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Growing informal sector to subdue hotel industry profit margins: Fitch

17 October 2017 12:15 am - 0     - {{hitsCtrl.values.hits}}

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  • Fitch predicts margins to compress by 200bp–300bps in 2-3 years
  • Says new IRA’s 2% corporate income tax increase to hit hotels
  • Forecasts potential Asian tourists to be low spenders 
  • Believes Colombo hotels uncompetitive with regional peers

 

 

The profit margins of Sri Lankan hotels will continue to fall over the next two to three years due to the competition arising from low-priced accommodation in local and regional markets, according to Fitch Ratings.


In a research report, Fitch said over the past two years, the margins of publicly listed hotel companies have fallen by around 100bp (or one percent) to 28 percent, since most operators are not passing the cost escalations to the customer in order to remain competitive.


“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,” Fitch said.


However, Fitch noted that the hotels will be passing on the increased value-added tax (VAT) rates to the consumer. Further, a 2 percent increase in corporate income taxes will also hit the hotels, under the new Inland Revenue legislation.


According to Fitch, the increased tourism demand from 2014-2016 had increased the average room rate to US $ 87 from US $ 70, while hotel occupancy had stabilized around 75 percent.


“Fitch believes that the 11,645 rooms that the Sri Lanka Tourism Development Authority 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,” it added.


The hotel sector last year barely managed to keep the share of accommodation it commands from falling below 50 percent, after losing nearly a quarter of the market to the informal sector as well as the supplementary establishments, which are registered but some of which provide the same services as the informal sector.


Fitch was however basing its projections on a more optimistic 15 percent expansion to Sri Lanka’s tourism arrivals over the next four years, which was slightly higher than the projections of the Pacific Asia Travel Association and Euromonitor International but much higher than the 2.9 percent growth experienced during the first eight months of this year.


In 2016, the growth had been 14 percent. Fitch said that the planned tourism promotion campaigns would boost arrivals, especially from India, China and other Asian markets in the future. However, Fitch noted that the tourists who would be coming from Asia may be low spenders.


Meanwhile, Fitch also noted that Colombo hotels are not competitive with their regional peers.


“Star-graded accommodation in the capital, Colombo, costs 10-15 percent more than regional competition, owing partly to the regulatory price floor but also to relatively high costs of construction, energy and imports. Fitch believes this will lead some tourists to choose cheaper destinations or lodging options,” it said.


The ratings agency said that removing the regulatory price floor could mitigate this risk by offering some degree of freedom for city hotel operators to price their services.


Although removing the price floor was expected to take place this year, the move was later deferred. 


Despite the challenges Fitch outlined, it also said that the credit metrics for the publicly listed hotel companies would remain stable since many are now finishing renovations undertaken with debt and would be deleveraging over the near term. 

 

 

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