ECONOMYNEXT – Growing competition from a thriving informal tourist accommodation business is squeezing profit margins of Sri Lanka’s listed hotels, Fitch Ratings said.
Fitch Ratings said it expects Sri Lanka’s hotels sector to face price competition from the growing informal sector and alternative accommodation models over the medium term.
EBITDA margins could also be squeezed by the expanding marketing budgets of hotel operators, the rating agency said in a new report.
“The margins of listed hotel operators considered in our analysis have softened by around 100bp over the last two years, to 28%, as most operators hold back on passing cost escalations to customers due to the prevalence of low cost competition,” it said.
“We expect this trend to continue over the medium term, and cause margins to compress by 200bp–300bp over the next two to three years.”
Demand for rooms of listed hotel operators has been enough to drive an increase in average room rate (ARR) to USD87 from USD70 between 2014 and 2016, while occupancy stabilised at around 75% during the same period.
Fitch said it believes that the 11,645 rooms that the Sri Lanka Tourism Development Authority (SLTDA) expects to come online by end-2018, will support medium-term demand.
“However, a likely glut in residential apartments and informal accommodation establishments will keep formal-sector occupancy pressured,” Fitch said.
(COLOMBO, October 17, 2017)