Upper-mid condo market: More room to grow?

New developers are crowding the mid-priced condo market. Prime Lands Group Chief Executive believes low-quality competition can erode trust in the industry

In current real estate discourse, it is the Shangri-la’s and Astorias that often take center stage. However, according to real estate consultancy firm Jones Lang LaSalle, the most significant demand at present comes from what they describe as the upper-mid segment for condos, ranging from Rs26,000 to Rs35,000 per square foot.

Rising land prices in Colombo and its suburbs have made housing costly for upper-middle class families who now purchase condos instead. Developers like Prime Lands Group have been capitalising on this opportunity. Its real estate development arm, Prime Residencies has already completed 12 out of the 33 condo projects it has commenced.

Prime Lands Group Co-Founder and Chairman B Premalal believes affordability is a relative question and a matter of location. However, some industry watchers point to the large number of units forecast to be available in the next few years in speculating that there could be a real estate bubble. But what worries Premalal is the threat posed by new developers who don’t have the required financial capability to complete projects as promised. He thinks this will result in unfinished and abandoned projects, leading to an industry-wide trust deficit. “This can lead to a bubble,” he says.

Here are excerpts from the interview…

How likely is a property bubble in the upper-mid and mid-market segments?
● As i see it, a bubble is only possible in one way.

Because of the opportunity, many have entered the real estate industry. This is a capital-intensive industry, but some do not have the financial resources, the product or the technical know-how. They are all primarily financing condo developments through the pre-sale of units. If pre-sales aren’t up to expectations, it becomes a huge problem for them. There can be lots of unfinished projects and abandoned apartments, and this can cause a bubble. A buyer should be aware of a developer’s credibility and financial capability before purchasing.

Is there concern about the affordability of apartments in Sri Lanka?
● We are focused on the upper-middle income segment. However, the price depends on the location. For example, we are going to launch an apartment project in Uswetakeiyawa, facing the beach, where a two-bedroom apartment will start from Rs15 million. We don’t want to confine ourselves to super luxury. We have a different approach. We have land in Colombo 7, Malabe and even Anuradhapura. In Athurugiriya, we have even sold apartments for Rs5-6 million a unit.

The challenge is to develop a product according to your customer’s budget. To make apartments more affordable, they will have to be located outside Colombo. Land prices account for 30% of a development’s cost. In addition, interest rates are also high and taxes are rising.

Are there too many projects under construction in Colombo currently?
● An apartment project may have up to 100 units. If there are 30 projects per annum, that is just 3,000 apartments. At least 3,000 people should be able to afford these. I believe you can sell even 5,000 units a year.

How different is your business model compared to that of others?
● Four years ago, we realised that there was a gap in the market. We found that almost all apartments were restricted to Colombo city limits. These units were priced high, at around Rs30 million a unit at the time, and restricted to the luxury category. We identified a strong need for houses in Colombo’s suburbs and at a lower price. With that in mind, we embarked on projects in non-traditional locations like Athurugiriya, Malabe, Battaramulla and Nawala.

We finance a project in three ways: self-funding, pre-sales and bank loans. Due to this, we are not over-dependent on banks or pre-sales.

We launched over 33 projects, and have already delivered 12. They were reasonably priced, and customers have enjoyed capital gains. Sometimes, it’s over 100% in a two-to-three year time span. These returns are very high. Also, perhaps uniquely, we celebrate the delivery of the complex, not the foundation stone laying or groundbreaking. This is how we differ.

Describe your average buyer.
● Our average buyer is generally a corporate executive, businessman, expatriate or a high-net-worth investor. Around 65% of our apartments are purchased by the end user, while the rest is for investment purposes.

There is room for more projects at the correct price. For example, if your apartment is priced at less than Rs8 million, how can a developer build it at that price, maintain quality and develop the project at a good location. All these factors have to be taken into account.

What does it take to succeed as a real estate company?
● Prime Lands has been in the market for the past 21 years, and in keeping with our name, 90% of our business is land development projects island-wide. We have a presence in a majority of the districts, so we are the most trusted real estate company. We deliver what we promise, and when it comes to real estate, the ‘trust factor’ matters. Families spend a large amount of their savings on a home, and at times their future earnings as well. We understand this commitment, and always give a good land or house to our customers. This dedication is the reason the group has come to the position it is in today.

What new hubs are you looking at?
● We are looking closely at Kandy. With the expressway being constructed, it will be a 1.5 hour drive, so we see significant potential there as the next real estate hub.

What structural reforms would you like to see being implemented to achieve a thriving real estate sector?
● Housing loan interest rates should be reduced. The recent increase in taxes and policy uncertainty act negatively in terms of investor sentiment. The government proposed allowance for foreigners to acquire land and property, but I don’t know what is happening with this. Other countries are lifting restrictions, so we are losing to these markets.

How do you foresee the future of the real estate market?
● We are very optimistic about the future. We are happy that we have introduced the apartment concept outside Colombo. It has expanded the boundaries of city life. The demand side for apartments will change from super luxury to luxury or mid-range. Whatever the form, we will change our strategy accordingly. My only fear is that some people with short-term goals will enter the market without the ability to complete projects. This will have a negative impact on the market in the future. So, buyers should be extra careful and analyse the developer before purchasing.