, the Airline Demand Segmentation segment (which includes crew business) may Hotels in Colombo cater to demand arising from depict a slight erosion, as the existing hotels varied market segments, such as Commercial, near the airport can absorb the existing Leisure, Meeting and Conference, Extended demand, as well as due to the Colombo hotels Stay, and Airline. The room nights consciously moving away from the low paying accommodated by the Commercial segment segment. MARKET PULSE: COLOMBO, KATUNAYAKE, NEGOMBO – SRI LANKA| PAGE 3 Hotel Operating Performance Outlook Hotels in Colombo recorded an average HVS is tracking approximately 4,200 rooms occupancy of 64% in 2016/17, a growth of announced as proposed supply for Colombo, 5.0% over that recorded in the previous fiscal. with both domestic players increasing their The market has consistently recorded a steady footprint, as well as international brands increase in occupancy over the last three years. entering the fray. Several of these projects are Average rates, on the other hand, tell a different actively under construction or near completion story. The city has witnessed room night supply and we anticipate 60% of the proposed supply growth over the past three years in the budget to be developed over the next five years. and midmarket positioning, a welcome addition Therefore, downward pressure on hotel to a market previously dominated by five star occupancies is to be expected in the short to and five star deluxe hotels. These hotels have medium term. been quickly absorbed in the market given their popularity with the price conscious Chinese and On the other hand, when taking the long-term Indian travellers; however, they have added view, the new branded hotels can play a part in pressure on the existing five star hotels, thereby the Sri Lanka growth story, and induce demand restricting the latter’s ability to increase for the entire market especially in the Meeting rates. Additionally, an important point to note and Conferences and Leisure segments. is the depreciating Sri Lankan rupee, due to Additionally, we anticipate that marketwide which marketwide average rates depict a average rates will display a moderate but decline or only marginal increases in US dollars.