Maldives’ taxing gambit

MALDIVES -- Maldives is aiming for a record $5 billion tourism receipts this year. A common way is to increase tourism taxes, which it recently has done. Uncommonly, the rises are steep, amounting to a bet that the rich will come no matter what.

Thus, the steepest increase in its departure tax is for those traveling in a private jet, up four times to $480 per person. First-class passengers in scheduled airlines pay $240, from $90; business class $120 from $60. Economy class folks pay $50 from $30.

On top of that, an airport development fee (same amounts) is levied on passengers departing the main Velana International Airport. Collected by airlines, these surcharges will make airfares to Maldives look dearer. (See the full details from Maldives Inland Revenue Authority here.)

But there’s more. Maldives’ green tax has doubled to $12 per person per night. Its tourism GST will be 17% from 16%, effective July 1.

Test of resilience

The outcome of all of this will reflect the resilience of luxury travelers and investors, and whether the country's confidence in its tourism sector is well-placed. Maldives still expects arrivals to increase this year, to 2.2 million visitors from 2 million in 2024, despite the new measures.

We see inbound activity in 2025 being muted as investors wait to see the impact of new regulations.

Ghaly Murthala

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Investors don’t know yet what to expect. “We see inbound activity in 2025 being muted as investors wait to see the impact of new regulations,” said Ghaly Murthala, founder and managing director of Morteza Capital, which specializes in Maldives.

Murthala has already seen “some cautiousness” in 2024, adding transactions last year were “not significantly higher” than in past years. This, however, could be due to factors such as difficulty in getting financing than the taxes. This year, Morteza Capital sees more opportunities to reposition underperforming assets. The company is also observing the ultra-luxury branded residences space, as several schemes have been announced that may streamline regulations to allow foreigners to own villas, although it’s still early days yet, Murthala said.

Julien Naouri, senior vice president, investment sales at JLL Hotels & Hospitality Group, expects trading performance to be challenging in the next 12-18 months as hotels adapt to the new taxes. But he believes the long-term outlook remains positive due to the industry’s “adaptability,” as has been proven time and again in the past decade.

Besides, there are silver linings for investors, Naouri said. For one, supply is tapering off after significant additions in 2022 and 2023. Only less than 2% growth in supply is on the cards between 2024 and 2025 and delays are likely, thanks to high construction and financing costs, he said.

Maldives is also investing in infrastructure that will benefit the industry, Naouri pointed out. A highlight is the opening of a new terminal at Velana airport this year that can handle seven million passengers annually, versus 1.5 million at the current terminal.

Julien Naouri, JLL Hotels & Hospitality

“On the back of the sale of The Standard Maldives in December 2024 [which JLL handled], this month we have secured exclusive negotiation rights for two additional resorts. We expect a total of three to four transactions for 2025, consistent with the average number of transactions in the Maldives over recent years,” Naouri said.

Good reasons?

There are good reasons for Maldives to believe the higher taxes won’t hurt its top cash cow, but there are also questionable areas.

With tourism revival going gangbusters since COVID-19, it may be expedient to raise taxes. Last year, arrivals surpassed two million. A healthy ultra-luxury demand is also seen in a 10% rise in private jet movements at Velana airport to more than 2,300 in 2024, over 2023.

Moreover, globally, the $1,000 per night villa is no longer eye-watering. In fact, in Maldives, luxury and ultra-luxury ADR (including service charge) in 1H2024 was nearly $1,400 and $3,250 per night, respectively, STR Global/JLL data show.

Yet, while the top hotels command the highest ADRs, their occupancies suggest some oversupply and/or price limit of customers. Luxury and ultra-luxury occupancies were about 55% and 60%, respectively, in 1H2024, compared with 70% for midscale.

The new taxes also come amid continued global economic uncertainties and ongoing conflicts. A strong U.S. dollar impacts affordability for European, Chinese and Japanese tourists. Ongoing Russia and Israel wars affect energy prices and key source markets. 

Moreover, heavier tax burdens on tourists and businesses could make the Maldives less competitive than other luxury destinations in the Indian Ocean and Southeast Asia, said Puneet Dhawan, head of Asia, Minor Hotels, the largest international operator in Maldives with nine resorts.

“This could impact arrivals, especially in the non-luxury segments, particularly if competitor destinations offer a better value proposition,” Dhawan said.

Minor's strategy is to maintain a strong value proposition for its guests in the upscale and luxury segments by streamlining operations and strategically adjusting pricing to remain competitive, Dhawan added.

Shankar Sreekumar, La Vie Hotels & Resorts

Shankar Sreekumar, head of South & Southeast Asia of La Vie Hotels & Resorts, which manages Nooe Maldives Kunaavashi, believes airline load factors to Maldives will drop as the country will now compete heavily with other Asian resort destinations like Thailand, Seychelles and Bali, which do not impose such high levies.

For hotels, he foresees the higher green tax and TGST, along with the existing 10% service charge, pushing up the consumer bill, already one of the highest in the South West Region, “anywhere between 27% and 32%.

On the other hand, the ADR in Maldives overall has been flat due to a significant change in market mix and an additional supply of branded and unbranded hotels, and guesthouses. “So, the impact of these taxes is a negative flow to operating profit, as opposed to the ability to grow ADR any further,” Sreekumar said.

Bangkok Airways, a popular boutique airline that codeshares with many global airlines on Asian routes, told Hotel Investment Today that it will maintain the current air fares to Maldives and the four-weekly flight frequency. It projects passenger numbers to be around 35,000, same as last year, and load factor to remain steady at 70%. “We're confident in our ability to maintain a stable flow of passengers despite the new taxes,” said Amornrat Kongsawat, the airline’s vice president - sales and marketing.

When approached, the International Air Transport Association said, “We are disappointed that the Maldives government continued with its decision to increase the Departure Tax and Airport Development Fee despite feedback from the airline industry and multiple requests for consultation to be carried out. There was no transparency and acceptable justifications to support these significant increases.

“The imposition of different rates for Maldivian passengers and foreign passengers is discriminatory. And having airlines impose different rates depending on the passenger’s nationality at the time of sale or ticketing can be a costly administrative nightmare.

“Aviation and the associated tourism activities support 212 thousand jobs in Maldives and contribute US$4.7 billion to the GDP, or 71% of the country’s GDP. The increases in the Departure Tax and Airport Development Fee will have a negative impact on travel demand and tourism.”

‘Investor-friendly’

But one competitive advantage Maldives has is being investor friendly. A JLL 2H2023 report cited examples such as 100% foreign ownership of leasehold rights over resorts; long leases of land for up to 99 years; U.S. dollar-denominated market; no foreign exchange or profit repatriation restrictions; and provision for overseas arbitration of disputes, among others.

Financing is also becoming more available as more institutional investors such as Blackstone, Ares Management and KSL Capital Partners join HNWIs and corporates for a slice of market, the latter historically buyers who finance their acquisitions through relationship banking.

Still paradise does not come cheap. The Maldives stands out as the most expensive option across all segments compared to other resort markets in APAC, according to a JLL 2H2023 report. The price per key in the luxury segment is around $1.2 million – four times higher than the average in popular Southeast Asian resorts such as Bali, Phuket and Danang.

But the payback is Maldives generates a GOP per room twice that of the others, thanks to a higher RevPAR. GOP per room of upscale hotels there ranges from $80,000 to $120,000 per year, and $150,000 to $250,000 for luxury properties.

At this point, it is likely to be more taxing for investors to decide on opportunities in the Maldives.