Five Trends in Sri Lanka’s Condo Market

Sri Lanka’s condo market is booming, making some question if it is heading for a bust

An increase in the supply of luxury condos, low interest rates and a high proportion of domestic apartment buyers were some real estate market trends that endured for years. But, things have changed. Interest rates have risen, deluges of developers have targeted the middle class, and policy has been relaxed on foreign nationals owning condos freehold, generating new interest.

Real estate is a popular and reliable asset class for capital preservation in most countries. It’s also an asset with little price volatility. Here are some major trends real estate consultants, leading estate agents and property developers think deserve to be watched in Sri Lanka’s condo market.

THE MIDDLE CLASS: THE NEW DRIVER OF GROWTH
Real estate developers are shifting lanes to cash in on the growing middle class’s demand for well-located condos close to the commercial capital. Jones Lang LaSalle (JLL), a real estate consultancy firm, says demand for upper-middle and middle-income apartments – classified as ones ranging from Rs26,000 to Rs35,000 per square foot – is growing.

Rising land prices in Colombo and its suburbs have made condos an attractive option for middle class families. “People can’t afford land to build houses” says Chandaka de Soysa of Acquest, a real estate agent. More importantly, apartments offer ease of access to schools, entertainment venues and central road networks, which are key concerns for middle class homebuyers who consider the commute to work, school and amenities. Prime Lands, the country’s largest middle income-focused real estate developer, forecasts demand for at least 5,000 condos per year. Recently, Krishan Balendra, an executive director at John Keells Holdings, who oversees the group’s leisure and property sector said the country’s annual condo sales at 2,000 units was a ‘small number’, indicating that there is greater potential for growth in the sector similar to the experience in cities like Bangkok and Kuala Lumpur over the last decade.

LUXURY APARTMENTS MAY FACE A DEMAND-SUPPLY IMBALANCE
Contradictory views of the Central Bank and condo developers about the viability of prices in the expensive condo market renewed the debate on whether Sri Lanka’s luxury condominium market is inching towards a bubble. “There is no established ‘slowdown’ in the luxury real estate market,” says Jones Lang LaSalle (JLL) Lanka’s Managing Director Steven Mayes.

A concern is the pace at which new apartments are being completed, and the possible mismatch with short-term demand. Apartments could end up unsold for longer. “This can be corrected by a slower pace of construction that allows demand to catch up,” says Mayes. JLL estimates 3,740 condos due to be completed over the next two to three years. Premium condo developments by Altair and Shangri-La have sold more than two-thirds of available units. “For premium apartment developments, it’s significant to have sold so much of available units,” says de Soysa.

PRICES WILL RISE, BUT AT A SLOWER RATE
Low interest rates after the war ended spurred renewed interest in real estate as an investment asset class. For the first time in four years, the Central Bank increased interest rates in mid-2016, and followed it by another three hikes in the subsequent months.

Construction costs have risen, but demand remains strong. “In the middle market sector, demand continues to outpace supply,” says Mayes. “So, prices will continue to rise, but at a slower rate than in the past twelve months.”

PORT CITY TO SLINGSHOT SRI LANKA AS A PREMIER REAL ESTATE DESTINATION
The Port City, a new downtown or Colombo built by reclaiming an area the size of Monaco from the Indian Ocean, is expected to add 21,000 apartment units at its completion. “It’s going to be a game-changer for Colombo,” says Mayes.

The 269 hectares of reclaimed land is expected to attract $15-20 billion in investment. High-net-worth individuals from the region, including India, Pakistan and Bangladesh, will be the main target for real estate investments in the Port City, according to industry experts. “It will be a catalyst to propel Sri Lanka up global real estate indices.”

AN INCREASE IN FOREIGN INFLOWS TO REAL ESTATE
Currently, residents and expatriate Sri Lankans buy 90% of condos. Developers are seeking to sell more new apartments to buyers from overseas, taking advantage of Colombo’s growing attraction as South Asia’s most cosmopolitan city.

To attract more foreign buyers, the government’s 2017 budget proposed allowing foreign buyers to borrow from a local bank up to 40% of the apartment’s value. According to Mayes, the relaxation of barriers has already garnered interest from India, China and others in East Asia.

“Some regulations have been relaxed, while others haven’t been ratified yet. The government has much to do to attract foreign buyers to Sri Lanka in significant numbers” he says.