Colombo’s property market is experiencing a recovery at various levels despite the ongoing COVID-19 impact on the overall economy, a report by JLL shows. JLL breaks down Colombo’s property market into four segments: residential, office, retail, and hotels—the report also takes an extended view at the South-West Coast tourism market. The residential market is experiencing encouraging demand and therefore the fastest to recover, followed by the office space segment which will have a gradual recovery towards the end of 2020. However, retail’s recovery will be slow, and the hotels segment will continue to bear the brunt of the COVID-19 pandemic in the short term. Despite the World Bank projecting that Sri Lanka’s GDP will contract by 6.1% in 2020 as the COVID-19 outbreak and lockdown measures weigh heavily on economic activity, the country’s services sector will show positive growth in 2020 which bodes well for the property market. JLL explores what this means for Colombo’s property market in its latest report ‘Colombo Property Market Monitor 3Q2020’, authored by Shazana Zarook, a Research Executive at JLL. New York listed Jones Lang LaSalle Incorporated, better known by its brand name JLL, is a leading professional services firm that specializes in real estate and investment management. JLL is a Fortune 500 company with annual revenue of $18 billion in 2019, operations in over 80 countries and a global workforce of nearly 93,000 as of June 30, 2020.

RESIDENTIAL

JLL’s outlook for the residential real estate market is positive after experiencing a visible recovery in the third quarter. The segment will benefit from the government’s targeted relief measures to uplift housing, and the slow return of investor confidence will lead to an increase in sales towards the end of 2020. There was a noticeable recovery in demand for residential apartments in the third quarter with property developers reporting an increase in buyer inquiries in the premium segment. Demand for housing was driven by locals in contrast to previous years where the market was largely dominated by Sri Lankans living overseas.

There was a noticeable recovery in demand for residential apartments in the third quarter with property developers reporting an increase in buyer inquiries in the premium segment. Demand for housing was driven by locals in contrast to previous years

The downward revision of housing loan interest rates because of the Central Bank’s monetary stimulus stance was the primary reason for piquing domestic interest. There were no additions to the stock of apartments in the city due to the coronavirus and construction slowdown. Also, developers delayed project constructions due to liquidity constraints. The government introduced a relief loan scheme to aid developers and construction companies, and this resulted in development activity picking up during the quarter after coming to a standstill in 2Q2020. Property developers offered steep discounts of 5-10% to overcome muted demand as rent yields fell 35% between January to August 2020. The average monthly rent for a three-bedroom apartment fell to $900 in August, compared to $1,400 at the beginning of the year. However, average capital value remained range bound during the period, in both luxury and mid-level segments, JLL reported.

OFFICE

JLL says the office space market will experience a gradual resurgence in demand towards the end of 2020 with initial green shoots seen in economic activity and improving sentiment. Healthcare, logistics, manufacturing and tech firms will drive this demand and reduce overall vacancy rates across the city, but rental rates will remain stable. However, the completion of several mixed-development high-rise projects such as Cinnamon Life, Ekroma and JFI are likely to insert downside pressure on rents. Demand for office space was muted in the third quarter of 2020 despite a gradual recovery from 52-day lockdown during the first wave of the pandemic earlier in the year. JLL reports that sentiment was cautiously optimistic with many companies deferring decisions to take up additional office space and reassessing their real estate portfolios to optimize both space and minimise costs.

No new A-grade properties were added to the market during the quarter with only Cinnamon Life expected to open by the end of the year. Other developments due for a 2021 completion date have been delayed by construction slowdowns. Overall vacancy increased to 18.7% at the end of Q3 2020 from 15% at the end of Q2 2020 with many small to medium sized companies downsizing and a slackening overall leasing demand following the lockdown period, the JLL report said. Despite a rise in vacancy, rents of prime grade-A buildings have been stable across the city. Prime office buildings completed in 2019 continued to command fixed rents that have not changed since. However, most developers and landlords offered various incentives and benefits to tide over the short-term liquidity crisis caused by the demand crunch. RETAIL The retail space segment will see a slow recovery and inventory will remain stable. JLL notes that many retailers will likely shelf their expansion plans due to cashflow challenges, but this is a short-term problem. Retail sales and leasing demand is expected to gradually accelerate as the economy continues to recover from the third quarter onwards. The city’s inventory of retail space is unlikely to expand over the next year due to delays in construction, according to JLL. Only Astoria, a mixed development project, is expected to complete 23,000 square feet of A-grade retail space in the short term.

The third quarter saw retailers tighten operating costs to overcome mute sales volumes with shoppers keeping away from malls and stores. An import ban on clothing forced some retailers to move out of malls and into cheaper spaces. “While some small-scale businesses continued to move out, a few international and local brands in cosmetic and jewellery continued to move into A-grade malls during 3Q20,” JLL reports. No new malls opened since the fourth quarter of 2019, and existing ones offered discounts to retain their tenants. This had a significant impact on rent where the net value declined by at least 15% in 2Q20 from 1Q20 and continued to 3Q20, the report noted. While most retailers were able to negotiate lower rentals, some landlords have not been able to charge rents from tenants during the period.

HOTELS

‘The outlook for the real estate market for hotels will continue to be weak for as long as global travel restrictions remain. However, Colombo continues to add inventory in anticipation of a post-COVID boom. This influx in inventory with several projects in the pipeline will also pressure pricing. “There are 11 hotels comprising 3,084 rooms expected to open in Colombo within the next 2-3 years. Luxury hotels form the largest segment of the future supply with four hotels comprising of more than

1,700 keys,” JLL suggests. Competition among high-end properties will likely intensify and new supply in these segments are expected to generate premium rates as large international operators such as Marriott, IHG and Amari enter the market. The global pandemic has weighed down the hospitality industry which was gradually recovering from the aftermath of the Easter attacks in April 2019. Colombo witnessed a 3.7% increase in occupancy in January 2020 as compared to January 2019. The onset of the pandemic and imposition of travel restrictions resulted in a 21% decline in March 2020.

Occupancy levels fell 50% year-on-year during the first nine months of 2020 while revenue per available room fell 57%, according to STR. Colombo hotel occupancy levels have picked up since the lockdown lifted in June, with September registering an 11.6% occupancy level. While international business travel continues to be negligible, this increase is led by a resurgence of domestic tourists, dining, and events with limits set on the number of attendees by health authorities. There were no additions to Colombo’s inventory of hotel rooms during the year although six new properties were due for completion. “Most of the new supply is expected to open in 2021, of which a notable upcoming hotel is the 800 key luxury hotels in the mixed-use development Cinnamon Life,” JLL said. A look at the hotel inventory of the South-West Coast showed only one notable hotel opening in 2020, which was the 172-room Sheraton Hotel Kosgoda Turtle Beach Resort. This region performed better than Colombo with occupancy levels falling 39% from January to September resulting in a revenue per available room falling by 41%, according to STR. The South-West Coast has seen a slight performance uptick since July, reaching an occupancy level of 26.3% in September, driven by domestic tourism after Sri Lanka emerged from a nation-wide lockdown June 28th.

JLL Sri Lanka is a leading professional services firm specializing in real estate service in the country. Based in Colombo, the firm provides end-to-end real estate services to investors, developers, local corporates, and multinational companies. Its services include research, analytics, project and development services, property and asset management, integrated facilities management, real estate capital markets and transactions across asset classes covering commercial office spaces, hotels, land assets, industrial, retail, and residential units.