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 SnapshotThe 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 4.6% in 2016,
as seen in Figure 1, and is anticipated to increase at an average annual rate of 5.2% between 2017-21, per
the Economist Intelligence Unit (EIU), primarily led by private consumption and the inflow of remittances, as
well as public investment in infrastructure. Historically, the Services sector has continued to contribute over
60% to the GDP (Figure 2), driven by the strength of the apparel, tourism and information technology
industries. Figure 1: Sectoral Growth Rates (2013-2017)*EIU Estimates ** EIU ForecastsSource: The
Economist Intelligence UnitFigure 2: Sectoral Contribution to GDP (2013-2017)*EIU Estimates ** EIU
ForecastsSource: The Economist Intelligence UnitThe Sri Lankan rupee continues to experience downward
volatility vis-à-vis the US dollar, averaging at LKR149/US$ in 2016 and this trend is expected to continue over
the next five years, given the substantial trade deficit and inflation differential with the United States.
Inflation, as measured by the Colombo consumer price index (CCPI), has averaged 4.5% in the past five
years.To sustain the Services driven economy and develop the nation as an integral trading hub, the Sri
Lankan government has undertaken ambitious programmes to modernise the island’s roads, railways, ports
and air transportation. Coupled with improvements in the power and telecom sectors, the infrastructure
developments in the Northern and Eastern provinces as well as around Colombo will ensure long term
economic growth.While the Colombo South Port Expansion project and the Hambantota Port development are
already underway, the government is also focusing on creating a sustainable road network with projects such
as the Outer Circular Highway, Colombo-Kandy Highway and the Southern Expressway. Additionally, the
Terminal 1 at Bandaranaike International Airport is likely to be expanded by 2019 to accommodate 15 million
passengers annually from the existing capacity of six million, further to which construction of the second
terminal with the same capacity will commence. Tourism & VisitationTourism is the third largest source of
foreign exchange earnings in Sri Lanka, accounting for 10.2% of the total in 2015. Total contribution of the
Travel & Tourism industry to the country’s GDP was 10.6% in 2015, and is forecasted to increase by 4.5% in
2016, per the World Travel & Tourism Council’s Economic Impact 2016 report. Furthermore, Sri Lanka
crossed the two million mark in tourist arrivals, recording a compounded annual growth rate (CAGR) of
almost 20% over the past five years. Figure 3 presents the figures for tourist arrivals in Sri Lanka for the past
ten years. Figure 3: Sri Lanka Tourist Arrivals (2007-2016)Source: Sri Lanka Tourism Development
AuthorityNot only have the tourist arrivals to the country witnessed exponential growth, earnings from
tourism have also witnessed a CAGR of 31% over the past five years, totalling US$3,026.5 million between
January and November 2016, according to the Central Bank of Sri Lanka.Further to presenting the overall
economic and tourism overview, we proceed to evaluate the operating performance over the past three
financial years and provide an outlook for the branded hotel sector in Colombo, Katunayake and Negombo. We
have considered the major international and domestic supply as the basis for the following analysis of these
hotel markets, and excluded the smaller boutique or unbranded properties and one to two-star rated hotels.
Moreover, the figures provided for the financial year 2016/17 are estimated based on interactions with the
hotels’ management and actual operating performance reported till December 2016. We have not accounted
for hotels that have been operational for less than six months in 2016/17.ColomboThe commercial capital of
the island, Colombo is connected by the Colombo-Katunayake Expressway (E03) to the Bandaranaike
International airport to the north. The city is well connected to other integral destinations such as Negombo,
the Southwest Coast, Kandy, Nuwara Eliya, Dambulla, and Anuradhapura by a network of highways. The data
set presented for the Colombo hotel market comprises approximately 3,200 rooms.Demand Segmentation