Sri Lanka tourism blooms

Brad Hayes arrived at China Bay, just outside the harbour city of Trincomalee on the eastern coast of Sri Lanka, in rare style.

The 47-year-old Australian chemical engineer was among the few paying passengers on a Sri Lankan Air Force flight from the northern city of Jaffna. The 45-minute hop was comfortable and generally uneventful, he said, save for the high-calibre bullet hole in the propeller plane’s fuselage right next to his seat.

“At least I had natural air-conditioning,” Hayes quipped.

The military of this island nation has lots of time — not to mention equipment and land — on their hands after the bloody and conclusive defeat of a decades-long insurgency in 2009. So it is turning an eye to civilian endeavours.

In addition to selling domestic seats on its planes, the Air Force runs helicopter sightseeing tours and operates at least one modest seaside resort. The Navy, meanwhile, will take visitors out on various marine excursions, including whale-watching trips. The Army has a travel agency and control of much prime property, especially in the former war zones.

Newly idled armed forces are just one of the players jostling for a piece of the booming travel and tourism pie as concerns large and small, foreign and domestic, launch or relaunch projects that were on hold during the civil war.

It is certainly an almost ideal time and place for the travel industry. A recent devaluation of the rupee, coupled with a rise in fuel prices and interest rates, could tamp down the torrid pace of GDP growth (estimated at 8% and change last year) and cause some real pain to those on the lower rungs of the economic ladder. But the peace is going to last. The government won the war decisively by killing, capturing or scattering the entire rebel movement. And it has yet to demobilize the wartime build-up, ensuring that tens of thousands of soldiers with weapons and training are not going to end up on the streets.

Sri Lanka is also remarkably secure from a personal-safety standpoint, with little violent crime and almost none of it directed at foreigners. The most dangerous thing a foreigner can do these days is get in a car or cross the street: With some exceptions, like the new expressway from the capital of Colombo to the southern port of Galle, driving in Sri Lanka is pretty much an endless succession of near-misses.

Reclaiming prime resort land

Luxury hotels are rising on white-sand beaches in the East that were once controlled by the feared Tamil Tigers. Spas and eco-resorts in the highlands and near the religious and archaeological sites of the central dry zone seem to open almost daily.

In Colombo, the five-star hotels are running at near-capacity. Multinational operators who either abandoned the country in the bad times or shied away from investing in it are signing deals for new properties. Across the island, roads are being built or upgraded to allow a quicker flow of commerce, be it animal, mineral or vegetable.

Foreign arrivals, while still relatively low compared to some other Asian tourist hot spots, are growing at an astonishing clip. In 2011, Sri Lanka welcomed about 860,000 visitors, a record and an increase of 31% over the previous year, which was also an all-time high at the time.

Well-heeled Western Europeans made up about 37% of the total, with neighbouring South Asian countries, mostly India, accounting for another 35%. The balance comes largely from places including Japan, China, Russia and Southeast Asia.

Americans account for only small fraction of the trade, at least partly due to the long travel time compared with other tropical destinations like Mexico and Costa Rica, but that could change as the New York Times in 2010 tapped Sri Lanka as the No. 1 “Place to Go” that year.

The government’s stated short-term goal is to reach 2 million tourists and revenue of $2.75 billion in the next few years, a target that many believe is easily attainable barring some unforeseen event.

“Leisure has taken off in a big way,” said Krishan Balendra, head of corporate finance & strategy at John Keell’s Holdings, Sri Lanka’s largest publicly traded firm with interests in tourism, retailing, transportation and other sectors. “We have already come a long way and if Cambodia can get over 2 million tourists a year, we can easily do it too.”

As a local firm, Keell’s had no choice but to stick it out as foreign visitation shrivelled to almost nothing. But he bears no ill will towards the foreign concerns now rushing in to take advantage of what boosters like to call “The Wonder of Asia.”

“We need more hotel rooms on the ground,” he said. “There is enough business for everyone as the country is pretty much sold out. We would encourage anything that attracts more people and the local brands can easily co-exist with the foreign ones.”

New luxury properties

In late February, Hong-Kong based Shangri-La Hotels broke ground on two new properties, one in Colombo and the other in Hambantota.

The latter city, on the southeast coast, is the site of both a new deepwater harbour and international airport. It has traditionally been one of the country’s poorest regions and is also, not coincidentally, the home political turf of Mahinda Rajapaksa, the current president. Rajapaksa has been spearheading an unprecedented multibillion dollar investment in infrastructure that is reaching into almost every corner of this West Virginia-sized nation.

“Sri Lanka is a country of unsurpassed natural beauty, rich in cultural heritage, and above all it is well recognized for its warm and hospitable population,” said Greg Dogan, president and chief executive of Shangri-La International Hotel Management. “The local government is fully committed to rebuilding the economy and we believe that Shangri-La will be able to assist in positioning the country as a prime global tourist destination.”

Shangri-La is putting about $550 million into the two projects, which will have roughly 1,000 rooms between them. The company caught a big break in that it was able to negotiate the outright purchase of 10 acres of government-owned land along Colombo’s magnificent oceanfront park, the Galle Face Green.

While the authorities have technically lifted a long-time ban on foreign land ownership, the issue remains politically charged and most deals are apt to be either management agreements or made on long-term leases.

As to the complexity of getting it off the ground, Dogan merely commented that “all projects regardless of destination require careful negotiations before we will consider them [and] in that sense Sri Lanka was no different from other destinations.”

Lots of interest from resort developers

Shangri-La’s investment is the biggest foreign one to date in the hotel sector but there are other companies in various stages of development. According to some local press reports and government sources, Marriott, Starwood and Hyatt have all given the country at least the once-over.

“We are very active in Sri Lanka looking at proposed projects,” said Avjit Ahulwaliya, Marriott’s director of Asian development. ”The country offers a lot of potential for resort development and we are at the moment looking at many projects which are in the planning stages.”

He added that as the infrastructure improves, “new areas will open up for tourism and we are focusing on many of these areas.”

The “current phase in Sri Lanka is more focused on land acquisition and investment and we expect that the second phase will be of investors finding hotel companies to manage properties,” Ahulwaliya.said.

At least one American casino operator has also been sniffing around, according to a foreign diplomat, but there is unlikely to be much action in that area until the regulatory environment is clarified. As it stands now, the gambling business is dominated by local operators who cheerfully do business under names like MGM Grand and Bally’s, trademarks that are owned in the U.S. by MGM Resorts and Caesars Entertainment CZR, respectively.

Sambur at Horton Plains

‘Bargain’ label in jeopardy

Manesh Fernando is the general manger of the Hilton Colombo Residence, which caters to a mix of business and leisure travellers. He said the property has experienced “phenomenal growth” with annual revenue increasing 35% to 40% since the end of the war. The hotel, which is owned by a local family and managed by Blackstone Group’s Hilton brand, was built in 1997 but has never seen such good times.

“People keep coming to this country and there is lot going on but we need to do more to promote the low seasons and to go to markets that are not our traditional ones: Malaysia, Indonesia and China,” he said.

Fernando is also confident the number of tourists will rise to 2 million a year as “the only reason we would not be able to do so is if we don’t get enough capacity” to handle that number.

A recent devaluation of the rupee has given the industry an additional hand, he noted. After expending billions in foreign reserves to keep the currency at an artificially high level, the central bank finally threw in the sponge a few months ago and let it float with the market. The result has caused no small pain for a country where so many are dependent on imports, and created a political headache for the ruling party.

But Fernando said “it will help the tourism industry as we will overall make more money in rupees” from rooms that are priced and paid for in U.S. dollars.

Hotel operators are also getting considerable support from the government when it comes to rates. To avoid the kind of cutthroat competition on price that characterized the war years, the minimum rate for a five-star hotel is currently $125 a night. Tack on 27% tax, of which 10% is a service fee that goes to hotel staff and the rest to the treasury, and Sri Lanka is apt to soon shed its reputation as a bargain destination.

That is not lost on Hayes, the Australian engineer who has made several lengthy visits here over the years.

“This is still a very nice place to come, with lots to see and do,” he said. “But it is definitely getting more expensive, even at the lower levels.”

William Spain is a MarketWatch staff writer in Chicago.

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