sri lanka real estate market brief jan 2012 (softcopy)

7/31/2019 Sri Lanka Real Estate Market Brief Jan 2012 (Softcopy)

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Sri LankaReal Estate

Market

Brief

Sri LankaReal Estate

Market

BriefVolume 1: January 2012

In association with

Research

Intelligence

Unit


2/10

Contents

Inner city clues 01

INSIGHT: The modern suburb 03

Sky high: Condominium market overview 04

Interview: Looming opportunity in construction 06

Residential lands in the suburbs 07

The market for real estate assets in Sri Lanka has shown a significant growth phenom-

enon since 2009 with a marked increase in price levels of real estate assets including

bare lands, residential housing, commercial premises and condominium style apart-

ments. Increased foreign investment interest in prime blocks of commercial lands in

the city of Colombo, the acquisition and resale of leisure properties by private inves-

tors and a general increase in confidence levels of household investors is likely to have

fueled the development of Sri Lankas property market during the past 24 months.

The changing landscape of Sri Lankas real estate market is likely to be further elabo-

rated by shifting lifestyles of real estate buyers including broader acceptance for

apartment style living, further cities becoming accessible and equipped with neces-

sary infrastructure and a growing leisure sector across a number of districts in Sri

Lanka. Further transformation is also likely to take place in the city of Colombo which

moves to becoming a picturesque and yet commercial city which could emerge as a

trade hub for South Asia.

A number of emerging opportunities could result from the development of Sri Lankas

real estate market for both the institution and the individual. Recent growth trends

have shown increasing activity in the construction industry, housing, property salesand apartment projects. Individuals are also likely to have benefited from increasing

property prices and appear to continue to invest in tangible real estate assets.

The Real Estate Market Brief will be an informative and interesting thought leadership

to those who wish to explore the potential of this sector.

Reyaz Mihular

Partner Head of Advisory,

KPMG in Sri Lanka.

KPMG Ford, Rhodes, Thornton & Co., in 2010 made the firms first mark on

the real estate market with the launch of a real estate advisory practice

encompassing a dedicated team of real estate professionals and working

with the aim of bridging information asymmetry between buyers and sellers

of real estate assets. Since inception, the team has worked collectively with

investors, financiers, land owners and intermediaries helping them to

convert strengths and synergies into successful and viable real estate

projects.

Even though the property market was one of the most mature industries in

Sri Lanka, one the main challenges we confronted was in relation to limitedpublished information available in relation to property prices, transactions

and the performance of the sector as well as its various sub sectors. The

Real Estate Market Brief we believe will address this challenge, making

useful information available to interested parties and keeping you more

aware and well informed of developments in the real estate sector.

Shiluka Goonewardene

Principal Financial and Real Estate Advisory,

KPMG in Sri Lanka.

Foreword

Overview of Real Estate Market Brief


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Unlike most emerging economies,

the urban population in Sri Lanka has

not increased in accordance with the

increase in population over the past

five decades and currently, only 15

percent of the population live incities. Despite issues regarding the

classification of urban and rural

areas, it is estimated that Sri Lanka

has a higher percentage of its

population living in rural areas than

even Afghanistan.

The permanent population of

Colombo City is estimated at around

900,000 whilst the floating popula-

tion is around 500,000. At the time

of gaining independence the city

was a model Capital in the entire

region and it is still widely remarked

that even Singapore, aspired to be

like Colombo. However, by the turn

of the millennium, almost half (49

percent) of the dwellings in the

capital were made up of low income

settlements.

Now at long last the landscape is in

a state of rapid transformation.

With the current drive to modernize

the city, stand-pipes, illegal dwellingsand make-shift latrines in the inner

city areas are becoming a thing of

the past as the city of Colombo

reclaims its past glory.

Colombo characterPrice data on land sale registrations

and advertised rates reflect several

driving factors. Firstly, a defining

characteristic of the city (in areas

such as Colombo 01, 02 and 03) isthe scarcity of private land sale

registrations. This reflects the

widespread level of state presence

in this area as well as the high

number of illegal dwellings. Sec-

ondly, with the few private property

transactions that were recorded at

the land registry, the per-perch

prices shows tremendous variation

from as low as Rs.1 million up to

Rs.14 million ( See chart 1.1).

This is due not only to the socio-

economic factors but also as a

consequence of various legal and

regulatory issues that impact the

market. For example, building

permits are generally only granted to

lands of over six perches and as a

result smaller plots are much

cheaper. Perceptions also impact

prices. Lands closer to Galle Road

are more expensive than lands

closer to the beach due to the

stronger security and higher com-mercial value.

However, the overwhelming factor

that impacts the land market is the

heavy presence of the state and the

Sri Lanka Real Estate Market Brief [ 1 ]

dynamics within various state

bodies, especially in Colombo 01 and

02. For example, according to RIU

sources, the D.R Wijeywardene

Mawatha and Banking Square areas

of Colombo 01 used to be owned byvarious state institutions like the

CMC and the Ports Authority.

However, now many such lands are

being vested under one state

authority the Urban Development

Authority (UDA). Many lands in this

area have been vested already and

others are currently in the process of

being transferred to the UDA.

Typically the UDAs policy is to give

out these lands to investors, both

foreign and local, on 66 or 99 year

leases which is in accordance with

the governments policy, as stipu-

lated in the recent budget. The UDA

has recently invited investors, both

foreign and local, to engage in

discussions for a number of such

developments.

Ear-marked areasThis part of Colombo 01, which

houses state and private buildings,

including warehouses that date backto the islands former Colonial era

when the lake was used to transport

goods from the Colombo port, is

believed to have been ear-marked as

a night-life tourist spot.

Inner City CluesInner city Colombo is an area where urban dwellers from diverse backgrounds have long lived shoulder-to-shoulder.

However, the citys landscape is currently in a state of transition with the government pursuing a policy of transformation

that will beautify the Capitals landscape.

Image courtesy David Altabev


4/10] Sri Lanka Real Estate Market Brief

Likewise, the Gangarama Lakefront

area has been ear-marked for linear

park and promenade developments

and already several international

deals are known to be in the

pipeline. According to RIU one such

project rumoured to commence

shortly is the US$400 million shop-ping and residential complex in the

Lakefront area. RIU sources indicate

that the UDA received US$23 million

for a 99 year lease of the two acres

Chart 1.1: Scarcity of Land Registrations and Price variations(Rs) within Colombo 01

of land on Sir James Peiris Mawatha.

Adjoining this development, another

linear park development for recre-

ation and night life is expected to

start early next year.

Meanwhile, the Galle Face area of

Colombo 02 has been ear-marked for

further tourism development and the

recent deal with the international

Shangri-La Group which bought a six

acre block of state land in Colombo's

'Galle Face' beach front for US$125

million to build a 500 room hotel,

shopping and apartment complex

according to LBO, represents a

further move in this direction.

ExodusIn order to make space for these

new developments, iIlegal and

encroached dwellers in these areas

are likely to be urged to move out of

the inner-city to areas which lie on

the outskirts of the city. Those with

legal deeds might also have the

option to move during this process

of inner-city transformation. As a

result of these policies, the future

land market in the inner city area is

likely to be drastically transformed

towards an exclusively high-end

area, and we can expect to witness

a decline in the current disparities asdiscussed above.

Consequently, the private land

values in Colombo 01 and Colombo

02 can be expected to experience

significant appreciation. Meanwhile,

areas that will be accommodating

the transferred dwellers, are likely to

face a price adjustment in the

medium term.

In the current climate, investorspredominantly from China and India

are set to give a complete make-

over to the Colombo 01 and 02

areas over the next two years.

There are many attractions for

foreign investors such as tax

holidays and capital repatriation

which coupled with a boom in the

tourism sector, can make Colombo

city one of the best investment

propositions in the region and

perhaps the world. Local investors

are also known to be showing

strong interest in acquiring these

lands from the UDA in order to

develop high-end recreational

attractions. Given the air of expec-

tation, those that do hold private

property in the inner city areas are

likely to witness significant apprecia-

tion in prices.

Land registration prices, in

Colombo 1 areas, like Main

Street, can fetch values of

around Rs.9-10 million

per-perch whilst Sea Street

sells at around Rs.8 million.

Five million rupees may

currently buy you one perch

in Colombo 3, four million

for Colombo 4 and

Colombo 6. Parts ofColombo 5 like

Thimbirigasyaya market at

around Rs.3.5 per perch

whilst properties in

Colombo 8, Borella,

average at around Rs.4.4

million. The Research

Intelligence Unit forecasts

double digit growth in the

post 2013 period.

Main Street: Rs. 9-10 Millionper perch

Sea Street: Rs. 8 Millionper perch

Source: Research Intelligence Unit (RIU)

ource: Research Intelligence Unit (RIU)

14000000

12000000

10000000

8000000

6000000

4000000

2000000

0

2005 2006 2007 2008 2009 2010 2011 2012

Price per perch Registered Rates Year of Registration

Pric

e

perperch


5/10Sri Lanka Real Estate Market Brief [ 3 ]

INSIGHT: The modern suburb of Maharagama

Property registration prices (Rs per perch) in Maharagama (2009-2011)

Taking a closer look at the of Maha-

ragama Urban Council area which is

situated some 15 kms from the

commercial Capital, a gradual

In order to understand the market

better, we need to look at our data

by separating land registrations into

difference areas, or wards, within

Maharagama. This municipal area in

Colombo District is a population of

increase in the price levels over the

past three years is observed. How-

ever, the trend is not uniform and

there is no close distinction between

the prices of properties with houses

and offices and those that are just

bare lands. The chart below is based

on an independent sample of

property registrations and corre-

sponding prices in Maharagama.

0

500000

1000000

1500000

2000000

2500000

1-Jun-2008 18-Dec-2008 6-Jul-2009 22-Jan-2010 10-Aug-2010 26-Feb-2011 14-Sep-2011 1-Apr-2012

Lands

Houses

Source: Maharagama Urban Council/Collated by Research Intelligence Unit (RIU)

Source: Maharagama Urban Council/Collated by Research Intelligence Unit (RIU)

some 300,000 is characterised by

wards that have department stores,

super markets, clothing shops, food

and beverage outlets and other

modern facilities that cater to the

needs of the population as well as

wards that are under-developed and

semi-rural in orientation. This is

clearly reflected in the data where

the urban and residential ward areas

tend to fetch notably higher prices

than the mixed and fringe areas.

0

100000

200000

300000

400000

500000

600000

700000

800000

1 2 3 4 5 6 7 8 9 10 1 1 12 1 3 1 4 1 5 16 1 7

MixedDevelopments

Urban Areas

Fringe Areas

Residental Areas

18

Average price (Rs) per perch by Ward in Maharagama

Averageprice(Rs)perperch

Wards in Maharagama


6/10

0

500

1000

15002000

2500

3000

3500

4000

Square

Foot

Area

Name of Condominium Building

Square Foot Area - 3 Bedroom Apartments

Whilst some asset classes in Sri

Lanka have been met with mixed

fortunes during late 2011, the overall

trend in the luxury real estate

segment has been positive. The

findings of the Research Intelligence

Unit suggest that the positive incline

in the market for condominium

properties in and around Colombo

city remains buoyant. Our position

based on primary and secondary

data is supported by the Central

Bank of Sri Lanka, which in its latest

Annual Report refers to the demand

for houses and urban infrastructure

as expanding rapidly with population

growth and urbanization. They, theCentral Bank, further note that the

private sector continued to play a

vital role in the housing sector

construction of condominium

housing is the increasing trend, with

corporate property development

being encouraged with various direct

and indirect fiscal incentives, mostly

under BOI status, and the growing

interest of expatriate Sri Lankans to

invest in the real estate sector.

Levels of interest in this sector are

certainly high. According RIU

sources, around one quarter of

apartments in two new high-rise

projects scheduled for construction

4 ] Sri Lanka Real Estate Market Brief

Condominium Market Overview

However, caution too needs to be

exercised with respect to two

fundamental market determinants.

Firstly, there are a finite number of

expat Sri Lankans living in the westwho are in the condominium market

and since the end of the civil war,

this segment has been at the

frontline in picking up luxury apart-

ments. The peak levels of expat

interest in Sri Lankan real estate

maybe fast approaching or even

possibly behind us in which case the

rate of demand growth will slow-

down. India, for example, has a far

larger number of expats living in the

west but the country is currentlyexperiencing a dip in the condo-

minium market due to the factors

that are more related to the domes-

tic economies of foreign countries

and factors such as the cost of

borrowing.

by one of Sri Lankas main condo-

minium developers have been

reserved even before construction

has started. Out of the 226 apart-

ments built in the first phase, only

ten remained to be sold. Generally,

our research points to high occu-

pancy levels across the board in

most condominium property with an

average pre-construction sale ratio of

around 50 percent. Some of the

more prestigious developments like

the Empire, Emperor, Lumiere and

Trillium tend to sell around 80

percent of their units by completion

of construction. Meanwhile, the

established buildings like Royal Parkand Iceland Residencies

have very few apartments available

for sale or re-sale.



7/10


Secondly, any perceived risks

involved with doing business in Sri

Lanka also tend to play a significant

role in the minds of potential expat

buyers.

On balance, we can note that on the

supply-side, developers have been

actively expanding the number of

condominium projects that silhou-

ette the landscape. For the mostpart, RIU research indicates high

levels of occupancy with pre-sales

moving fast enough to encourage

further entry of players and projects.

What we have also noted is that the

top-tier projects have tended to

perform much better in this regard

than the condominium projects that

are comparatively more affordable.

One reason for this is that the

income levels in the Western Prov-

ince and Colombo in particular arefar higher than the national average

and the mean average income is

twice over the median average

income level in the district. This

illustrates that there is an increasing

number of high-net-worth individuals

(HNI) living in Colombo now.

However, RIUs long-term position is

somewhat conservative for this

segment of the real estate market as

past bullish sentiments have notalways been reflective of long-term

stability. For example, we can note

that large scale, luxury, condo-

minium properties appeared in 2002

at the time of a ceasefire agreement

between the Government of Sri

Lanka and the rebels. The boom in

demand caused prices to surge in

this market segment and by 2006/07

values reached levels comparable to

those in the developed world.

However, as more and more devel-

opers entered this market and

sought to cash-in, the return ofconflict dealt a blow to demand and

this segment was stifled from

2007-09 with many developers

reporting losses.

Returning to peace in the island led

this segment to receive an almost

immediate dividend. To some extent

there is an expat bubble element in

the bullish double-digit growth that

maybe sustained over the short

term. In the long-term, more consis-

tent growth is likely to prevail given

the overall global economy dynam-

ics.

The government is also looking to

encourage more foreign participation

and has reduced the tax obligations

of international buyers.


4500

40003500

3000

2500

2000

1500

1000

500

0

TheE

mpir

e

Mon

arch

Onthree2

0

Hyde

ParkRe

siden

cies

Spath

odea

Resid

encie

s

Barnes

PlaceR

eside

ncies

Rosm

eadP

laceT

owers

Lumier

eApa

rtments

RoyalP

ark

2 Bedroom Square Foot Area 3 Bedroom AptSquare Foot Area


8/10

Can you tell us a bit about the

type of projects Sierra is involved

with at the moment?

We have just entered into a strategic

business partnership with Browns

and LOLC where all three parties will

be active in the real estate market

with Sierra handling all constriction

related activities. Currently, we are

developing a new and exciting

leisure sector project in Kosgoda

together with Browns. The Samudra

beach Hotel is a state-of-the-art

facility with a 150 room capacity and

we have got all the necessaryapprovals from the central authori-

ties. We are currently in the process

of getting clearances from the local

government authorities. This last

stage can sometimes take too much

time to complete.

So do you feel quite bullish on the

leisure sector?

Yes, we are very positive in this

regard and the current and future

focus will be to develop top classhotels in various parts of the island.

In this regard, we are looking at the

top end of the market where tourists

have a budget of $200 per night or

higher. It will be good for the country

to attract a better class of tourists

who spend their money here. One

example of such a project is the

upcoming Tea Leaf that will be an

excellent example of a boutique type

eco-friendly experience.

When we consider that 43,000 new

hotel rooms are needed by 2016 in

order to keep pace with the

governments target to achieve 2.5

million inbound tourists by 2015, a

massive effort is needed. In fact, this

is a very achievable target and the

leisure sector is currently the driving

force of the construction industry,

not the housing sector. If we fail to

meet the demand then we will face

a shortage that will in turn drive up

the room rates. This will harm the

tourism market.

What is the future for the domes-

tic tourists? Will they be able to

afford the local rates in future?Domestic tourism is a very impor-

tant aspect of the sector and it has

to be accommodated. For some

segments of the domestic market,

flying to Thailand or Singapore will

soon be more affordable than local

five-star hotels. However, we have to

understand that domestic tourism is

our mainstay market and we need to

ensure that they are well looked

after. One aspect of this strategy

should be to develop and upgradethe rest-houses that are scattered

around the island in large numbers

with some located in incredibly

scenic and beautiful spots. These

facilities should be renovated,

perhaps under public private partner-

ships, in order to support the city-to-

city tourism, like in India.

From the construction sector

perspective, what issues do you

face?

The construction sector in Sri Lanka

is looking good at the moment and

the outlook for the next decade is

] Sri Lanka Real Estate Market Brief

Sri Lankas Looming Construction

IndustryAn RIU Interview with Priyantha Perera, Group Director, Sierra Construction

and Chairman of the Contractors Association of Sri Lanka discusses opportunities

in the construction sector.

very positive. We are currently

looking at around eight percent

growth rate that will likely increase

over the coming years.

However, there are some serious

issues. Firstly, we are currently

facing a shortage in human

resources, particularly for the skilled

and semi-skilled workers. This is

partly due to the fact that many of

our workers are currently doing jobs

overseas. It is also a product of the

fact that many school leavers come

out with no technical skills in metalwork, wood work, etc., that can

contribute to this sector. We have

taken some measures to address

this but more efforts are needed.

Another issue that we face is the

rising cost of raw materials. One

reason for this is the fact that most

materials have to be imported.

Another reason is connected to the

fact that getting approvals for mining

and quarrying takes a long time and

is a difficult process. Consequently,the construction sector has to

absorb this cost.

We also feel that despite of the fact

that we have the government that is

largely supportive in terms of the

policies that affect the construction

sector, some individual officials in

government departments can be too

slow to do their jobs. Officials who

drag their feet are responsible for

slowing-down progress that

ultimately has an economic cost.


9/10

The story of land prices in the

suburbs has been one of almost

continual appreciation over the pasttwo decades according to available

data. The factors exerting upward

pressure on prices include rising

demand for housing, currently

estimated at around 90,000 units per

annum, increases in per capita GDP,

increases in migrant worker remit-

tances and the financial health of

local corporations. Fluctuations in

interest rates have direct short-term

impacts where the relationship is

traditionally a negative correlation.

Available data (Central Bank / Valua-

tions Department) also indicate that

the rise in residential land prices in

the suburbs has been much sharper

than it has been in the city areas, be

it from a much lower base. This is

likely to be a reflection of the fact

that unlike some CMC areas that

may have reached their peak in

terms of development potential,

given existing regulations on

constructions and building restric-

tions, the suburban areas are still

significantly below their develop-

ment potential. The second factor is


Residential Lands in the suburbs

Trends in Residential prices andinterest rates

Trends in residential land pricesand foreign remittances

Source: Central Bank of Sri Lanka/Valuation Department/

Research Intelligence Unit (RIU)

socio-economic and demographic.

Given the affordability power of the

middle-income buyers who mainly

consist of newly-weds and civil

servants, which accounts for the

larger share of the property market,

CMC areas are a non-starter for most

middle-income buyers tighter budget

constraints.

However, the contrast in prices

increases between the CMC areas

and the suburbs is less pronounced

for industrial lands. We can also note

a sharp dip in the overall price levelsin 2007 which is likely to be a conse-

quence of high interest rates at the

time, the return of conflict to the

island which was then followed by

the global financial crisis that had a

direct and negative impact on foreign

remittances. However, 2009 was a

turning point with the ending of the

conflict and with the domestic

economy largely on-track, RIU notes

a stable growth rate of around 4.5

percent at present time. The rate hasthe potential to increase further up to

around 7.5 percent, given a favour-

able interest rate and stability in the

Middle East.Source: Central Bank of Sri Lanka/Valuation Department/Research Intelligence Unit (RIU)

What are your concerns regarding

the wider real-estate market?

In Sri Lanka, its hard for the middle-

income segment to enter the

property market. If you consider that

a buyer needs around Rs.15 million

in order to afford a decent house in

Colombo, for most, this is beyond

their budget. The reason why

housing is costly is partly due to thehigh costs of construction, as I said

earlier. The government needs to

take steps in order to make housing

more affordable like, for example,

cutting taxes on essential material

imports. The government can also

extend more support to buyers from

both the public and private sector to

buy their own home.

What opportunities do you see for

those who can enter the market?Now, it is a good time for people to

get ready to start their projects.

Mixed residential and tourism sector

facilities will have a good demand in

the medium term. Commercial and

retail properties are also set to

experience strong demand growth.

How about the luxury apartment

sector?

Currently, we have too many apart-ments in Colombo where the

market is over-supplied. Most

people who buy these apartments

do so for renting out and very few

actually live there. If we take

Colombo 06 for example, we find

that since the dawn of peace,

people who originated from the

north have now returned to Jaffna

and surrounding areas. This has

resulted in a slackening of demand

for high-end properties that were

previously experiencing strong

demand from locals and expats.

Finally, turning to you, what keeps

you motivated and how do you

see your future in the industry?

I started out as a businessman over

thirty years back in various areas

including agriculture and manufactur-

ing. However, in the early eighties, Ientered the construction sector and

started Sierra. I excelled in this

sector due to my all round knowl-

edge in design and engineering as

well as construction. The construc-

tion sector is the biggest business in

the world. It employs workers at all

levels. Currently I am the Chairman

of the Contractors Association of Sri

Lanka.

400

350

300

250

200

150

100

50

0 0

5

10

15

25

20

0

5

10

15

20

0

-5

-10

5

10

15

20 25

1998

1999

2000

2001

2002

20

03

2004

2005

2006

20

07

20

08

Dec20

09

Jun

2010

19

98

1999

2000

2001

2002

2003

2004

2005

20

06

2007

2008

Dec

200

9

Jun

2010

Percent

Index

Percent

Index

Colombo District

Yield om 3 month Treasury Bill

Weighted Average Prime Lending Rate

Land Price Growth - C olombo District

Growth in Private Remittances


10/10

Contact us

Reyaz Mihular

Partner Head of Advisory

KPMG in Sri Lanka

T:+94 (11) 5426400

E: [email protected]

M.F. Jifry

Manager - Real Estate Advisor

KPMG in Sri Lanka

T:+94 (11) 5426423

M: +94 727356544


Shiluka GoonewardenePrincipal Financial & Real Estate

Advisory

KPMG in Sri Lanka

T: +94 (11) 5426403


Roshan Madawela

Director

Research Intelligence Unit

T: +94 722741305


Divya HundlaniAnaylst


T: +94 (11) 4369616-8


Mohamed Hilal Niyas

Manager - Publications


T: +94 (11) 4369616-8


The information contained herein is of a general nature and is not intended to address the

circumstances of any particular individual or entity. Although we endeavour to provide accurate

and timely information, there can be no guarantee that such information is accurate as of the

date it is received or that it will continue to be accurate in the future. No one should act on such

information without appropriate professional advice after a thorough examination of theparticular situation.

2012 KPMG Ford, Rhodes, Thornton & Co., a Sri Lankan Partnership and a member firm of the

KPMG network of independent member firms affiliated with KPMG International Cooperative

(KPMG International), a Swiss entity. All rights reserved.

Printed in Sri Lanka. Publication date: January 2012.

www.lk.kpmg.com

sri lanka real estate market brief jan 2012 (softcopy)

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