REAL-ESTATE SURVEILLANCE BRIEF: A market for the patient

By Roshan Madawela


The RIU has been conducting market surveillance in the real estate sector for the past two years and all evidence indicates that the post-CFA property boom has now cooled-out. However, the levels of interest in the Sri Lankan real-estate market remains strong with both the local and international stakeholders keeping the faith in a positive outcome. We expect the market to reward those who are patient.

Market overview

A key observation of the real estate market is that it is a time-lagged industry where the deal process can take up to several months and decisions made in October 2007 may only be registered as a statistic today. This is of some concern as our research was consistently finding a strong demand for most segments of the real estate market including condominiums during the first two quarters of 2007. However, since then, we have noted a down-turn in activity across the board and the change can largely be attributed to the deterioration in the security situation as well as concerns regarding the state of the economy. Thus, a return to the buoyant property market enjoyed during the first few years of the CFA period may take a little more time to materialize.

The real estate market in Sri Lanka can be distinguished into several categories according to one senior analyst at Bartleet Trans-Capital. The high value segment of this market consists of the luxury apartment and condominium sector that was amongst the first to take-off during the 2003-06 period. However, it was also the frontline segment of the market to ‘feel the pinch’ last year when prices and pre-construction sales witnessed a downturn. Nevertheless, recent months have witnessed a fairly encouraging rate of deal closures so the indications are that the future certainly is tinged with optimism. Moreover, the South Asian region is looking at a property market boom in the coming period and this is indicated by the fact that a large number of Indian corporations are backing large-scale real-estate projects in Sri Lanka.

Another important category of the market is the middle-income segment that is also increasingly dominated by the property developers who sell ready-built houses and plots of land. This segment is largely dependent on the domestic economy and the housing loan market that is determined by interest rates. However, due to the demographic, cultural and societal trends that are leading to wider home ownership in Sri Lanka, especially amongst young newly married couples, the demand here is expected to withstand the currently sky high interest rates.

We can also note that the interest in commercial property and office space is a significant contributor to the overall industry and this market is driven by additional factors connected to infrastructure, availability of parking space, population density and security. For instance, infrastructure developments in areas surrounding Colombo have resulted in healthy increase in the land prices of these areas as corporations bases their operations within commutable distance from the city. Our research indicated that in the Wattala area prices have risen four-fold over the past few years due to strong demand for factory and warehouse space. As this area is well connected to the airport, port and other routes around the country as well as being within a half-hour drive into the city, it meets the requirements of many commercial property hunters. Moreover, the development of the Katunayake Airport Highway will further boost prices in these sub-urban areas.

Another force in the land and property market in Sri Lanka is the leisure property segment that is mainly driven by foreign interest. This market is directly connected to the tourism trade and hence also to the security situation and it has recoiled to a great extent over the past one-two years. Nevertheless, the tourist industry is planning a ‘come-back’ in 2008 so a turn around is entirely possible.

However, returning to the hear-and-now, several issues remain. Commenting on the current market conditions, Dulan Gomez of Viva Serendib noted that they have always had a strong outlook for the property market in Sri Lanka. However, he added that it is now ‘evident that the boom we saw in the apartment market is cooling off largely due to the current uncertainty in the market. The growth in this sector in the past was due to high investor confidence which was largely driven by the CFA and relatively low interest rates. Currently when taking into consideration high interest rates, war and the escalating cost of living a high rate of uncertainty looms over the investor.’ He added that the economic indicators would suggest that the market will level-off for the moment whilst a crash is not on the cards.

The high life

The luxury condominium market is limited to a very small number of high income earning locals and marketing was originally aimed at the expatriate community. Thus, it is difficult to estimate the true size of this market or its demand patterns. For instance, the presently high domestic interest rate has limited impact on demand for luxury apartments as the foreign money coming in can be borrowed at incomparably lower rates. However, the security situation and perceived macro-economic environment in the country does have an overbearing affect on investor sentiments.

Our research does indicate that the first phase of the ‘condominium boom’ was driven by the strong interest shown by Sri Lankan’s living overseas who considered luxury apartments as a sound investment, especially given the positive developments surround the conflicts and the implementation of the ceasefire agreement in 2001. The following period of some three to four years was marked by an excellent demand for luxury apartments and the developers are known to have made seriously lucrative profit margins. The local investors who could afford to invest also followed as the rentable value of these properties justified their high prices. Some observers had noted that the prices of condominium flats in Colombo were comparable to prices in Dubai and even New York. Such a bizarre market was principally attributed to the unleashing of pent-up demand from a small but significant segment of the local buyers and from expatriates looking to invest amidst a climate of optimism.

From a developer’s perspective, the healthy profit margins made by the first wave of developers clearly served to attract more and more investors into the sector. The early constructions were by most accounts an overwhelming financial success as apartments were sold out even at the pre-construction stage in a number of cases. Though legal issues surrounding condominium laws remained, buyers threw caution to the wind whilst lenders were equally enthusiastic.

Bust or adjust?

However, the notable change in demand and pricing levels in the condominium market experienced at present can be attributed to market adjustment and may not be indicative of any serious long-term depression. That the islands apartments were fetching prices that are comparable to those of the developed world was an indication of a suppressed demand. However, being a comparatively free market economy, a price adjustment of some sort is perfectly normal and should not be associated with a boom-bust cycle. Whilst it is true that the economy as a whole is going through a tough-time and the coming months are likely to throw-up more difficulties to the people as a whole, many of the higher income earners are cushioned from the impact due to various reasons.

Moreover, Sri Lanka’s economy has tended to be determined by political factors and sensitive to changes in the security situation. Positive change in these crucial parameters could have (and still would) propel the economy into sustained double-digit growth as the island strives to fulfill its true potential. The post-independence record confirms however that it has been, without a doubt, one of the perennial under-achievers in the region.

According to one global real estate group, the Sri Lankan property market is set to witness continued annual growth of between 24-25 per cent and the condominium sector is expected to play a significant role. The recently floated Condominium Management Authority confirmed an increase of 35 per cent in the number of new condominium certificates issues in 2007 as compared to 2006. The authority has also reported that some 200 condominium certificates had been issued for constructions in and around Colombo up till February 2008. Typically, these apartments fall in the above Rs.25 million category.

It was announced recently that the BOI has approved the construction of a 59 floor ‘Diamond Tower’ on Darley Road, Colombo. The $150 million project is set to be the tallest building on the island and will consist of apartments as well as commercial areas to form a ‘tower township’. This year also witnessed the unveiling of plans to build another apartment complex in Nugagoda. This $30 million project is expected to add ten floors to the sky-line where 50 luxury apartments will cater to the needs of high income earners. These will add further to the Western Province skyline that is now witnessing the impact of deals made over the past few years. For example, the Hyatt Regency, a 70 story building is on schedule for completion in 2009.

The on-line real estate specialist bhoomi (www.bhoomi.com) is also reporting some 100,000 hits per day on its property website as an indication of both local and foreign interest in the market. With the finger on the pulse of foreign investors, the indicators are that demand is ticking healthily but there is a strong ‘wait and see’ element in the market at present. This factor is being felt across the board in all areas of land and property as compared with the steady rise in prices experienced earlier.

Property hunter’s paradise?

Sources with their ear to the ground do confirm the recent inactivity and claim that deals are not presently coming through due to caution on the part of buyers. Consequently, our research points to the condominium sector undergoing a process of maturing and its appeal and affordability is now likely to open up to a greater section of the local buyers as well as the overseas investor. Inflated prices and obese profits are perhaps a thing of the past.

The benefits of condominium living with reference to life-style, security, waste management, facilities like swimming and gym will ensure their continued attraction to those who can afford them. With the downward adjustment in prices, more local income earners will now be able to buy into the lifestyle that comes with such apartments. The only catch is that they will not be burdened by the high interest rates.

For those with a more modest budget, our research indicates that buyers should look at purchasing property outside of the major metropolitan areas due to their current un-inflated prices. Gomez from Viva Serendib claims that ‘when taking into consideration current infrastructure developments in certain townships it is evident that bold investors are sure to make strong capital gains buying at these locations, this is mainly due to sound fundamentals in these areas and property not being overpriced.’

Overall we can expect foreign investors to return once there is more stability in the economy. Local investors should look to build their property portfolio with high capital growth properties in a number of locations. The main consideration should be to avoid paying over inflated prices for your property.

In terms of the ‘big picture’ the players could reason that the large-scale projects inked recently can take from between one and three years to construct. That such activity is taking place despite the currently uncomfortable country situation is a positive indication in its self of the future. We can only hope that the developers are ‘spot-on’ with their mathematics.


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