SINGAPORE—Sri Lanka has become attractive to hotel developers in recent years, but even as demand growth slows, hotelier pricing power persists, according to an analysis from STR.

Over the 12 months ending with March 2018, Sri Lanka’s supply (room nights available) grew 6.2%, while demand (room nights sold) increased 2.1%. As a result, occupancy fell 3.8% to an annualized rate of 65.1%. However, average daily rate (ADR) was up 7.2% to LKR17,333.83.

“The last few years have seen Sri Lanka become very popular with developers,” said Jesper Palmqvist, STR’s area director for the Asia Pacific region. “Supply growth reached 6.8% last year, and that came with demand basically flat year over year (+0.1%). Hoteliers will need to develop impactful marketing campaigns to increase that demand and avoid a continued occupancy slide. Regardless, it will be interesting to track pricing power with new supply and new competitors on the island.”

STR’s hotel performance sample in Sri Lanka has grown to nearly 50% of the 14,806 rooms in the country. STR’s census database shows 146 properties with another 26 across the Under Contract phases of the pipeline. STR’s March Pipeline Report showed 15 properties in construction comprising 3,450 rooms.

“The Colombo skyline in particular continues to be busy with construction cranes,” Palmqvist said. “A lot of the new supply set to come online will be in in luxury and upper upscale segment, so we foresee interesting market dynamics ahead that will pressure occupancy and rate levels.”

Overall, ADR has grown year over year for 30 consecutive months in Sri Lanka. The Q1 absolute level in the metric (LKR19,867.60) was the highest for any first quarter in STR’s Sri Lanka database. Occupancy for Q1 grew 1.0% after dropping 6.2% for total-year 2017.

“Hoteliers have been able to increase room costs to counter the declines in occupancy,” Palmqvist noted. “It will be key for those hoteliers to monitor the market performance in order to react prudently to more new supply.”