Real Estate Overview for Sri Lanka



MARKET COMMENTARY


Steady trend emerging in Western Province

The real estate sector in Sri Lanka has now matured in many of the traditionally popular geographic areas whilst other emerging spots are driving the overall market in an upward direction. Prices have not dropped in any area on the Western Province over the past two months as reported by sector analysts however, some of the high-prices suburbs like Colombo 07 have now reached a peak. Legislation may have some part in the leveling out. For instance, there are new Urban Development Authority (UDA) laws that enforce restrictions on the height limits of new constructions in some exclusive areas.

However, as the Colombo central areas level out, property development is showing a pattern of outward expansion, moving from one development center to the next as it expands. New spots are born and others maturing as prices respond to higher demand for land and property that is within commutable distance to the commercial center.

As the market diversifies

Currently, the big-time property developers in the sector are said to be active, buying up land and erecting apartment complexes, many of which are exclusive. The demand for luxury condominiums are mainly driven by a small section of the local buyers and Sri Lankan national living overseas.

The demand for commercial property also adds considerable value to the sector. Sound economic growth ensures a good demand for warehouses, showroom and office space as commercial entities look to expand. Much of the lure in this area is a function of population density of any given area.

Another area that has witnessed strong growth is housing and land sales. These are driven by buyers who consider social status and other personal considerations and want uniquely designed houses. Others buy-up ready built houses from individuals or property developers and are motivated by realities of work and the need to commute.

Another component of the overall market in the island is the estate / plantation sector consisting of either rubber, coconut or tea. Here commentators have noted considerable activity this in 2007 from both individuals who want a strong investment and from companies looking to diversify their asset portfolio. Likewise, some activity in the hospitality sector has also been noted. By-and-large, foreigners have been looking to invest into beachfront properties in order to develop them into commercial or private resorts.


BANKING AND FINANCE

More banks compete for middle-income real estate projects

A number of banks have announced new housing load facilities since the start of 2007. Sri Lanka’s largest mortgage lender HDFC Bank announced in February that it will raise one billion rupees in ten-year funds through a mortgage securitization issue that will fund the growing demand for housing loans. In 2006 the bank issues 13,000 housing loans for new houses and upgrades, up from 11,000 the previous year. HDFC is also building apartments in Wellawatte and other areas aimed at meeting middle-class demand. Citibank is set to structure the issue and it is set to be completed by May this year, freeing up more funds for investment into real estate activities.

Competition is likely to be fierce though with existing players and the flow of new entrants into the real estate arena. Central Finance Company (CFC), recently awarded a A+ rating from Fitch has also announced plans to branch out into real estate. Whilst the mainstay of the company’s business has been in vehicle finance, CFC has also started a condominium project via a wholly owned subsidiary that will also target the middle income market.

Meanwhile, State Mortgage and Investment Bank (SMIB) has received a stable rating from Fitch following its trimming of non-performing loans. Third quarter alone last year saw a 26 per cent drop in non-performing loans and spurred the rating agency to revise its downgrade last year. SMIB also has a low credit risk factor due to its ability to secure loans against Employment Provident Fund balances of customers.

As new non-interest based funding is set for launch

HDFC bank also announced pipelined plans to offer mortgage facilities based on Islamic finance principal that stay clear of interest based funding. The current system is said to exclude many potential customers of the Islamic faith. HDFC bank is consulting with Malaysian experts and local religious scholars in order to bring out a new housing finance product. In addition to the prohibition of interest, the HDFC will also need to show a disassociation with alcohol, pornography, gambling and arms and ammunition related investments in order to pass the test of ‘Sharia’ compliance.


ECONOMIC ENVIORNMENT

The macro economic environment continues to be in good shape as far as the real estate market is concerned. New data out for February showed that the rate of inflation was down from 20.5 per cent in January to 19.2 per cent in February. This enabled the Central Bank to raise the rates by 0.5 per cent to 10.5 per cent. Borrowing and loans advanced for home purchases had been reported to be high due to the fact that current interest rates are still below inflations. Last year the Central Bank increased rates by a total of 1.25 per cent points. Furthermore, foreign remittances, also an importance source of funding for real estate purchases is expected to continue on the upward trend. In 2006, foreign remittance totaled an estimated $2.3 billion and was responsible for keeping the countries reserves in surplus.



NEWS IN BRIEF

Architects need to buck-up ideas: Sri Lanka Institute of Architects (SLIA) has said that local architects need to pay more attention to economical design methods given the spread of urbanization. Design concepts need to be more efficient and economic whilst design should make efficient use of materials, workmanship and other scare resources. Jeremy Harris, former Mayor of Honolulu, said to be the world’s most sustainable city, was in Sri Lanka in February to attend a conference organized by the SLIA. He said that ‘we have not been building our cities in a sustainable way. Architects have to be responsible for the entire built environment”.

Panic hits US market: Some 22 lenders have declared bankruptcy in the US sub-prime mortgage sector in the past two months. Consequently, the cost of insuring against default has rocketed raising fears that a credit crunch could spread to the rest of the market. Nouriel Roubini, economic professor at New York University, is quoted to have said that the housing slump is pilling the US into recession. He cites a 14 per cent drop in housing starts in January with an estimated loss of 600,000 jobs in the real estate sector.

India booms but needs new rules: India’s real estate market is booming as developers grab land for development of houses and malls. However, first-time buyers are complains of inflated prices that prevent them from entering the property ladder. Some estimates place the property price hike at 25-50 per cent. The sector is estimated to be worth $12 billion and is growing at 30 per cent per annum according to the Federation of Indian Chambers of Commerce and Industry. A causal factor is the fall in mortgage rates that have fallen from around 18 per cent twelve years ago to the current 9.5 per cent. However, the growth has been accompanied by a rise in fraud with cow-boy agents taking money on pre-launch housing projects and disappearing. New legislation is set to regulate real estate sales and strengthen buyer’s rights.