A Prime Slump


In the scorching March heat, property developer Rohan Parikh, with his shirt already starting to blot with sweat, suggests dealing with the heat is an inevitability in construction before exiting the relative comfort of a makeshift VIP tent to pose for a photograph in front of the firm’s latest project, Iconic Galaxy.

Around half the homes at Iconic Galaxy, a condo development outside Colombo, have been sold. Targeting the mid-market, buyers at the development are mostly Sri Lankans looking to move closer to the city and is similar to the firm’s first development, Iconic 110 Parliament Road, which is a kilometer away.

1The project is one of the few positioned well to target the middle-class Sri Lankan, he says.

Many other condo developments in Colombo target investors, who have speculated on real estate since the end of the 25-year civil war in 2009, and to a greater degree since 2014, when interest was piqued about the country’s economic potential.

Listed stocks haven’t yielded good returns in the past decade, while interest rates have declined since 2009, compared to previous decades, making real estate an attractive asset class.

Nayana Mawilmada, property sector head at John Keells Holdings (JKH), says around 95% of condo buyers are Sri Lankans, either living here or abroad. Many eye investment returns.

“It’s overwhelmingly expats who are occupying or renting condos’,” says Mawilmada, who has expertise in architecture and city planning, and had at one time served as the Director General of the Urban Development Authority. According to JKH’s own estimates, around 78% of apartment occupants are expatriates, with one of the firm’s own projects, Monarch, having just 4% local occupants.

However, the investment asset class and rental yield-led boom has now run out of steam, at least for now. Sales volumes are lower across the market.

Jones Lang Lasalle (JLL), a real estate investment service provider, projected in 2017 a slowdown in condo sales in the coming years due to a demand-supply gap, but maintained a positive industry outlook. Economic growth has slowed considerably. In the fourth quarter of 2018 it was just 1.8%, and 3.2% for the full year of 2018, the lowest annual rise since the 1.5% slump of 2001.


Parikh says the political crisis of late 2018, when President Sirisena switched political alliances and appointed ex-President Mahinda Rajapaksa Prime Minister, dealt a hard blow to luxury condo developers targeting foreign investors. Other real estate developers were also affected but by a lesser degree, he says.

Real estate demand had cooled when the political blow landed. He is now expecting landed property prices will decline.

“We have not been procuring land over the past 12 months because our expectation is land prices will fall. Already we can see this happening,” Parikh says.

Hiroshini Fernando, chief executive of commercial real estate firm RIL Property, says her valuers reported that land prices marginally dipped in central Colombo towards end-2018. Advertising data (not transaction data) tracked by LankaPropertyWeb, an online land and housing aggregator, shows land prices in Sri Lanka had stabilized by December 2018, while in Colombo, prices fell marginally after their sharp rise since 2016.

Prices for 3-bedroom apartments had fallen 7% in the December quarter compared to the previous quarter, according to the website’s property index.

2The Land Price Index (LPI) of the Central Bank, however, has not recorded such a phenomenon, instead growing at a robust 18% in the second half of 2018, with double digit growth for residential, commercial, and industrial land in Colombo. The LPI tracks per-perch bare land data from the Government Valuation Department across all divisional secretariats (an administrative sub-unit) in Colombo, Central Bank Statistics Department Director Rohana Wijesekera says.

He points out that an index of an aggregator like LankaPropertyWeb’s could be misleading if multiple low-priced units are advertised within a short period. He explains data from the Land Registry would be the most accurate track of real estate price trends.

The Land Registration Department is currently transitioning to a digital system. Its revamping is motivated also by government initiatives to climb higher on the World Bank’s Doing Business rankings, by facilitating faster property registration through digitalization.

It is arduous to track thousands of daily transaction data processed manually, Wijesekera adimits. LPI’s data may differ from actual transaction data if transaction values are underreported to minimise taxes. But in a fragmented market, it was difficult to get a representative sample from disclosures of property developers, he says.

3The Valuation Department data is a long-running series, and is the most trustworthy, official source available to be published, he said.

The Central Bank aims to provide more complete data on land, type of property (including different types and sizes), and geographies, once the Land Registry is fully digitalized, to match benchmark datasets available across the globe. Chandaka de Soysa, founder and director of Acquest, Sri Lanka’s leading real estate services provider, is optimistic about the medium-to-long-term outlook for the condominium market, given its strong fundamentals. However, in the short term, he anticipates price corrections on condominium developments which are not optimally positioned to cater to local buyer preferences. Currently, value is hard to find, but products which are aligned with target market preferences offer compelling medium to long investment opportunities.

“We won’t see a month-on-month increase, but over a two to three-year period, there would be an appreciation,” he said of the better-positioned condominiums.

In addition to Acquest, Echelon spoke to Hatton National Bank (HNB), commercial office space developer RIL Properties and four residential property developers (one of whom refused to go on the record) and the Central Bank over the past month. Attempts to reach the Condominium Developers Association of Sri Lanka and JLL were unsuccessful.

HNB, a commercial bank, and Sri Lanka’s largest conglomerate John Keells Holdings (JKH) which has interests in real estate, said they have seen land and apartment prices stabilizing, while the others said there would be a dip in prices of land and some apartments. None forecast that land and condo prices will appreciate in the short term.

Since the real estate industry in Sri Lanka is fragmented, De Soysa warned it was hard to generalize even within segments such as mid-range or luxury, and each project should be looked at by itself.

Property developers, many with only 40-60% presales, are trying hard to move inventory so they wouldn’t have to drop prices.

Adding to demand woes is the government’s planned 15% value-added tax on apartment sales from April 1 2019, which will put condos further beyond the reach of the average Sri Lankan.

Many dollar price-marked developments saw their rupee pricing jump in 2018, as the political uncertainty and poor economic management led to currency depreciation. The rupee depreciated about 20% against the dollar in 2018.

Over the course of the first two months of 2019, at least eight publicity-generating events related to the real estate market took place to generate sales interest ahead of the VAT imposition. The real estate slowdown is not just affecting Sri Lanka. Around the world’s major cities, real estate prices are cooling, albeit for different reasons.

4Prices have slumped in London, Hong Kong, Sydney, Auckland, New York, and Vancouver, while price growth is starting to decline in Berlin and San Francisco. Key among the reasons is the Chinese government’s anti-corruption restrictions on its citizens laundering money through real estate in other countries. Sanken Group Managing Director Ranjith Gunatilleke opined this will also impact foreign real estate demand in Colombo, just as the Chinese-built Port City inches towards its real estate investment phase. As an asset class, real estate does not attract the wide appeal of that do stocks or cryptocurrencies, because markets are relatively illiquid and the capital outlay is high. However, rarely have real estate prices declined a safe option for an investor, whether in medieval Japan, the fictional worlds of Jane Austen, Emily Bronte, and Honore de Balzac, or in contemporary Sri Lanka.

The long-term formula is simple. The population is growing; land, excluding reclamation, is not. Limited supply, and growing demand.

Land is required not just for housing, but to also cultivate crops, to a lesser extent for direct human consumption and to a larger extent, for the animals bred for food. As countries become more urbanized, the equation in cities favours supply even further.

Booms, busts, or bubbles apply to real estate similar to other asset classes. The last big real estate bubble popped in 2008 in the US sub-prime mortgages which dragged the global economy into recession.

In Sri Lanka, memories fade fast. Just before the civil war ended, Sri Lanka’s property bubble popped, and took along with it billions in customer deposits which had been used to fund grand property development projects by companies associated with Ceylinco group.

De Soysa, who founded Acquest in 2013, had back then just started in the industry as a real estate broker. “Around 2006-2007, land prices were inflated. A prime perch of Colombo land was selling for around Rs7 million. It then fell to Rs4 million,” he says.

Following the end of that bust and until late 2018, the real estate industry saw unprecedented growth, with a perch in Colombo 03, a prime area, being quoted as high as Rs20 million, he says. The post-war optimism of economic growth certainly helped, especially driven by the country’s tourism potential.


After witnessing a rapid increase in tourist arrivals after the end of the conflict, the government signed a deal with Hong Kong-based Shangri-La for a mixed-development project, which included a hotel, apartments, office space, and a shopping mall in 2010, selling prime Galle Face promenade-fronting land for around Rs8 million per perch.

This confidence-lifting deal soon after a property bust led other foreign-funded projects to also lease or buy land. The resulting boom immediately following a bust was unprecedented, driven by post-conflict optimism and low real estate prices.

An average unit at a luxury post-war boom condo project such as Altair and Shangri-La were priced over Rs100 million. ITC’s Sapphire Residences pushes the envelope to the maximum, charging Rs250 million ($1.4 million) for a 2-bedroom apartment, with its most costly penthouse listed at a whopping Rs1.8 billion ($10 million).

The so called mid-market condo segment ranges from Rs30 million to Rs80 million, with prices varying due to size, location, and amenities. The monthly gross national income of a person in 2017 was Rs50,250. Given that Sri Lanka has only 35% of women labour force participation, most families are single-earner households. For the typical Sri Lankan family, even a mid-market condo is out of reach.

The 2019 budget proposal to give a 25-year-long Rs10 million loan with subsidized 6% interest can’t afford even a low-cost city apartment unless recipients liquidate another asset. The monthly installment of Rs. 65,000 for a Rs 10 million loan falls more within the budget of a young married couple, who are both ambitious private-sector executives.

5High interest rates, along with the price tags, explains why mortgage to gross domestic product (GDP) in Sri Lanka is under 10%, while in the US it’s over 50%, around 35% in Malaysia, and 20% in China.

With just 14,000 apartments set to enter the supply, against an annual residential demand of 100,000 units due to urbanization, according to Acquest data and the low mortgage to GDP rates, vertical living in Sri Lanka is still at a nascent stage.

Most Sri Lankans still prefer to live in traditional landed houses, with only 10% of housing in Colombo in high-rise buildings, according to Mawilmada.

Further stifling demand is fear of another bubble which started around 2017, when some analysts speculated there would not be buyers for the apartment supply entering the market between 2014 and 2017. In early 2017, the Central Bank told the International Monetary Fund it would be ready to restrict credit to the sector if there’s a systematic risk to the economy from real estate.

Property developers played down the bubble talk, noting that only five percent of sales were mortgage-funded in the luxury condo segment. The Central Bank later played down bubble fears.

However, the Central Bank’s moral suasion soured sentiment. The financial entity’s move was well timed and stopped prices heating further, which could have led to a crisis. Banks have always been wary of lending to condo developers. Dud loans have risen to 3.4% in 2018 from 2.5% in 2017.

“We evaluate each case on merit. Obviously, we will continue working with the tried and tested top industry players, but otherwise we will not grow our real estate exposure much,” HNB Managing Director Johnathan Alles says.

6Investors may shift to safer and liquid choices like fixed income assets, given interest rates are high and inflation is low.

“Maybe money is going into fixed deposits, maybe it’s going into treasury bills or bonds. Some of it is stuck in real estate, but there’s no new money going into the real estate market because people are kind of scared about the future of real estate,” HNB Chief Strategy Officer Rajive Dissanayake says.

However, condo rental yields are still attractive. Rental yields that apartments offer range from 5.5% to 7.5%, in comparison rental yields for landed residential property which ranges from 1% to 1.5%, relative affordability, convenience and cost-effective management make apartments a more attractive investment option for a majority of real estate investors, according to Acquest.

Therefore, investors may hold on to condos and enjoy rental income until the asset class starts to appreciate at a higher level once more to offload them.

Political instability in Sri Lanka’s may continue until 2020, which is an election year.

Sanken is expecting optimism and growth will return to real estate by end-2019.

However, Fernando is expecting a medium-term  downturn that would only reverse in the long-term once the government builds better infrastructure, the rate of economic growth improves, and the port city becomes a construction site, giving knock-off benefits to mainland real estate.

Acquest is projecting investors to regain their appetite in 2020, while a larger residential mindset change may take slightly longer.

“It is clear to us that there will be a significant shift towards condominium living over the next 3 to 5 years, resulting from changing lifestyle preferences and the prohibitive cost of land.”

With the gap between midrange housing demand and supply, and the lack of cheap land in Colombo, apartments are the obvious choice of future housing, de Soysa says.

7Parikh has seen apartment sales for Iconic Galaxy rebound almost immediately after the political crisis ended.

“There were sales since January. In fact, March is going to be one of our best months ever,” he says. Apartments are easier to maintain, and many are being built as a part of mixed-development projects, along with retail, entertainment, and office spaces, offering all amenities within the development, and in the process, becoming cities within a city.

Developers expect more condo demand to come from suburban residents who will soon tire of their commute. Around 44% of the daily commuters to the city take up around 87% of the road space on private vehicles due to a lack of quality public transport, and average speeds into Colombo are falling annually, according to JKH.

“If you’re coming from beyond Rajagiriya to Colombo, you will spend an hour and a half on the commute, that adds to 5 or 6 years of your life spent navigating rush hour traffic,” Mawilmada says.

Developers are offering dizzyingly attractive payment structures to captivate buyers. Some, like Iconic, take a 20-30% downpayment and expect full payment at the end of construction.

Accounting for time value of money, this is effectively a discount without a reduction in list pricing, which many developers are averse to.

Parikh offers to cut 30% off prices of his future projects if the government cuts protectionist para-tariffs on construction goods. Raw materials such as ceramics, sanitaryware, steel, aluminium, and cement are taxed heavily, with some as much as 100% helping only a handful of oligarchs make super-profits at the cost of 21 million other Sri Lankans.

“Who’s paying that price? The homeowner. It’s completely crazy,” Parikh says.

The 2018 budget promised to do away with such taxes within 3 years. The 2019 budget extends this by another 3-5 years, giving the protectionist agenda more time to victimize the country’s citizens.

De Soysa explains that policies that promote investor confidence would naturally lead to demand for real estate, as investments create economic growth, which would lead to higher salaries for locals, making housing and mortgages more affordable.


He lauded the 2019 budget proposal on granting residential visas for foreign nationals who invest over $400,000 in condominiums from 2019.

However, he sees the need for a lot more to be done in terms of implementing consistent policies to strengthen the fundamentals to facilitate sustainable growth of the real estate industry. One fact is clear, more than anything else. Parikh and Mawilmada both agree that developers need to start addressing the needs of the average Sri Lankan for the industry to grow.

The government too has had its interest kindled, with Finance Minister Mangala Samaraweera showing his amenability to release state land in Colombo to developers who present attractive proposals.