ISSN: 1391 - 0531
Sunday, April 22, 2007
Vol. 41 - No 47
Financial Times  

Tips on buying an apartment

What you should know and should do

By Dr. Kingsley A. de Alwis
So you plan to buy an apartment? Apartment living is becoming more and more popular these days as it has a number of advantages over living in a house. Thus, apartments provide better security, have fewer inconveniences such as power outages and water cuts, require less maintenance, and are generally better located for commuting purposes, as compared to a house.

You also have the possibility of locking up and leaving on long holidays and visits abroad without having to make elaborate arrangements for the care of your home in your absence. Superior apartment complexes may also include a number of amenities such as a swimming pool, a gymnasium and a children’s play area.

As a bonus, you may even command a beautiful view from your window if you buy an apartment on one of the upper floors.
The downside of life in an apartment is that you cannot have a garden or pets and you may feel rather restricted in terms of space.
Since buying an apartment would probably be one of the biggest investments you will make in your lifetime (unless you belong to the “super-rich”), there are some things you need to know, some precautions you must observe and some actions you should consider taking in order to avoid endless grief and heartache from a wrong decision.

Apartment as an investment
Before you go searching for an apartment to buy, you must decide whether you are buying it as an investment or buying it with the intention of living in it. If you plan on buying an apartment as an investment, here are some things you should consider, especially if you are putting in a good part of your life-savings into it.

A large number of apartments have come up recently and many others are sprouting up like mushrooms, especially in Colombo and its suburbs. When you start inquiring about apartment prices, however, you will realize that the cost per square foot can range from 15 to 25 thousand rupees - depending on location, size and floor level - and the building costs keep going up and up. These high prices are partly due to (a) the high cost of building materials and labour, (b) inflation and the consequent decline of the value of the rupee against foreign currencies, and (c) the high, and often unconscionable, profit margins of developers.

If you are buying an apartment as an investment, you should look at the probable returns you will get from leasing or renting it out. You should also consider the appreciation/ depreciation over the short and long term in relation to when you might decide to sell it. Those who got into the apartment market early found rapid appreciation of the market value of their apartments and many sold them, making windfall profits. Nowadays, with the apartments priced so high and more of them becoming available by the day, prices are less likely to appreciate at the same rate.

Furthermore, one needs to look into the supply and demand situation. How many of us who wish to buy an apartment can afford the price, even at their present levels? Most of the new apartments are bought by Sri Lankans living abroad. Foreigners are generally put off by the unpredictable security situation in the country and the rather inflated prices in relation to real estate values in many other cities of the world.

At the rate at which new apartment buildings are coming up, is there a danger of oversupply? One can already discern some desperation in the marketing strategies being used to sell new apartments, some developers even inviting potential buyers to multiple “launches” in five star hotels with the hope of persuading them to buy.

If the supply of apartments begins to exceed the demand at some stage, there would be a lot of vacant apartments and not enough tenants to occupy them. Then apartment rents would come down and you may not get a proper return on your investment. Worse still, apartment values might drop and you might find that your investment has depreciated overnight. This happened in Thailand, Indonesia, the Philippines, Malaysia and other ASEAN countries where there was an overcapacity of apartments and office buildings in the early nineties. The doomsday scenario of course would be where banks have financed most of the apartment purchases and increased their debt exposure on unrecoverable real estate loans to such an extent, that they themselves get into trouble. They could be left with a large inventory of apartments which cannot be rented, or could only be sold at a big loss, and this could bring the whole economy of the country down.

Overcapacity resulting from the proliferation of apartments could also be physical in nature. When large numbers of apartments come up without corresponding development of the infrastructure, they could stretch the capacity of the essential physical facilities and services such as the sewerage system, drainage system (especially during the rainy season), electricity supply, domestic water supply, the carrying capacity of the road system, solid waste (garbage) disposal arrangements, etc. This happened in a number of Chinese cities such as Beijing and Shanghai where housing development overtook the water supply and other amenities due to rapid influx of people from the countryside. Those cities are still trying to recover from this problem by expanding their facilities.

If you buy an apartment as an investment, you also need to think about its resale value and ease of selling. In this respect, your top three priorities have to be location, location and location. You don’t want an apartment for which you need repeated advertisements and an army of brokers to sell.

Buying an apartment to live in
If you are buying an apartment to live in, a whole range of other considerations apply in addition, of course, to those mentioned above. Once you have made the decision to buy, you should look around at the available options. As in the case of houses, the first, second and third considerations are location, location and location.

Other matters of concern include commuting distance to your place of work or your most frequently visited place, availability of groceries, drugstores and shops in the vicinity to get your daily needs, access to medical facilities and safety of the neighbourhood.
Find out as much as you can about the neighbourhood – crime, shanties, garbage dumps, noise levels of traffic and other sources of noise (such as temples, mosques, trains) etc. as well as positive features such as supermarkets, groceries, stores, walkways, etc. within easy reach.

One thing you need to determine is whether the apartment block has been designated as a residential building or as a mixed (hybrid) commercial and residential building in the certificate of conformity. Many developers get permission to put up residential buildings and surreptitiously retain part of the building (often part of the common areas) wherein they carry out all kinds of businesses, including sales offices, business centres and even bakeries. They also block out parking spaces for their businesses, which should rightly be common elements for use as visitor parking by owners and residents.

You should not trust the brochures supplied by the developer - these may not hold up in a court of law. Get your lawyer to make sure that the common elements (areas and property owned jointly by all the owners of the individual apartments) are specified in detail in your sale agreement, transfer deed, condominium declaration and condominium plan.

Don’t expect to get these things and matters like parking sorted out after you have purchased the apartment. Nor should you expect any help from the Condominium Management Authority (CMA) after you have bought the apartment. This is a toothless organization and making complaints to them will just take up a lot of your time and/or money. However, you could check on the developer’s track record with the CMA, whether there are complaints against him about non-fulfilment of obligations or of fraudulent practices.

In general, keep litigation as your last resort, but don’t hesitate if you are driven to it by an obdurate developer who is trying to take you for a ride. Ask around and get a reasonable lawyer (if you can find one) as sometimes the shark on the other side may be as bad as the one you are trying to deal with! Note that the most famous (and expensive) lawyer may not be the best for you. Many lawyers are better at conducting seminars and workshops on the subject than at representing clients against unscrupulous developers.

Crafty practices adopted by some unscrupulous developers include the retention and subsequent renting out of a large number of apartments without paying the management fee to the Condominium Management Corporation (this is the organization elected by the owners under the law to take over management of the apartment complex from the developer after one year). Various ruses are adopted by such developers to avoid paying the management fees, such as claiming fictitious expenses incurred in the first year during which the developer manages the apartment block.

Ask the owners and residents of any apartment complex managed by the developer you are dealing with, how satisfied they are with his performance. Make inquiries before you entrust your money to one of these sharks! It is generally better to deal with a well-established Sri Lankan company than with fly-by-night companies set up by foreign-based individuals of unknown antecedents.
If the apartment block is designated as a mixed residential and business property, you should be prepared for the inconveniences of sharing the access and some common areas with casual clients dropping in to do business in the premises. This will generally also impact on the level of security that can be assured for the apartments.

There might also be some disagreements between the businesses that occupy part of the building and owners of the apartments on what constitutes common areas. This will apply especially to visitor parking and areas covered by security services of the businesses.
Make sure that your entitlements of parking and visitor parking are clearly specified in your deeds. These should be defined in terms, not only of numbered lots, but also with the boundaries of the adjacent lots clearly stated.

In these days when parking on the road is not allowed in many areas, visitor parking within the premises is of the utmost importance. Beware of developers who gloss over the visitor parking arrangements. They will often try to retain most of the parking for themselves and their businesses.

You should also inquire about arrangements for garbage disposal, security (MATV surveillance, burglar alarm, and security staff), standby power and water supply, and recreation (gymnasium, swimming pool, roof-top facilities, cable TV, etc.). Get these specified in your sale agreement, insisting on specific performance guarantees.

Ascertain the traffic situation around the building, particularly with respect to getting in and leaving the premises. Also inquire about the arrangements for sewage disposal (both storm water and sewerage). The sewerage system in Colombo is so old and decrepit that it is only a matter of time before it collapses under the heavy strain imposed by the many new highrise buildings coming up all over the city. Find out whether the area around the apartment block gets flooded during heavy downpours.

Apartment features
The features of the particular apartment you will buy need to be considered in some detail. Do not be pressurised into buying the first available apartment in a block. Things to look for would include the view, for which you will usually pay a premium. If you do select the apartment for the view, find out the likelihood of your view getting blocked off by other highrise buildings which may come up nearby. This can be ascertained from the Urban Development Authority. Look not only at the view, but also consider the aspect – north-facing apartments will have the least direct sunlight to deal with.

Look for Basic Apartment Safety features such as: solid foundations (what specifications have they been built to?); whether the building is constructed to be reasonably earthquake proof; fire escape and fire precautions (e.g. fire truck route, fire hydrants; fire separators between floors in service ducts; sprinklers in all the common areas; the correct type of fire extinguisher for each location, and gas leak and smoke alarms).

Many apartments lack adequate light and ventilation due to poor design or attempts to crowd in as many apartments as possible in a single block. The result is that artificial lighting is required even in the daytime, especially in some areas such as the kitchen and bathrooms. Without adequate ventilation, high powered exhaust fans will be required to ventilate areas of the house without windows, and this can add to the cost of maintaining the building and the management fee you will have to pay. A good design will ensure that there is a window in every room.

If you don’t wish to spend much of your waking life standing and waiting for a lift, make sure that there is an adequate number of lifts in the building to cater to the expected passenger traffic. This could become a source of frustration in apartment living, especially if you have to get in or out of the building during rush hours. There should also be a service elevator or large lift to carry big items of furniture such as a dining table (or a coffin!).

Basic Apartment Security should be ensured not only by the security services, but also by the nature of the construction. After all, one of the main reasons you are moving into an apartment is the greater security it provides. All exterior doors should: be made of solid wood or metal; fit the frame tightly (no more than 1/8" clearance) and have strong reliable locks; be well-lit and visible on the CCTV screen; have a viewer, security chain and burglar alarm; and have hinges on the inside, not the outside.
Windows should have firm locks and not be obscured from view by security staff moving around the building; and be connected to a burglar alarm - for apartments on the 3rd floor or below.

Make your own checklist and use it to assess all these and other features that might be important to you personally (e.g. proximity to a particular school, user friendly entrances and exits if you use a wheel chair, access to airport roads if you travel abroad frequently).

(The writer is the author of the book, “Highrise Disasters: How to be ready; What to do.” He has also invested in a Colombo apartment


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Copyright 2007 Wijeya Newspapers Ltd.Colombo. Sri Lanka.