Seeing value opportunities in Sri Lanka

It’s uncomfortable  talking about real estate opportunities in the context of what happened here in late April but the impact on the boutique hotel and villa market market is significant and so worth considering. As ever, tough times can bring opportunities.

 

Tourist arrival numbers, relative to recent years, have dropped sharply. May and June are typically quiet(er) months but hotel owners we speak to report occupancy levels of around 20%-30% for July and August – peak season months that had been delivering occupancy of 70-80%.

 

We’re optimistic those numbers will improve relatively quickly and, indeed, there’s evidence of returning volume but the backdrop is challenging. The economics of boutique hotels is tough at the best of times and any business with significant fixed overheads or heavy rental obligations will have struggled. We’ve seen several small hotel operations opt to shut their doors permanently rather than see cash drip away slowly. Others are riding the period out and there’s consensus amongst the well-established that the market may come back stronger.

 

Those looking for value, then, might now see opportunity.

 

They’ll have to look hard, of course. The property market outside of Colombo remains opaque – fair value being subjective. With bare-land ‘sellers’ often not desperate to complete, most have been disinclined to settle for less than the most recent heard-of valuation. That’s left many more than happy to sit and wait, for years if need be, to meet an asking price.

 

A good number of property owners, though, will be feeling an increasing pressure and the option to release capital with a quicker sale will be tempting. We’re already in discussion with owners prepared to lower asking prices on prime bare-land and expect that to continue.

 

We’re also seeing operational hoteliers more inclined to discount the multiples on future revenues to reach a valuation. There’s a sense from some that poor operating profits for 2019 (post-April) will do too much to undermine goodwill value in their businesses. Several owners we’re working with are valuing purely on what they see as the market rate for the land and the cost of building. For those properties that have built excellent reputations, have a strong returning client-base, and well-established distribution channels, new owners, happy to be patient for a return to good occupancy levels, might see great value.  

 

Of course, the short-term picture in Sri Lankan hospitality real estate shifted massively earlier this year. It’s a tough time but for the right investor, if able to look more than 6-12 months out, the market could now start to look uniquely attractive.