Given the rather "anaemic" demand prior to 2009, when the war ended, most hotel operators had been compelled to compete on price, RAM Ratings (Lanka) said in a report on the island's hotel sector.
"Price undercutting had been evident among most city hotels and those in the southern region, with certain 05-star establishment only charging about 60 US dollars per night."
However, the government started imposing minimum room rates in 2009 to curb excessive price competition, and a third increase recently implemented raised minimum rates to 125 dollars from April.
"With tourist arrivals hitting a record high in 2010, occupancy levels have also surged, reducing the pressure to compete on price," RAM Ratings said.
"The upsurge in demand for hotel rooms has led to a concurrent rise in room rates across the industry."
Room rates had increased over 20 percent as at end-December 2010 from a year ago.
The rating agency quoted the Global Hotel Price Index as saying Sri Lanka’s 05-star room rates had risen 21.38 percent to an average of 105.63 dollars by end-December 2010 from the previous year.
"This represents the fifth-largest spike in room rates globally," RAM Ratings (Lanka) said.
"The scenario of escalating room rates is likely to prevail in the short to medium term as the industry will be challenged to expand its capacity to meet the surge in demand.
"The higher price tags will in turn boost hoteliers’ financial performance through broader profit margins."
Robust demand and inadequate supply of rooms over the short to medium term will continue supporting occupancy levels and room rates, the report said.
"Part of the latter will be regulation-driven as the minimum room rates imposed by the government will be increased," it said.
"We believe the scenario of high occupancy levels is likely to prevail in the short to medium term, as the industry faces a room-supply deficit amid more robust demand."
The current capacity of nearly 15,000 rooms is sufficient to cater to only some 800,000 guests a year – indicating a "substantial deficit" in supply should the government’s target of 2.5 million tourists be achieved, the report said.
Industry experts believe that the current capacity of graded rooms should be nearly doubled to around 28,000 rooms.
"According to plans already announced by local and foreign hotel operators, 1,000 rooms will be added over the medium term, albeit still insufficient to cater to the expected influx of tourists," the rating agency said.
"Furthermore, the closure of hotels for refurbishment could tighten supply further in the short term.
"Against this backdrop, we believe that hotels will continue enjoying high occupancy levels and lucrative rates in the short to medium term."
RAM Ratings also noted that despite the recent rate hikes, Sri Lankan hotel rates are still lower than those of the other countries in the Asia-Pacific region.
source - www.lbo.lk
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