Picture a Sri Lankan hotelier, call him an optimist, who spots a plot of land by the beach and decides to build. A modest four-star property, the kind that could carry a Radisson or Holiday Inn flag, will cost him $180,000 per room to build. At a $180 nightly rate and 65% annual occupancy, a 35% gross operating profit margin, his investment yields a stabilised return of around 8.3%. This is what a hotel in London, Sydney, or New York might be content with. But in a frontier emerging market like ours, a hotel developer typically needs at least double that for a project to be viable.
He builds anyway. The simple payback period runs to about 12 years. Once debt servicing, capital expenditure, inflation and taxation are folded in, it stretches between 15 and 18 years. The industry benchmark for a frontier market is 7 to 10 years.
“The reason we’re not competitive is our construction cost is up there, while our ADRs [Average Daily Rates] and our ROIs are not matching those costs,” says Stefan Furkhan, Chairman and Chief Executive at Confifi Group who also sits on the board of Browns Hotels and is a director of the Radisson Colombo, Radisson Kandy and Radisson Blu Galle. “The problem is that capital costs are rising faster than the rates.”
The numbers put a finer point on it. “We may be only 20% below Singapore and the Maldives on construction costs,” says Dmitri Cooray, Managing Director at Jetwing Hotels, the two most expensive construction markets in the region. The rates tell a different story. Phuket’s 4 to 5-star hotels average $220 to $400 a night. Bali’s run $250 to $450. India’s major cities fetch $300 to $600. Sri Lanka’s equivalent properties earn $110 to $350. “We are not getting the rates anywhere close to them,” Cooray says.
Dmitri Cooray, Managing Director at Jetwing Hotels
For a while, the optimist manages. During the good years, occupancy is solid, and the money is consistent. Then a shock arrives, as it always does, sending tourists away and revenue plummeting. The refurbishment he’d been putting off gets pushed back further, because the materials are expensive and the cash isn’t there. Guests notice. The reviews start mentioning dated bathrooms and worn bedsheets. Rates soften to compensate.
Eventually, the optimist, now a pessimist, decides to sell. The asking price reflects what he’s put in over the years. But buyers only look at what the asset can return, and Sri Lanka’s room rates do not justify the number he’s asking. The property sits, unsold and decaying. “In the hospitality industry,” Furkhan says, “there is no such thing as sunk cost.”
2.3 million tourist arrivals were recorded last year, which is a record. Yet tourism revenues ran roughly $1 billion short of what the industry earned in 2018, a year of fewer crowds. The gap between what it costs to build and maintain a competitive hotel vs what the market will pay for a room at that hotel sits at the centre of that paradox. Until it closes, the industry will keep growing in volume while shrinking in value.
Recently Jetwing has added heritage villas to its hotel selection by acquiring and retrofitting century-old houses and colonial-era properties into intimate luxury hotels. The economics, however, are unforgiving. Cooray, the third generation of the family in the business, points out a property acquired for Rs40 million could require Rs200 to 250 million for restoration, rewiring and replumbing. Old houses seldom have en-suites, swimming pools and equipped kitchens. “The cost of the work,” he says, “can run 5 to 6 times the acquisition price.”
Coastal properties carry an additional burden. Many of Jetwing’s properties sit by the shore, where salt air degrades air conditioning units and metal furniture far faster than it would inland. Those components need attention every 3-4 years. The economic crisis of 2022 compressed the problem further. Cooray says that sanitary ware and air conditioning, among the largest single line items in any refurbishment, roughly doubled or tripled in price after the rupee depreciated.
Cooray’s response has been methodical rather than reactive. Jetwing maintains a standing operational maintenance budget across its properties and addresses small defects immediately rather than allowing them to accumulate into major expenditures. A soft-refurbishment cycle can be stretched to 7 or 8 years through consistent minor maintenance, reducing the peak capital outlay at each interval.
The Construction Tariff Traps
Import duties on the materials a hotel needs to refurbish are not incidental costs. They are a structural feature of our trade policy, and they compound in ways that are not obvious from any single line of the tariff schedule.
Most imports are hit with five levies, each calculated on a base that already includes the ones before it. Customs duty comes first, assessed on the CIF value of the goods. The Ports and Airports Development Levy is then applied on top of the duty-paid value. Cess is a separate export development levy that adds another layer to that. VAT, nominally 18%, is applied last, on the full accumulated total of goods plus all preceding taxes. A tariff that looks like 20% at the first line of the schedule becomes something quite different by the time the final invoice is settled.
For ceramic wall and floor tiles, the cascade runs: 20% customs duty, then a 35% surcharge on that duty, then a 10% ports levy, then 18% VAT applied to the full accumulated total. At a notional import value of Rs1,000 per square metre, the landed cost reaches Rs1,640, an effective 64% tax. That is before the schedule’s specific-duty floors apply. For cheaper tiles, imported from India or China at low unit cost, the floors are expressed in rupees per square metre rather than as a percentage of value. For those products, the specific floors dominate, and the effective burden climbs further.
Aluminium door and window frames carry a heavier load still. Cascading customs duty, Cess, ports levy and VAT push the effective rate to 68% and above. Specific-duty floors on both customs and Cess mean the effective rate on finished, pre-fabricated window and door assemblies, the kind branded hotel refurbishments require, runs higher still.
Cement sits at the other end of the range. The customs duty is zero. What remains is a 10% ports levy, a 6% Cess, a Special Purpose Duty of 4 rupees per kilogram on bulk imports, and 18% VAT. The effective rate on bulk Portland cement works out to roughly 37–42%. Yet the price gap within the region persists regardless. “A tonne of cement costs about $114 in Sri Lanka, compared to $53 in Thailand,” says Dhananath Fernando, Chief Executive at the Advocata Institute.
Dhananath Fernando, Chief Executive at The Advocata Institute
The stated purpose of these protections is to conserve foreign exchange and shield domestic manufacturers. On the former goal, Fernando’s views are direct. “The results have not worked,” he says. He points to domestic tile production, which involves using kilns running primarily on LPG, which is itself imported. “By trying to make it here with a very high energy cost, we are basically sending more dollars out than we are actually saving.”
Whereas in terms of shielding domestic manufacturers, the tariff wall has worked so well that it created conditions for market concentration. A 2024 Advocata Institute report on anti-competitive practices in the construction industry found that in cement, two producers hold the dominant share of domestic supply. In tiles and aluminium, the concentration runs deeper. The controlling shareholder of Vallibel One, which holds Royal Ceramics (trading as Rocell), also controls Hayleys PLC, which owns Alumex. Through a chain of subsidiaries, Royal Ceramics controls Lanka Tiles, which in turn owns a stake in Swisstek, another aluminium extrusions provider. Two of the most heavily imported materials in any hotel refurbishment sit inside a single ownership structure.
The report found that this structure is self-reinforcing. “Both the high startup costs required to operate in these industries and the extensive distribution channels that domestic manufacturers currently have access to suggest that barriers to entry are high. As a result, the threat of potential entrants is low. The existence of cross ownership between these domestic players and the protection they receive via the government’s inconsistent tariff policies increases the bargaining power of manufacturers.”
Even if Sri Lanka negotiates new free trade agreements, the structural problem survives. Free trade agreements reduce or eliminate import duties between signatory countries. But governments routinely carve out industries they want to protect by placing them on a negative list, which is a catalogue of goods excluded from preferential treatment regardless of origin. For those products, the full domestic tariff applies as if no agreement existed. The same Advocata report found that around 90% of construction materials are on negative lists under both the Indo-Lanka and Pakistan-Lanka Free Trade Agreements. For cement, the general customs duty is already zero, so the preferential rate offers nothing new. The ports levy, Cess, Special Purpose Duty and VAT apply to all origins equally, treaty or not.
The distortion in construction costs falls not only on hotels. “There’s the Numbeo index, which measures home prices to income,” Fernando says.
“Colombo’s price to income ratio is second only to Shanghai; even higher than London, Tokyo, New York, Karachi, and Dhaka.” Construction cost inflation, driven in part by these same tariffs, is a tax on every household in the country. Hotels feel it more acutely because they build and refurbish on a greater scale.
There are signs the wall may be shifting. The cabinet approved the removal of cess on 2,634 imported goods in stages through to 2029. Whether hotel construction materials are among them remains to be seen; successive governments have given the same promise before.
The Labour Skills Gap
High material costs are not the only thing driving construction budgets up. A shortage of skilled labour adds its own premium, and it runs through both the construction phase and the operation that follows.
Fernando describes a lost tourism project where an architect recommended a specific finish requiring craftsmen with skillsets unavailable locally. An attempt was made to bring a specialist from China. The visa was refused. “They said, ‘Why bring someone just to lay marble?'” Fernando says. “But they [local artisans] don’t know how to manage that sensitive marble.” As construction becomes more technically demanding, Fernando says, the gap between what an architect designs and what the local workforce can execute widens. The cost of bridging it falls on the developer.
For Cooray, the shortage shows up in every project Jetwing undertakes. For larger builds, the group works with major construction companies, transferring the labour-sourcing problem to them. For smaller works, it sources contractors directly. “There is a shortage,” he observes. “And if someone is a skilled labourer, you are paying a relative premium.”
The shortage extends well beyond construction. Furkhan is blunt about what the crisis years and COVID did to mid-tier hospitality management. “It is hard now to find management,” he says. “Restaurant managers, food and beverage managers, chefs, sous-chefs. The talent is hard to find. And to keep them, you have to pay them a lot.” Staff who left during the economic crisis found work in the Gulf, in Australia, in the United Kingdom, and have not come back. The industry is rebuilding its product with a workforce that is thinner in the middle than it has ever been.
The Revenue Problem
The other side of the equation is the prices hotels charge. At the four-to-five-star level, the Average Daily Rate [ADR] runs roughly $110 to $180, by Furkhan’s reckoning; at the large flagged five-star tier, Cooray puts the range at $200 to $350. At the top, luxury boutiques command rates of $400 to $1,000. Below that, the mass market earns what the mass market pays. The regional comparison is uncomfortable.
Stefan Furkhan, Chairman and Chief Executive at The Confifi Group
Phuket’s five-star hotels average $220 to $400 a night. Bali’s run $250 to $450. Both markets, with comparable or lower construction costs, charge more for the four-star experience than Colombo or the southern coast. India offers a sharper contrast. In the big cities, five-star hotels are “probably double the price of what you pay in Colombo,” Cooray says, sometimes two to three times more. The difference is domestic demand: India’s priced by its own middle class, not by what foreign visitors pay.
“Even though our construction cost is up here, if we had the ability to charge higher prices and get that occupancy, then we’d attract investors,” Furkhan says. International capital has done the same maths and reached the same conclusion. The Maldives charges $700 to $1,500 a night. The experience it offers with one island, one resort, and complete privacy can’t be replicated. But the rates it commands have drawn Blackstone, Four Seasons, Six Senses and a roster of global institutional developers, because the yield justifies the high construction and operational costs.
“The reason for building in the Maldives is because the ROI, the ADR and the occupancy are higher, and justify that return,” Furkhan says. The branded hotel deficit here tells the same story in reverse. “How many Sheratons do we have?” Furkhan asks. “Two. How many Marriotts? One on the beach, and one in the city, which is slightly lower. How many Four Seasons? How many Six Senses?” He pauses. “Zero. The Maldives is practically 90% branded. The pipeline here runs almost entirely on local brands.”
The room rate problem compounds itself at refurbishment time. After a renovation, a hotel needs to raise its rates by 20-30% to justify the capital spent, Cooray says. Many operators do not, or cannot: the market will not bear it. The destination is not positioned to sustain higher prices, and in a crowded market, hotels compete on rate. The result is capital expenditure without a matching return, which defers the next refurbishment, which ages the product, which makes rate increases harder. The ceiling is set at the destination level.
“In order to charge more, we need to brand the destination,” Furkhan says. Sri Lanka has not had a consistent marketing voice for years. Arrivals are rising, but “it’s attracting numbers, not necessarily revenue,” he says. Yield has fallen. Cooray is more direct. “The biggest issue Sri Lanka is facing more than anything is the marketing of the country.” Without sustained destination branding, individual hotels are trapped beneath a price ceiling.
The visitor numbers obscure how serious this is. Last year’s record 2.3 million arrivals came largely without coordinated promotion. They were drawn by organic exposure rather than strategy. They are, Cooray says, broadly budget travellers. The current 50-50 split between budget and mid to high spend visitors is the inverse of what an industry built on quality products requires. The target, in his view, is 80% mid to high, 20% budget travellers.
Hoteliers Designing for Yield
The market will pay $800 to $1,000 a night when the product warrants it. Uga Yala, Resplendent Ceylon and Hilton Yala are evidence of that. For a two-night stay in late March 2026, an inclusive stay at Uga Yala runs $1,738 per night for two adults; Resplendent Ceylon’s Wild Coast Tented Lodge comes to $1,350 per night; Hilton Yala, with safari, $842. When the product is distinctive, and the experience meets expectation, pricing power follows. The constraint is not consumer willingness. It is the gap between what those properties offer and the standard of the broader installed base.
For operators seeking to close that gap, refurbishment is the lever. “If you upgrade the product properly, you can charge more,” Cooray says. “We don’t want to compete on price. We want to compete on value.” The distinction matters: competing on price in a market where construction costs are high is a route to permanent underinvestment. Once a property is renovated and repositioned, rates can move. “That’s how you reset your benchmark,” Cooray says.
The same logic shapes decisions about scale. He points to Jetwing’s property in Kandy as an example. “The big hotels are charging around $80 to $150,” Cooray says. “Our property, which is outside the city, with 26 rooms, is doing between $250 and $400. We are sometimes getting the same revenue as a 100-room hotel, but with a much smaller size. The cost structure is different. With fewer rooms, you have fewer staff, lower overheads, and better control.”
One cost advantage that does not fully offset the rest is land. Beachfront land in Thailand or Bali runs 2x–3x the price of a comparable plot here, Furkhan says. But land accounts for only 15–20% of the total project cost. The remaining 80% is construction, and it is there that the regional cost gap reasserts itself.
When planned purposefully, refurbishments can also reduce operating costs. Energy provides the clearest example. “Electricity is the biggest cost,” Furkhan says. Integrating solar or other renewable systems at the design stage can reduce that exposure over time. The constraint is capital. “It increases the upfront cost,” he says, and developers often prioritise delivering the hotel within budget over sustainability investments, even when those investments would lower costs over the life of the asset.
Jetwing chose to absorb the upfront cost. In 2024, the group spent about $1 million on the second phase of its solar programme, adding 1.5 megawatts of capacity. Total installed solar capacity across its properties now stands at 2.2 megawatts. The chain also invested in biomass boilers, biogas chambers and absorption chillers. The impact has been measurable. “Electricity costs in some hotels have reduced by 40–50%,” Cooray says. Across the portfolio, 60–65% of daytime energy now comes from renewables. “It’s a long-term investment,” he says. “The capital outlay is high at the start, but it pays over 15–20 years.”
Sustainability, both suggest, has moved beyond optics. “It’s a financial necessity nowadays rather than a brand exercise,” Cooray says. Jetwing’s solar programme illustrates the logic: high capital outlay at the start, measurable savings across 15 to 20 years. Guests are also more aware of environmental impact, particularly in resort destinations, and that shapes booking decisions. In a market where rates are capped and capital is scarce, the discipline of investing for long-run cost reduction is no longer optional.
Not every developer has absorbed that lesson. Furkhan is candid about what he sees in the market: some operators are building new hotels calibrated to today’s competitive benchmark rather than tomorrow’s. The product looks adequate now because arrivals are rising and rooms are full. “But if the market matures and becomes competitive, with real products [international brands],” he says, “those hotels will honestly not cut it.”
Financing in a Shock-Prone Market
The true cost of import tariffs doesn’t stop at the invoice. Fernando points to a mechanism that the headline duty rate obscures: when construction materials are more expensive, developers borrow more to finance them, and pay interest on the inflated sum. “It’s not only about the price difference,” he says.
“Because many [hoteliers] have a bank loan or financing facility to finance that, so you add on top another 10%, 12%, or 15% to finance that additional amount.” A tariff that raises a material’s cost by a third does not simply raise the project cost by a third. It raises the loan required, and the interest on that loan, and the return the hotel must generate to service both. The compounding effect transforms feasible tourism projects into ones that are unviable.
For Cooray, the discipline of how Jetwing funds its work has been hard-won. Heritage villa restorations are financed personally, without any debt, which Cooray acknowledges is partly a reflection of the fact that their operational payback is long. “These properties will take a long time to recover that investment,” he says. “Our real value is the asset itself and the appreciation over time.” For the broader hotel portfolio, Jetwing uses a mix of internal cash flow and borrowings, but the borrowings are deliberately capped. “We try to limit our borrowings to about 30%,” Cooray says. “If you borrow more than that, it is very difficult to sustain.”
The currency of that borrowing has also shifted. Jetwing now borrows exclusively in Sri Lankan rupees. “Earlier we used to borrow in dollars,” Cooray says, “but now the dollar rate and the rupee rate are not much of a difference when it comes to interest rates.” When the 2022 crisis hit and the rupee lost roughly half its value against the dollar, operators who had borrowed in dollars found their debt burdens doubling overnight. The risk of currency mismatch was no longer theoretical. “People who had significant debt are unfortunately struggling even now to pay back,” Cooray says.
Furkhan’s view of the financing landscape is less optimistic. “Our finance costs are also higher than our benchmark countries in the region,” he says. “If you’re borrowing rupees, it’s higher. If you’re borrowing dollars, it’s also higher here than it would be elsewhere.” How operators respond to that cost varies widely. “Broadly speaking, everyone is doing it differently,” Furkhan says. Some stack debt because they have access to it and the appetite to use it. Others are more conservative. “Our attitude was: not too much debt,” Furkhan says of when the Confifi Group ran its own hotels. “The moment we get a shock, we’d not have any reserves. So it’s better to keep a conservative approach.”
That conservatism has roots going back further than the crises of recent years. “When the Gulf War hit, business went down,” Furkhan says. Oil prices rose, long-haul ticket prices followed, and charter-dependent resorts (the majority at the time) felt it immediately. The 30-year long civil war further strained balance sheets. “Our refurbishment cycles weren’t keeping up because of the war,” Furkhan says. “It’s a structural thing.” The constitutional crisis of 2018, the Easter bombings of 2019, COVID, and the economic collapse of 2022 simply extended a pattern that was already decades old.
When a shock hits, Furkhan says, the damage runs deeper than occupancy. Revenue falls on two axes simultaneously: fewer rooms are filled, and those that are filled sell for less, because price competition starts the moment demand softens. “Not only is he [a hotelier] having less occupancy,” he says, “he’s also charging less for those occupants he’s getting.” For operators carrying significant debt, when that happens, a moderate shock can become a serious one quickly.
Tourism is, by most measures, in its strongest position in years. Occupancy is high, arrivals are at a record, and some operators are reporting their best financial years. The question is what that recovery is being used for. “While the sun is shining, let’s get our debts sorted,” Furkhan says. “And as a result, things like refurbishments and renovations are getting pushed back once again.” The hotel that should be reinvesting in its product is instead clearing the debt it accumulated during the years it could not. The cycle of shock, deferral and partial recovery has been running, in one form or another, for three decades. The good years have always arrived. Eventually, the bad ones will too.
What Would Change the Equation
The competitive disadvantage is not complicated. “Our costs are much higher than most of our neighbouring countries,” Cooray says. “To pay off high construction and refurbishment costs, we must charge higher rates. Whereas regional competitors can offer the same product, or better, at lower prices.” A traveller choosing between a four-star room in southern Sri Lanka and a comparable room in Thailand or Malaysia will often find the regional option both cheaper and newer.
Two levers would move the cost side of the equation. The first is targetted duty relief on construction inputs that cannot be sourced domestically to the brand standard. “If prices and taxation on certain things are reduced, people would be more willing,” Cooray says. “It would accelerate not just our own projects that we’ve pushed back, but many others as well.” Furkhan frames a complementary argument: duty-free concessions on qualifying tourism inputs, paired with government land released at concessional rates in designated tourism zones, recovering the discount through taxes and economic activity over 15–20 years rather than demanding full market price upfront. Tourism, he notes, “has a higher economic multiplier than almost any other industry. The land is not being given away. It is being invested.”
The second lever is the approval process. Furkhan says developers can build and open a hotel in the Maldives in 18 months from a bare plot. Here, multiple agencies — the National Building Research Organisation, Urban Development Authority, the Sri Lanka Tourism Development Authority, the Department of Archaeology, and the Department of Wildlife Conservation — each hold veto power over a project. None holds coordination authority. “Government agencies have the tendency to tell you what you can’t do,” Furkhan says. “They send you from pillar to post rather than facilitate you. For overseas players, it’s a disincentive.” The dysfunction has persisted across governments for at least two decades. The 18-month contrast is not a logistical curiosity. It is a measure of how seriously a country has committed to tourism as an industry.
The demand side has its own unfulfilled lever. The tourism industry contributes a 1% levy on revenues to the Sri Lanka Tourism Development Authority, Cooray says, but operators are not seeing that translate into the kind of sustained destination campaigns that move the market. “We’ve been talking about this for more than ten years,” Cooray says. “We haven’t had a proper marketing campaign, and it has affected our rates.” In the absence of a national voice, operators like Jetwing run their own overseas marketing campaigns to bring guests to their properties. “If we wait for the government to do it,” Cooray says, “nothing will happen.”
Destination management is the other half of the marketing problem, and Yala illustrates it precisely. Hotels there charge $800 to $1,000 a night. The guest paying that price has come for the safari experience. They enter the park and share a track with a hundred other vehicles. “That client is going to say: I can go to Africa for a private game, pay the same price, and it’ll be the leopard and me,” Furkhan says. The hotel’s value proposition depends on an experience it does not control. His proposed fix is a premium block of the park accessible at a premium entry fee, structured similarly to cabin classes on an airline and open to any guest willing to pay.
None of these problems are without solutions. The tariff structure could be reformed. The approval process could be consolidated. The tourism levy could fund the campaigns it was designed to fund. The record arrivals of the past two years suggest the destination has an appeal that no government campaign manufactured. The question is what is built on top of it. “We are growing by default, not by design,” Furkhan says. In tourism, the difference between those two things is the difference between filling rooms and building an industry.