Real estate surveillance: Is buoyancy back?

The RIU has been conducting market surveillance in the real estate sector for the past three years and all evidence indicates that the boom experienced during the start of the new millennium 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 market buoyancy to return in 2009.

Sum of parts

The real estate market in Sri Lanka can be distinguished into several categories. The high value segment of this market consists of the luxury apartment and condominium sector. This segment was amongst the first to take-off during the 2003-06 period and it was also at the frontline when the market started to ‘feel the pinch’ in 2006 when prices and pre-construction sales witnessed a downturn. Nevertheless, 2008 has witnessed a fairly encouraging rate of deal closures so the indications are that the future certainly is tinged with optimism.

The South Asian region too is looking at a continued incline in the high-value property market for years to come with the Indian Middle-class population now estimated at over 40 million. One indication of the buoyancy in this sector can be seen with reference to the large number of Indian corporations that 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 property developers who sell ready-built houses and plots of land. This segment is dependent on the domestic economy and several other key factors including demographic trends. Cultural and societal trends that are leading to wider home ownership in Sri Lanka, especially amongst young newly married couples who area increasingly looking to own their own home as compared with the option of living with their parents is also driving the market.

Consequently, demand for home loans in Sri Lanka is on the rise. Industry experts says the market has grown at a compound rate with the escalation of per capita income and changing patterns of consumption and saving habits in the recent past.
The key factors triggering the progressive growth of home loans on the demand side are:
•Changes in interest rates over the past year that have encouraged investment in properties rather than in low income yielding government securities and term deposits.
•Tax benefits extended to borrowers, which have further reduced the effective cost of borrowings.
•The demand arising from migrant workers and Sri Lankan’s residing abroad.

We can also note that the interest in commercial property and office space is a significant contributor to the overall industry. This market is driven by additional factors that include local infrastructure, availability of parking space, population density and security. For instance, infrastructure developments in sub-urban areas surrounding Colombo have resulted in healthy increases in the land prices of these areas as corporations base their operations within commutable distance from the city. Our research indicated that in the Wattala area prices have risen four-fold over the past five-six 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, when it eventually happens.

Another force in the land and property market in Sri Lanka according to one senior consultant at Bartleet TransCapital, 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. Thus it has recoiled to a great extent over the past one-two years. Figures up to July 2008 indicate a fall in tourist arrivals of 4.1 per cent with earning dropping to $200.7 million as compared to $209.8 million during the corresponding period in 2007. However, considering the overall country situation, even this segment could be described as resilient and a sustainable upturn can be expected next year. Opportune bargain hunters might find it a good time to pick-up on some leisure property this year.

Policy environment

Demand for housing in Sri Lanka is estimated at a rate of 80,000 to 100,000 units per annum and this number is expected to substantially increase in the future. State owned institutions play a major role in the housing finance market in Sri Lanka. Traditionally, the housing finance market has concentrated on state funded sources since housing development strategies in Sri Lanka have been mainly initiated through state owned institutions. The Government concentrates mainly on affordable housing for low and middle-income earning groups with a policy that includes subsidized housing loans, participatory housing schemes for low-income groups and apartment complexes in urban areas for middle-income groups. In urban areas, shanties are cleared and the land is released for development of apartments for shanty dwellers. The income derived from the acquired and released land would be sufficient to construct apartments for shanty dwellers who abstain from the right of living on the land acquired.
The growing demand for condominium properties, particularly in the Western Province has raised questions with regard to the policy environment and institutional frameworks that are needed to regulate the sector. Some recent amendments to the legal framework include the Apartment Ownership Law No 11 of 1973 which has been amended by Act No 45 of 1982 and further amended by Act No 39 of 2003 giving more and more authority and flexibility to apartment owners and lenders.

Legislation in 1973 introduced a statute called the Apartment Ownership Law, replacing the
Condominium Property Law. Today, the law on Condominiums in Sri Lanka is governed by the
Apartment Ownership Law and its amendments made in 1982. Roman Dutch Law was limited in
the sense that it recognized singular ownership from the ground level upwards and did not make
provision to recognize ownership in the horizontal layers of a building. However, shortcomings
remain. For instance, it is difficult for banks to lend on these apartments sans ownership deeds.
Some banks have developed tripartite arrangements that involve the lender, buyer and developer
for cases where the property is still under construction. However, these are limited to selective
clients. Due to the rising demand for condominiums, the government has instituted a
Condominium Management Authority.

Foreign interest

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 February 2008 may only be registered as a statistic today. Thus the impact of improved stability in the economic and political environment today will show up as statistics in the first quarter next year. Thus, a swift return to the expat-driven buoyant property market enjoyed during the first few years of the CFA period is dependent on current perceptions on the state of the island economy.
Many Sri Lankan’s living abroad have not been deterred by recent turbulence and have been putting their money back into the country through real estate purchases. Overseas buyers from India, Japan, China and Europe, particularly Britain, are at the frontline of those taking an interest in the sector.

Market forecast

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.

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.