ARE LUXURY CONDOS STILL A HOT INVESTMENT?

WELL-LOCATED, SMARTLY POSITIONED CONDO DEVELOPMENTS HAVE RETURNED AN ANNUAL 15% IN THE PAST. CAN COLOMBO’S NEW RITZY DEVELOPMENTS KEEP UP?

CHATHAM STREET IS BUZZING WITH CONSTRUCTION WORKERS BUILDING SOUTH ASIA’S TALLEST SKYSCRAPERS. THE THREE SKYSCRAPERS’ DEVELOPMENT ON A 4.5-ACRE P LOT CLOSE TO THE WORLD TRADE CENTRE IS BRANDED ‘THE ONE’. AT $550 MILLION FOR CONSTRUCTION A LONE, THE INVESTMENT IS ONE OF THE MOST SIGNIFICANT FOR A REAL ESTATE PROJECT, INCLUDING TWO
HOTELS, APARTMENTS AND SHOPPING IN THE TWO TOWERS BEING CONSTRUCTED FIRST.

“In a world of low yields, the search for returns has pushed vast sums into the ultra-luxury condominium market. Most buyers seek potential for capital appreciation and rental yields,” says Jayamal Dias, the chief sales officer at the Sri Lankan unit of Zhong Tian Ding Hui (ZTDH), the largest privately owned construction company in China. ZTDH is in a partnership with the project’s developer and owner, The One Transworks Square.

Someone considering spending $760,000 (around Rs120 million) for a two-bed condo (the most affordable unit in the development) would discover that Dias, referred by the hypocorism Jay, has the sophistication to match the perfected sales pitch.

Perfectly located and clearly positioned condo developments have yielded extraordinary capital appreciation over nearly a decade, and was the preferred asset class for wealth preservation and capital gains for the rich. Dias makes the pitch that the first building of the One Transworks Square project nails both location and positioning. On a third of the upper floors, the 80-storey first tower under construction will have Sri Lanka’s first Ritz Carlton hotel. The other floors (levels 16 through 52) will contain 187 apartments, of which 82 had been sold by June 2018.

The condos are also designed to specifications of, managed and branded by The Ritz Carlton. The central business district location and Ritz Carlton residences branding has proved to be a potent mix for luxury condo buyers. Jay says that at least 20 buyers have purchased more than one unit.

Its website says The Ritz-Carlton does not own, develop or sell ‘the Residences’. The One Transworks Square uses The Ritz-Carlton mark under a licence agreement, it adds. The website does not contain many details of the hotel, but highlights that it will house Sri Lanka’s largest banquet on one of the topmost floors.

“There are limited Ritz-Carlton residencies around the world, and here is an opportunity to take a piece of the brand,” he beams during an interview at its office housed at a heritage building constructed during the British occupation referred to as Transworks House on the property’s southern border. Once the three towers are complete, Transworks House will be converted to an upmarket shopping mall. Touches of Ritz-Carlton branding can be seen in the interiors, splashed with energetic colour palettes. Typical Ritz-fashion yellowish marble adorns the walls and floors, and each space has a dominating grand chandelier.

Dias points out that the yellow marble’s swirls and vein patterns – at just the right intensity – were only available from the best Italian quarries. High ceilings and spacious living spaces require large and costlier marble slabs to avoid visual distortion of joints. At Transworks House, a model apartment is being fitted out so that buyers of the 60%, or so of units now in the market can experience the product. For any buyer, the Jay Dias key pitch is the investment angle. Rental yields continue to be attractive even though condo capital gains have slowed from an annual 10-15% to around 7-9% over the last couple of years for the best located and clearly positioned properties.

“Rental yields are 5-6%, depending on the type of property. In real estate, you can look at an annual return of 14-15%. There are some investors holding 30 or more apartments in Colombo, easily getting a good rental income on top of capital appreciation. There is nothing to lose even if the property appreciates, unlike withholding tax and brokerage fees incurred while investing in the stock market,” he says. He optimistically states that sales volumes have been maintained despite oversupply concerns, and suggests demand from the ultra-luxury segment wouldn’t dry up any time soon due to the lack of other asset classes that can perform as well.

Ritz-Carlton tower is 80 storeys and construction had reached the 11th floor by June 2018, with a new floor expected to be added every week. A second tower facing Colombo’s Hilton Hotel on the site’s northern end, which is yet to be tied with a brand, will have 77 floors. Piling for the second tower is complete and construction is due to begin soon. Finally, the third tower, ‘The One’, will have 92 floors and piling work has just commenced. The Ritz tower will have teams manage the properties and deliver concierge services and facilities from in-residence dining to housekeeping. One of its many firsts include a building that has a complete glass façade, like some New York City apartments and unlike developments in the tropics that often feature a balcony.

ZTDH is funding project construction but does not hold equity in One Transworks Square (Pvt) Ltd., which is owned by India’s Krrish Group. ZTDH expects to recover its property development costs by earning commissions on the condos it markets and selling a number of units under its ownership, under a development deal with One Transworks Square. Jay Dias says receipts from apartment sales in the third tower will altogether go to ZTDH.

“Our project doesn’t depend on the buyers to fund construction, and its funded by ZTDH.” Usually, construction project delays happen when they are over-reliant on pre-sales for funding construction. “It’s a vicious cycle, and we are clearly avoiding that path,” adds Dias who says the Ritz-Carlton tower will be complete by late 2021 and the whole project by 2023.

“We wouldn’t go into the market with such inventory if we see that digestion is not good.” He adds that another reason for delays in other developments is currency volatility.

“We contract at dollar rates, as 70% of our raw materials are imported. It will be a disaster if we open ourselves to elements over which we have no control. In fact, this is a huge issue faced by developers. Some are dealing with it by writing the possible currency depreciation into their pricing, when quoting in rupees,” he says.

The Chinese contractor hasn’t borrowed from local banks to finance the project. Construction costs are extremely high, as it’s a branded building and needs to have a certain flair to the elements used. Most items such as kitchen and bathroom fittings and light fixtures are purchased from Ritz-Carlton approved vendors.

“We purchase cement, sand and metals locally, but have tax exemptions for items like tiles and bathroom fittings, etc. We have to import certain building materials to maintain promised quality, regardless of whether there are tax exemptions or not.”

The entire development will encompass over 4.5 million square feet of built-up space and feature three of South Asia’s tallest buildings. Affluent buyers enter the real estate market with the capacity to purchase and sell properties for reasons beyond mere necessity, unlike buyers in the general housing market, says Dias. In fact, a fine home is considered an ultimate expression of an individual’s taste and achievement, and an acquisition of passion and lifestyle. They are motivated by capital growth, along with the interest to own an asset of lasting intrinsic value.

“Around 90% of the sold units are to Sri Lankans living here and overseas, and purchased with zero gearing. Only those purchasing at the lower end, from small real estate projects, take loans. There is very little gearing from higher-end customers,” adds Dias.

The client portfolio for ultra-luxury real estate includes a good balance of locals, foreigners and expats, at 65%, 25% and 10%, respectively. “The local client base can be further classified into self-made entrepreneurs, corporate professionals and those who possess inherited wealth. Entrepreneurs buy luxury property as a status symbol to indicate that they have made it, and because they can collateralize it in the future,” he says. Dias adds that the thinking of corporate professionals is very different from other clients. They calculate minute details of an investment–like future value, the exchange rate impact, etc. An increasing number of professionals are climbing the corporate ladder and moving into the elite segment, and are buying units that were predominantly bought by the investor class earlier.

“Around 60% of ultra-luxury properties in the industry have been absorbed by the market, and there aren’t many projects in the pipeline for the next five to six years within this segment,” says Dias. A seasoned investor buys a new property every four years, which is considered the normal cycle.

In addition to the Transworks project, the ZTDH Group has also invested in a number of other development projects in Colombo, noting that Sri Lanka is an important link in China’s Belt and Road Initiative. They have already begun construction in Colombo 10 of a residential tower with 340 units. ZTDH is also working on a joint venture to develop the Excel World complex, to feature an office tower, a water-themed park and high-end boutique mall.

“We entered the market with such inventory volumes only because the market has the capacity to absorb it. In fact, the real estate market has benefitted from a much higher rate of return than any other asset class in recent times,” concludes Dias.