Comments on the Speculated Looming Real Estate ‘Bubble’

May 30, 2017

 

In the market, and amongst the leading banking institutions in Sri Lanka, it is being speculated that a Real Estate Bubble is looming. These are speculations focused on the condominium market in Colombo, predominantly based on slowing apartment sales figures in the Luxury/ Ultra-Luxury segment (US$250-US$400/sqft). Part of the concern is that a building and buying boom of this scale in Colombo, especially for condominiums, has never been seen before, and it has taken many in the market by surprise, especially given the starting point of being fresh out of civil conflict in May 2009. Since that point, many speculative investors and developers have gambled correctly that with Colombo’s growth through peacetime and the limited stock of what are considered ‘luxury’ real estate products in the country’s capital city, that this was a gap needing filling. These investors and developers when done correctly made some of their most profitable decisions in this high-growth period, where a major component to this was the low land price, which was a fraction of what it is now.

 

Since then, as more stock has entered the market, the competition for apartment products increased, and the cash used to buy up the units were reducing, the disposal rates of new stock as begun to slow down. Apartment prices have also been increasing to meet the rise in land prices, whilst these units have predominantly been focused on selling to the HNWIs of Sri Lanka and the Overseas Sri Lankans who represent 15% of the country’s population. The investment scope of these units have not been helped by a slower growth in employment opportunities in Colombo which is needed to support a healthy rental yield growth, and so at present, the condominium market may look to be moving towards an unbalanced situation.  In addition to this, the Central Bank of Sri Lanka recently accepted that loans taken out for ‘alternative special projects’ may have actually be used for Real Estate projects, therefore misrepresenting the amount of debt in the system that is at risk of defaulting from poor sales performance figures. This altogether, with the ongoing development of condominiums, is the worry amongst many, of a looming real estate ‘bubble’, and from the look of it, they have reason to worry.

 

However, one thing that is forgotten in this analysis – is that Sri Lanka was at war between 1983-2009, and was essentially under foreign occupation for the 500 years preceding this bar the short period of freedom after declaring Independence in 1948. We are only 8 years after the end of armed conflict, and the level of development and urbanization that the country has started with is one of the lowest in the region however with one of the highest literacy rates and stock of high-skilled graduates. What I’m suggesting, is that where we are in Sri Lanka’s history in terms of the scale of growth required to become what it has the potential to be, is only at the earliest crumbs of a beginning, that worrying over the sale of a few apartments bears into insignificance the scope of growth and development required over the next two-three decades. The true potential for real estate development in Sri Lanka from our perspective is in a longer-term strategy that is integrated into the key growth sectors and areas required to sustain economic growth and not only take from it. Any new development must be able to address critical infrastructural challenges such as waste management, storm-water management, and improved construction efficiency in number of laborers and safety, whilst providing the required stock of housing, retail, commercial, logistics, and hospitality spaces required to meet the demands of the growing country. It is true – if a developer wanted to exclusively build luxury apartments and only rely on this, they will run into significant problems, because Sri Lanka still has a way to go to support a stable luxury apartment market. However, if a developer wanted to help provide sufficient quality housing for the growing middle-class in and around Colombo, or improve tourism-related infrastructure in the more remote areas of the country, or assist in master-planning new townships that will form part of the future industrial cities in Sri Lanka, then those are the investments that will benefit from the longer and steeper growth-curve to ultimately pay the greatest rewards.

 

With our ANYA scheme, this certainly puts us in a challenging position – we have to be careful with how many luxury apartments we eventually put on the market, and how many five-star rooms we are looking to absorb, where being the “best product on the market” will only help us so much if that market is too small. A smart developer should be able to adapt with the times and see the longer-term progress of a country, only adding assistance and value to that growth. This is what we need to do to ensure our investors and partners also benefit from Sri Lanka’s Renaissance, where it will be a win-win-win situation for us, our partners, and the people to be part of Sri Lanka’s future story.

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