If demand for Colombo’s prime real estate is a guide, then Sri Lanka is in the midst of a boom – the likes of which hasn’t been seen in over a decade. In the last five years super-prime Colombo real estate has surged, doubling prices in some areas. Sellers demand up to Rs15 million a perch (an area of 270 square feet) – twice the amount demanded five years ago – in the city’s most desired residential area identified by its old, Colombo 7, postcode.
Demand is robust. Record low mortgage interest rates and tight supply have contributed to this. Property prices are also nudged upwards by other factors impacting demand; optimism about the future following the long conflict’s end, confidence about real estate’s suitability as an inflation hedge and store of wealth and the lack of other investment options.
In select areas of the city, property prices are racing ahead. Dinner party conversations are often interspersed with tales of prime Colombo real estate changing hands at twice or three times the price paid for them five or eight years ago. A three bedroom apartment at Colombo’s Emperor which sold off-plan at Rs22 million ten years ago is now worth Rs85 million.
Some dinner partygoers fear the optimism about the economic turnaround may have become over exuberant. In just the last eight months three bedroom units at the mid price-range JKH built OnThree20 complex are up by Rs8 million to Rs45 million. They are wondering if the current property boom is grounded in rising demand rather than driven by low interest rates and heady optimism. It’s estimated that premium and some mid-market apartment prices in Colombo and Rajagiriya, a suburb, have been rising at an annual 12% to 15% over the last eight years and rental yields have topped 5% annually. The last time Sri Lanka’s property prices rose so far so fast they reached bubble territory. When the bubble popped in 2009, land prices collapsed and bankrupted many developers who were forced to halt projects.
[pullquote]The prime real estate boom is due to hefty demand growth in the last five years as a newly well-off class joined the purchasing power of old money[/pullquote]
Chandaka De Soysa is Colombo’s top estate agent for the rich. He is founder and chief executive of estate agency Acquest, which deals in half of Colombo’s prime apartment sales. Acquest – which he founded three years ago – also handles a chunk of prime Colombo landed home and office building sales and leases. De Soysa is focused on the market’s premium and mid-market segments. He is also the go to agent for super prime apartments – a segment often defined as the largest units, in the premium apartment complexes Empire, Iceland, Monarch and Emperor. Located in Colombo’s central business district, a square foot at one of these four complexes can cost upwards of Rs35, 000 and up to Rs60, 000. He estimates between four to eight premium apartments change hands every month. Super prime apartments rarely trade.
A two million dollar (Rs290 million at the current exchange rate) Presidential Suite (a penthouse) at the Emperor – which fronts Galle Road in Colombo a hundred metres from the Prime Minister’s official residence – is the priciest apartment sold by De Soysa. Now the owner of a similar unit at the Emperor has engaged De Soysa and Acquest to market a unit with an asking price of $2.2 million. Patience is a virtue for success in super prime real estate deals. “There isn’t a huge amount of demand for these units” Chandaka concedes. He estimates people who purchased these units have done so with the intention of occupying them sometime in the future. In the meantime they are renting these. Prime real estate boom is due to a hefty demand growth in the last five years as a newly well-off class joined the purchasing power of old money. Real estate – and apartments in particular – are a popular asset class for investments for those who may not be able to fully explain the source of their recent wealth. Their demand has contributed to the boom.
There are three types of buyers of Colombo’s 650 prime apartments and the ones under construction. Buying patterns of mid-range apartments are similar to those of prime ones. Midrange – defined as homes with a square foot price of Rs22,000 to Rs35,000 – are much larger and include developments in Colombo’s central business district like Onthree20 and ones outside the city like the residential high-rises in Rajagiriya. The largest section of buyers are speculators attracted by the exceptional investment returns apartments have generated in the past; touching 20% a year including lease rentals. Real estate is a far less risky asset class than equity, where the risk of losing the capital is higher. De Soysa estimates rich Sri Lankans are buying 70 to 75% of premium units, a chunk of them as investments. “Most of these people live in their own houses. They buy these off-plan and sell during construction or after construction.” Secondary market sales are often priced in Sri Lankan Rupees. The second types of buyers are ones from overseas, foreign nationals and Sri Lankans living or working overseas, who account for around 25% of premium apartments sold. Most premium projects are priced in foreign currency and those with foreign currency now find these to be more attractive due to the weak Sri Lankan Rupee.
The third type falls in to one of the first two categories; they are the 15% of owners who live in the apartment. “That’s not an ideal situation for a property market,” admits De Soysa about the low owner occupancy of apartments in the premium segment. “You need end user demand at some stage, that’s what justifies building these projects.” Low owner occupancy is also a feature in the city centre’s mid-range apartments but the ratio improves outside the central business district and in out of town apartment complexes.
A small market is easier to corner, but that is about to change. Supply constraints in the central business district (post codes Colombo 1 to 3) are disappearing. The government has released super prime Galle Face promenade fronting and other central business district prime land to developers. Low income families occupying prime land have been offered developer financed high-rise apartments in the same locale with government intervention freeing up the rest of the land for premium private developments including apartments, shopping malls and hotels. Corporations like John Keells Holdings are also investing to develop prime real estate they own and an ambitious private sector funded project to reclaim a portion of the sea alongside the downtown Colombo coastline will be a significant addition to the prime real estate stock. Real estate investors are now wondering about the impact on returns of the new prime and super prime apartments that will become available over the next three years. De Soysa believes the headiest years are probably over, “rental yields are 5% to 7 % at the moment and you can only guess about how much they will decline by. They could fall by 1% or 1.5%.”
It’s possible the hierarchy factors driving prime property prices will alter in the future. The sites closest to megadevelopments
will alter the demand for building plots. Some of this change is discernible in the demand for apartments in the 1500 prime and super prime apartments now being constructed or are about to be launched in the market. They include Shangri La’s 406 units, right next to it on the Galle Face promenade a development of 136 units by Indian firm ITC, JKH backed Water Front project with 231 units in a tower now being marketed and possibly another 196 units in a second tower, Abans backed Colombo City Center with 178 units and the iconic Altair building with 410 apartments.
Some of the premium apartment complexes like hotel chain Shangri La’s The Residence has sold 40% of available space and Waterfront promoted by JKH has sold almost 60% of available space. In the premium segment the quick returns and fast capital appreciation seen in the past with certain projects may not be available so easily in the future. People have to think longer term contends De Soysa about an altered mindset he is encouraging buyers have.
How fast premium apartment prices will rise, is a difficult call to make considering the myriad opportunities now facing Colombo. Businesses may soon start scrambling for a foothold in what could become South Asia’s business centre. Firms locating or expanding here will include multinational firms whose employees will need somewhere to live. Chaotic traffic and lack of cosmopolitan lifestyle options will rule out living in towns outside Colombo.
The boom in demand for local construction material and talent is pushing up costs. Apartment block development costs are impacted by the grand infrastructure road, port and transport projects which are all looking to hire the same crane operators, truck drivers and engineers.
During a boom, building plot price increases in the swishiest areas run ahead of rising construction costs. This is because downtown and building plots around hotspots are limited.
Chandaka De Soysa – who worked as an independent estate agent for over five years before founding Acquest – despairs at developers’ preconceived views about real estate development they plan to launch here. Developers always believe the best margins are available in the high end, which isn’t necessarily true. “It’s the location that should drive the decision about positioning. If you go from mid-range to premium what’s the return differential you are getting?” asks De Soysa of developers who seek his views before launching projects.
“You have to take the ego out of property development,“ he muses. Developers, he says, don’t put enough emphasis on understanding the dynamics of the Colombo real estate market; unit sizes, unit mixes and how to approach the market.
[pullquote]Apartment block development costs are impacted by the grand infrastructure road, port and transport projects which are all looking to hire the same crane operators, truck drivers and engineers[/pullquote]
Businessmen and dealmakers with unexplained wealth are purchasing swankier properties in Colombo to profit from the boom. An important shift in the market may come when these speculative bets involve leverage. Because the cost of entry is enormous, middle class Sri Lankans have had no opportunity to participate in the riches.
In any economy with some optimism about the future, real estate prices will rise. This is because every family will be scrimping and saving to afford a home with a little bit more space and a little closer to the city where they work. Construction costs increases pushed up by inflation will also drive prices up.
The weak Rupee makes secondary market purchases cheaper for overseas buyers. Acquest represents the largest institutional investor in Sri Lankan real estate, a US-based real estate fund that owns 60 apartments in Colombo and the suburbs with a portfolio value topping $30 million. The portfolio includes 36 premium apartments in Colombo and 25 mid-range ones. Acquest rents these 60 units to maximize returns and advises the US client about opportunities in the market.
Weak public finances and high budget deficits – which have been a feature of the Sri Lankan economy may continue for some more years, making bets attractive for foreign capital. In the 2016 budget the government also lifted rules that made buying and leasing property costly for foreigners.
De Soysa does not anticipate many hiccups in the next few years. He is most optimistic about Sri Lankans working and living overseas buying real estate here to have a foothold here as the country rapidly rises in the economic league tables.