Is Sri Lanka poised for a dream come true moment?

SRI LANKA – It isn’t raved about like the other South Asian country India, but Sri Lanka is starting to become more interesting with the imminent opening of a mega-integrated resort and as the destination strives this year to match or, some dare say, surpass 2018’s record arrivals of 2.3 million. As of August 11, Sri Lanka has already reached 85% of last year’s 1.5 million arrivals.

John Keells Holdings, the country’s largest conglomerate whose business includes Cinnamon Hotels & Resorts, is forking out substantial pre-opening costs for its 687-key Cinnamon Life hotel debuting in October at City of Dreams Sri Lanka, a 4.5 million square feet waterfront development in Colombo which the company initiated.

Melco Resorts & Entertainment, having been granted a 20-year license in April, is spending $125 million to fit-out and equip a demarcated gaming space at the site. It is also developing a 113-key hotel under its brand, Nuwa, scheduled to open next year.

When fully completed in mid-2025, the $1 billion City of Dreams Sri Lanka will also feature offices and residences.

At one go, 800 keys from a single project are being added in Sri Lanka’s fragmented hotel sector. Out of a total 4,346 accommodation establishments, only 168 (4%) are classified tourist hotels providing 16,686 rooms, or an average of 100 rooms per property. The rest comprises guesthouses, bungalows, homestays, lodges and others, bumping up the total number of rooms in Sri Lanka to 53,229 in 2023, according to Sri Lanka Tourism Development Authority (SLTDA) data.

Made for post-COVID

A tourist image of Sri Lanka is typically of verdant rice terraces, rich culture and heritage, exciting wildlife and adventure, and indeed, the diversity of small and medium-size accommodations offering personalized service. It’s an image made for post-COVID travel, as seen by the 107% year-over-year increase in arrivals to nearly 1.5 million in 2023.

Hiran Cooray, chairman, Jetwing Symphony and The Lighthouse Hotel

The hotel investor view, however, might have been of a country declared bankrupt in April 2022 due to economy mismanagement and impact of the pandemic on key sectors such as overseas workers remittance, textiles and garments, and tourism, its three top earners in that order. But that perception is gradually changing as an IMF debt restructuring program continues to progress well, and with the strong growth in arrivals.

“Confidence levels in tourism are high now. The [economic] progress in the past 24 months has been better than expected. We are grateful to the international donors, the current administration, and the governor of the Central Bank of Sri Lanka for helping in the recovery,” said Hiran Cooray, chairman of Jetwing Symphony and The Lighthouse Hotel.

Jetwing invested US$10 million in the past three years to uplift existing properties and introduce new villas. It also bought a boutique resort, Saman Villas in Bentota, and is opening a 16-room hotel, Sigiriyaya, located next to its eco-luxury resort Jetwing Vil Uyana. As well, it forayed into the F&B business with a rooftop restaurant and bar, Virticle by Jetwing.

Describing the continued investment in Sri Lanka’s hospitality sector as his “best decision,” Jetwing’s Cooray said, “COVID and the [country’s] internal political upheaval strengthened our resolve even more. Sri Lanka is a unique destination. The warmth, cheerfulness and resilience of the people cannot be taken away.”

COVID and the [country’s] internal political upheaval strengthened our resolve even more. Sri Lanka is a unique destination. The warmth, cheerfulness and resilience of the people cannot be taken away.

Hiran Cooray

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Last year, 34 projects contributing 1,273 new rooms were approved. They amounted to an investment of $170 million, the highest since 2019. However, that investment volume is low compared with 2019’s $756 million from 57 approved projects with 2,027 rooms, SLTDA data shows.

Noesis Capital Advisors, India & South Asia’s hotel investment advisory and consulting firm, expects a bigger volume of investment in Sri Lanka this year.

Said CEO Nandivardhan Jain, “The Sri Lankan hotel market is cautiously optimistic as it begins to recover from recent crises. While last year saw limited investment due to political and economic challenges, this year promises to be different.

“With the IMF bailout stabilizing the economy, we expect to see increased investment activity, especially in acquiring distressed assets and refurbishing properties. Although investment volumes may edge closer to pre-crisis levels, the pace of full recovery will still depend on the global economic landscape and local political developments.”

Investment opportunities

Jain sees opportunities in the upscale and luxury segments, especially in Colombo and the southern coastal areas. There is rising demand for properties catering to high-spending, experience-driven tourists, he said. Boutique hotels, eco-resorts and wellness retreats stand out, aligning with the growing trend towards sustainable tourism.

Nandivardhan Jain, CEO, Noesis Capital Advisors

“Luxury hotels in Colombo and popular coastal areas are maintaining healthy margins, while budget hotels and guesthouses are feeling the strain from rising operational costs. As tourism numbers recover, profitability should improve, but effective cost management will be crucial,” Jain said.

He also believes that Port City Colombo, positioned to become a business hub, is a strategic investment opportunity. “Hotel developments within this SEZ [special economic zone] can cater to business travelers, luxury tourists and long-stay visitors. Investors should also keep an eye on emerging regions like the Eastern Province, where infrastructure developments are opening up new areas to tourism,” Jain said.

On the horizon are also promising developments such as the expansion of Colombo International Financial City and the modernization of airports, he added. Additionally, the government’s focus on improving road connectivity and developing secondary airports will enhance access to emerging tourist destinations.

But will a presidential election this September 21 create a wait-and-see effect on investors? Jain said it might. However, investors with a long-term perspective may view it as a prime opportunity to enter the market at favorable valuations. “Local financing may be difficult, but international investors with access to external capital are likely to find an advantage,” he said.

According to Jetwing's Cooray, the three front-runners to the presidency have pledged to focus on tourism as a key driver of the economy. “We don’t see much disruption as all their campaigns have been peaceful. Many have been campaigning digitally. Therefore, crowd movements and disruptions have been minimized. We expect 2025 to be even better than the current year,” Cooray said.

Investors should also keep an eye on emerging regions like the Eastern Province, where infrastructure developments are opening up new areas to tourism.

Nandivardhan Jain

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John Keells Chairman and CEO Krishan Balendra said during a recent earnings webinar that the main parties have broadly committed to the current economic path with the IMF program. So, there’s no cause for concern on economic volatility or uncertainty beyond the election.

Cinnamon spices up Colombo

Balendra declined to give a specific guidance on occupancy for Cinnamon Life but it’s clear the company hopes it will be high. “If you look at integrated resorts in the region, be it Singapore or Manila or Macau, they operate at high occupancies of well over 80%. That’s one way of looking [at it]. But Colombo is new for integrated resorts; it doesn't mean it will follow the same pattern.”

In an interview with Hotel Investment Today, Dileep Mudadeniya, John Keells head of Corporate Affairs, said a key target market for City of Dreams Sri Lanka is the intra-regional countries within a travel radius of six hours, such as India, Dubai and the Far East. This is especially during the country’s monsoon season typically from May to October.

“They [the intra-regional markets] love culture and beaches but also city life, food, events, concerts and such. An hour’s drive from Colombo will take them to Sri Lanka’s cultural and beach spots; within 2.5 hours, they can see wildlife. So, within three days, they can do all three. We are creating new demand that will benefit everyone, not just us,” he said.

“Our idea is that Colombo city becomes more attractive,” Mudadeniya continued. “Look at examples such as Marina Bay [Sands] Singapore; it has everything for the whole family, not just gaming but entertainment, etc. Sri Lanka can produce this, plus all the other highlights as mentioned that can be reached within a short period of time, providing tourists with the highest diversity of attractions.”

Prospects for non-gaming businesses such as meetings, exhibitions, events and destination weddings are also high. “We have many conference halls, ballrooms and exhibition centers [at the resort],” he said.

When probed for average room rate expectations, he said $200 including taxes is their “aspiration.”

But is having a world-class casino a good thing for the country?

Ben Lee, managing partner of IGamiX, a gaming management consultancy, said it is. “Hopefully the integrated resort will be able to develop international tourism for the country,” Lee said. “Having a casino there will obviously enhance Sri Lanka’s revenue. But I hope they don’t depend too much on the casino to drive the bulk of the revenue, which is usually anywhere between 70% and 90% around Asia – in Macau it's 95%. I hope they can develop the non-gaming aspect of the resort, which is how they can draw the India business, such as the upper middle class who are not yet rich enough to throw weddings in Europe or the Mediterranean but for whom Sri Lanka would be a significantly reasonable alternative.”

According to Lee, the Indian market is not really a gaming market, with the exception of a handful of uber rich Indians who will go to Monaco or London to be seen and to gamble in the Mediterranean or the U.K.

He doesn’t think it will spoil Sri Lanka’s image as a culture and nature haven either. “That path is pretty well beaten now. So, this development, in fact, could rejuvenate the tourism industry and give it a new oomph like Marina Bay Sands did for Singapore,” Lee said.

Jesper Palmqvist, STR senior director APAC, said Sri Lanka does not enjoy the attention that India is getting these days, but at least it is moving finally in the right direction. “It’s not for everyone, perhaps, but neutral [industry people] would want them to succeed since it’s a beautiful place with great potential and wonderful people.”