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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Hotel investment – time for a pause?

Hotel investment – time for a pause?

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1Hotel investment – time for a pause? Empty Hotel investment – time for a pause? Sun Sep 02, 2012 5:54 pm


Director - Equity Analytics
Director - Equity Analytics
The annual reports of two South coast resort hotel operators reviewed in our business pages today record that they have achieved their best ever profits during the year ended March 31, 2012. This, no doubt, is a cause for satisfaction for their owners and other stakeholders. Nevertheless, neither of the two properties we mention, despite their record profits, had run occupancies over 65% or so. The reason for high earnings despite less than satisfactory occupancy is that hotels have been able to command better room rates than previously for a number of reasons, mainly the ending of the war. The reason why we are bringing up this subject is that there has been a surge of new investments in hotels with several currently under construction and many more at their planning stages and beyond. Can we attract sufficient visitors to fill them all is the big question that must be urgently addressed.

There is no need to labour the point that the war together with terrorist acts outside the theatre of conflict slowed visitor arrivals to a trickle. The hospitality industry, now aglow with expectation, has been putting its money where its mouth is. Given last year’s record tourist arrivals, expected to be surpassed this year, there is good reason for optimism. That is why existing players are investing heavily in refurbishing and expanding their properties and shoals of new players are entering the industry. The country is obviously gearing to host upwards of two million visitors within the next two years and all indications are that the necessary rooms will be in place. Yet some disquieting signals are evident. There has been a suggestion that some of our resort hotels are over-priced in comparison to competing destinations in the region, many offering a better product. Some have responded to this perception by offering off-season bargains, many of which have been taken by locals.

It makes sense for any hotel to sell a room at any price rather than keep it empty, the late Cyril Gardiner of the Galle Face Hotel used to say. ``Once the night passes, the room night is gone for good,’’ he explained with unshakeable logic. ``It’s never ever going to come back again.’’ That was why five-star rooms in Colombo could be had once upon a time for as little as USD 25. Hoteliers engaged in cut-throat competition and guests would bargain with immaculately clad and groomed front office staff in plush hotels in the manner of people shopping in the Pettah. It was not unknown for guests to move from one hotel to another as a better rate was available up or down the street. Attempts to impose minimum rates, at least on the five-stars, were often undermined with too many players jostling to grab the little business that was around. All that is now water under the bridges and both room rates and visitors arrivals have been going up steadily. The country offers many attractions, scenic and cultural, not forgetting the famed hospitality of its people. The recent depreciation of the rupee also helps make prices more attractive. That is why hardnosed managers prefer to price their product in dollars rather than rupees.

Given the investment that has been made and what is already in the pipeline, it is essential for regulators to ensure that there is no over-supply of rooms. While we have not seen the actual data, judging by the many reports of investments in hotels and upcoming projects, an uneasy feeling that we may be biting off more than we can chew is natural. Reliable studies of what the market can take must precede the granting of approvals for new projects. Given the country’s appetite and need for investment, regulators may be tempted to flag off new projects without sufficient attention to the size of the cake. That can lead to the too many cooks syndrome. There are many examples in other fields of activity like mobile telephony where the market seems to be over-saturated and the stock broking industry where too many licenses appear to have been issued. This becomes very evident in lean times such as those we are hopefully passing. Competition, of course, is always good. No doubt the consumer benefits from the many mobile phone operators jostling to offer various deals. There is also the fact that Internet penetration in this country, despite its knowledge hub ambitions, is yet very low. That is a field that is wide open for telecommunication companies to exploit.

The hotel industry was able to survive the lean times partly on account of domestic tourism during periods foreign visitor arrivals were low. It demonstrated remarkable resilience in those bad old days. We also had advantages like Airlanka, the predecessor of SriLankan Airlines, which was able to fly in the few tourists who wanted to come here when many international carriers suspended or stopped their services following catastrophes like July 1983 and headline grabbing acts of terror by the LTTE. But we must be ever conscious that external circumstances, totally outside our control, can inflict unanticipated setbacks. We have been lucky that the economic downturn in Europe that has reduced holiday spending especially to long haul destinations has been balanced with gains from other markets. The recent UK travel advisory is obviously a negative given that in recent years Britain was a major traffic generator. Hopefully that will not inflict too much damage.

The bottom line is the need for a careful assessment on the number of hotels we need. This should be determined both nationally and area-wise – for instance city hotels in Colombo, Kandy and other big urban centers, resorts in emerging areas like Kalpitiya and the East coast. Such assessments must also cover the various categories of accommodation on offer. There is no doubt that our regulatory mechanisms need sharpening. We must not plunge into an over-served situation. Investments on the ground must not be prevented from earning an economic return by saturation with too many players permitted to open shop. Perhaps the time has come to make a detailed study of where we are in terms of investment in the hospitality industry with reliable projections on the demand side.

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