Colombo’s real estate market still mainly focuses on residential properties in the upper-income and premium sectors, due to investments being more speculative in nature, with 50 per cent “pure profits” on off plan, or under construction, disposals being common, according to Sri Lanka-based Vox and Co. (Vox), a strategy consultancy operating in multiple sectors locally. [...]

The Sundaytimes Sri Lanka

Colombo’s real estate market still targets top -end clientele and premium customers

Banks have trimmed home loans’ portfolio, says Vox report

Colombo’s real estate market still mainly focuses on residential properties in the upper-income and premium sectors, due to investments being more speculative in nature, with 50 per cent “pure profits” on off plan, or under construction, disposals being common, according to Sri Lanka-based Vox and Co. (Vox), a strategy consultancy operating in multiple sectors locally.

Commenting in its recently-issued March 2014 report, titled “Growing Up: Unlocking Colombo’s Revolutionary New Skyline”, the consultancy also signalled that there was “(large) and growing untapped demand in the middle income market”.

Elaborating further, the document also stated that “still unaddressed is the opportunity to tap into the growing cash assets of middle class income earners, hitting the peak of their earning strides over the next 5–10 years. Vox and Co. believes that while upper tier residential supply will soon plateau the market space for US$55 – US$ 80 per sq.ft. residential is on the verge of a suburban

Artist’s impression of the Altair project in Colombo


Also noteworthy in the report was the assertion that “Colombo’s lack of affordable middle class living (had driven) more residents into far suburbs, but even worse, has limited genuine economic migration to the city… To compound a resident population of 2.3 million, the city’s daily migrant, or transient population hits over 500,000 or nearly 25 per cent, according to the National Census of 2012″.
However, Vox also opined that, “over the past five years, there has been more market fragmentation – specifically serving pockets of investment interest outside what has been a fairly narrow price range… New developers are seeking out more lucrative residential markets, creating an interesting divergence in the pace of growth, and absorption levels of new condos”.


The consultancy also profiled the end-consumers fuelling this growth, stating; “Condo buyers are typically Sri Lankan returnees living overseas, retirees, individual investors and Sri Lankan expatriates; however there are new market spaces opening up around this core to serve institutional investors, real estate firms and (Real Estate Investment Trusts)”.

The report also quoted an unnamed leading realtor in Colombo as stating; “Colombo’s real estate goes through a fairly sharp, upward spike in real estate prices every 5-6 years, for example in 1991-1997, Colombo 7 properties were around $25–30 per sq. ft.; in the early 2000’s it went up to average around $90, then more recently, you’re seeing $145–175. This is what is attractive to investors and they’re now really cottoning on to the returns on appreciation in property and real estate values, not the returns, which are around 3-4 per cent in Colombo”.

“Premium and upper tiers still have a portion of pent-up apartment demand, as demonstrated by projects such as Altair and Havelock City… As such realtors believe that 8 per cent – 10 per cent annual growth in price points will slow down as more upper-tier inventory comes online,” also opined Vox.

At the same time, the report also highlighted increasing construction costs. “Amid the flurry of first-gen developments, construction costs have escalated rapidly, with construction costs having inflated 30 per cent in the past five years, exposing early investors to significant cost pressures. This past year appears to (have intensified) construction materials price increases with 2012 costs reported to have grown around 18–20 per cent over the previous year.”

It said, “Sri Lanka’s dependence on imported raw materials, construction equipment, and more recently construction human capital continues to impact the sector, and developers who can cheaply finance projects while getting large customs concessions are already ahead in this space”


Additionally, another problem emerging was identified as increasingly longer building times. “While dozens of plans and proposals circulate fiercely among financiers and regulators, lead times in project realisation and set up have puzzled first time investors”, stated the report.

On the other hand, the report also noted that “increasingly, processes have sped up, while transparency in transaction processes have lagged behind… The UDA now states that a financially viable urban project will, on average, take up to a year to clear through the many permits and licenses. Investors are often encouraged to work through the Board of Investment, Sri Lanka’s investment promotions authority, which grants fiscal benefits on strategic projects set up in the country”.

Vox, in its report, also commented on other trends impacting the country’s commercial capital, “Colombo’s population growth has remained at half the national average at around 0.23 per cent annually. It is neither over-occupied nor densely crowded with a manageable 4,000 people per square km, in comparison with over 14,000 people per sq. km. in Jakarta and even 8,300 in Singapore… But while Sri Lanka’s population density grows at less than 1.3 per cent annually, the RMV reports that vehicle ownership has grown at an annual rate of over 5 per cent over the past decade”.

Road access

It also added that “(little) has been done for the better part of a century to improve road access in Colombo, which culminates in a single point in the city centre… Poorly developed public transport and a tough housing market means that the middle class exert their incomes on the all-important motor vehicle. The resulting problem: traffic and congestion”.

However, Vox also noted that “Colombo’s 2030 plan focusses on developments to accommodate both a resident and transient population of 8.5 million by 2030. Transport projects such as monorails and mega-terminals are among the city’s growth plans… In the medium-term, steep changes in import duties have choked the mid-priced automotive market in an effort to stave off further congestion”.

Further, the consultancy was also of the opinion that “(affordable), suburban housing for families, and slightly less affordable professional housing within the city are paramount to develop Colombo into not just a tourist-friendly city, but also a liveable and accessible modern metropolis… This slowdown is also through Colombo building approval trends, with fewer middle-income housing units coming online annually”.

It also pointed to a lack of competitive lending option as a further hinderance, stating; “As lending rates appear to (have climbed) to their pre-2008 levels, this has further stalled housing growth at the middle income level… Domestic banks, struggling for liquidity and under mandates to reduce non-strategic lending, have significantly trimmed their home-loan portfolios”.

“The result is the largest home ownership fall-out in a decade where banks extended on average 15–16 per cent of their lending portfolios towards property development and housing. In 2011, only 2 per cent of bank loans went towards housing,” revealed the report.

Going further in depth, the report also revealed; “High borrowing rates have all but ground the middle-income construction market to a halt. The rate of housing unit growth in Colombo is among the lowest in the Western Province… This slowdown has increased the likelihood of multi-generational family living — a very ‘un-Sri Lankan’ characteristic where family units remain more nuclear than in the subcontinent… So while housing in Colombo remains just beyond the grasp of young professional and new families, the suburban markets have also been ‘subdued’ by relatively high build costs and borrowing rates”.

At the same time, this lack of access to loans has had unexpected benefits. “Colombo’s real estate market is also a vastly stable source of investment — according to analysts—more than 90 per cent of properties are debt-free and re-mortgaging homes are almost unheard of… According to recent estimates, Sri Lanka’s mortgage market amounted to Rs. 159 billion ($1.3 billion), or just 2.4 per cent of GDP in 2011, compared with around 40 per cent for economies like Singapore,” added Vox.

Price gains

The consultancy also went on to opine; “Even during the peak periods of wartime, Colombo real estate was the ultimate asset investment, prone to dramatic price appreciation. Despite trying economic times, the eccentricities of Colombo’s real estate market have reliably superseded economic trends… Real estate price appreciation is at the core of what makes Colombo a rewarding investment, premium real estate has appreciated consistently between 10-15 per cent annually, since the close of the civil war… Land for international projects such as Krrish Square and Shangri-La Colombo have been picked up at top dollar— between $200–300 per square foot”.

“While average land prices remain much lower than most South East Asian markets, prices are expected to continue this trajectory but will soften as more prime city land is released for development… Real estate prices also swing wildly between the city’s core urban areas and its more precarious suburbs. Despite being less than 3 km apart from each other, two satellite suburbs of Colombo—Dehiwela and Mount Lavinia have a 90 per cent differential in land prices… This wide dispersion in price has led to more interest in projects just outside the city – from Fairway Group to 110 Parliament and even to commercial projects like Suchir NEB,” commented Vox.

However, the report also quoted Shiluka Goonewardene, a Principal in the Financial and Real Estate Advisory, of KPMG in Sri Lanka, as saying; “The asking prices of land have grown by 30 per cent since 2009. The most recent five large transactions – Krrish Group, Sheraton, Hyatt, Shangri La, etc. have on average been valued at least, around $170–210 per sq. ft. There are different concessions when working with government land in terms of fiscal benefits attached of course”.

With regards to the market for commercial real estate, the report stated; “Peacetime was meant to be a time of valuable opportunities for enterprise growth and foreign investment. Despite those promises the development of industrial parks, IT, BPO or KPO campuses have remained few and far between… New business registrations have picked up considerably, but a credit chokehold hovers over businesses, like (a) Damocles Sword”.


It further quoted an unnamed leading developer in Colombo as saying; “Competition, location, service standards drive occupancy. In the commercial segment, unfortunately, most average office buildings are in a position where if they increase their rentals by Rs. 10–15 per sq. ft, ($0.10-0.15 per sq.ft.) their tenants will move out to a less desirable location or building because they are so price sensitive”.

As such, Vox opined; “Domestic firms are aggressively controlling their fixed costs and making do in low-value spaces, dampening yields in the commercial market. There are, however, pockets of pent-up demand. Recent estimates by Jones Lang LaSalle state that Colombo’s investment grade office stock is expected to multiply by 2.4 times, driven by investment in IT, finance and the BPO sector. But to date, only a handful of starts have been made to address the kind of solutions to which multinationals are accustomed”.

The consultancy was also of the view that, “despite a few individual projects, strategic development of major suburban tracts is sorely lacking. BPOs, IT/ITES and offshoring enterprises need low cost facilities on the fringes—industries that can be jumpstarted by some speculative development”.

At the same time, Vox also indicated that (while) the stock of Grade A space is allotted at high occupancies, majority of domestic firms occupy sub-par space and are in cost control mode, creating pressure for rental rates (which) are to remain within a narrow band of affordability… But even in the commercial market there is a sharp diversion at upper price points. Developments like the World Trade Centre experience an almost entirely different paradigm, in that with almost 100 per cent premium over market rates, occupancy levels post-war have remained consistently at close to 100 per cent”. The report also once again quoted statistics issued by Jones Lang LaSalle, which identified the “current stock of Grade A office space (being) around 5 million square feet, all at over 90 per cent occupancy”.

Further, the view was also presented that, “with an apparent lack of coherent initiatives to create employment, keeping yields and demand low, investors continue to exercise caution in the commercial space… And until a major strategy to create a more investor-friendly environment is in place, businesses will remain watchful over their controllable overheads”.

Abans mall?

Meanwhile, the report also highlighted the comments of an unnamed ‘leading investments official’ who said; “We absolutely need to make this a shopping and retail hub. Krrish is developing a Mega Mall (and) JKH is developing a mixed project on their land. Abans has 2 acres of the CCC property on which I’m sure they’re developing a mall”.

However, the report also indicated; “Despite its emergence as a shopping destination, the city does not, to date, have a major multi-tenanted mall-space comparable to retail destinations like Bangkok or Singapore… Domestic retailers scramble over a handful of leasable space with a vigour that has driven monthly rental rates to between $5-7 per square foot, almost five times that of the commercial sector… With these attractive rental rates, and more Indian, Maldivian, Arab and Chinese tourists specifically visiting Colombo for a city and retail experience, more entrants are placing their bets on mall- space as a lucrative and necessary investment”.
Concluding, the report also identified some “out of the box” type areas of ongoing development, stating; “Both the education and healthcare sectors are of immediate interest to many developers for the island’s potential to function as a ‘host’ or a ‘hub’ to South Asia”.

Providing some background on the education sector, it noted that the “Sri Lankan government is promoting strategic initiatives to host at least 50,000 international students in Sri Lanka over the next five years… With a relatively permissive regulatory landscape governing the setting up of foreign university branch campuses than India, Sri Lanka appears to be a brave new frontier for western higher education institutes to serve offshore markets across the subcontinent… From long-established universities such as the University of Central Lancashire to large education groups like Navitas, Sri Lanka is a more logical location to serve the Maldives, South India, and even Chinese students. Increasingly, students are drawn to Sri Lanka’s international student tuition structures which when compared to Singapore, Malaysia and Australia, are significantly more attractive”.


Further, the report stated that “Sri Lankan students spend over $1.2 billion annually in international tuition fees and travel, and many international education providers are looking to take away share from this promising market”.

With regard to healthcare, the report stated; “Similarly, Sri Lanka’s well established national healthcare system and reputation for a strong base of human capital in medicine also makes it a natural fit to serve offshore healthcare markets… Private healthcare is increasingly affordable and there are more proposals specifically targeting long-stay, hospice and tertiary, consultative care formats of healthcare delivery, specifically for foreign markets… New ambulatory and tertiary care providers like Danish Emergency Medicine Provider Falck and home-grown providers such as Healing Journey have announced operations on the ground focused on the healthcare tourism market”.


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