Sunday Times 2
Reimagining urban living
View(s):- Why Sri Lanka needs a strong condominium property framework
By Janitha Chirath
As the global tide of urbanisation continues, Sri Lanka finds itself at a pivotal juncture, witnessing a significant surge in the development of condominiums and apartment complexes. These vertical communities, while emblematic of modern architectural prowess and economic advancement, operate within the confines of an inadequately regulated system of condominium property management popularly known as condominium management in Sri Lanka.
This critical oversight has fostered a landscape rife with governance challenges, financial inefficiencies, and pervasive legal ambiguities, collectively threatening the long-term viability of communal living and the intrinsic value of these burgeoning properties. The urgency for a comprehensive, enforceable framework has never been more apparent, as the nation grapples with the complexities of its evolving urban fabric.
The evolving urban landscape
Sri Lanka’s journey towards urbanisation, though often perceived as gradual, is marked by distinct phases of growth. The condominium property sector, governed primarily by the Apartment Ownership Law (Act No. 11 of 1973) and its subsequent amendments, has become an increasingly vital component of the nation’s housing strategy. However, the foundational legislation, enacted in 1973, has struggled to keep pace with the accelerating rate and complexity of modern urban developments. This disparity between the legal framework and contemporary reality underscores the pressing need for reform.
Between 1997 and 2008, Colombo experienced a rapid expansion of its urban land area, followed by a continued, albeit moderated, growth from 2008 to 2019. This outward expansion, initially characterised by outlying growth and later by edge expansion, signifies the increasing pressure on land resources and the subsequent rise of vertical housing solutions.
Dynamics of the condominium market
The condominium market, following a subdued period during 2020-2022, showed signs of recovery. In Q3 2023, new condominium sales witnessed a notable surge, increasing by 33.8% quarter-on-quarter and an impressive 30.3% year-on-year. Concurrently, the price index for new condominiums within the Colombo district recorded a robust 17.8% year-on-year growth in Q3 2023. However, the market’s trajectory was not without its challenges. The majority of condominium transactions in Q4 2023, specifically 49%, fell within the Rs. 25-50 million price range, indicating a strong demand for mid-range luxury properties.
A crucial demographic insight into the Sri Lankan condominium market is the overwhelming prevalence of domestic buyers. This trend underscores the intrinsic appeal of condominium living to the local population, driven by factors such as convenience, security, and proximity to urban amenities. The limited foreign investment is potentially a missed opportunity for capital inflow.
Current gaps
The existing legal and operational framework governing condominium properties in Sri Lanka, primarily the Apartment Ownership Law (Act No. 11 of 1973) and its subsequent amendments, has proven increasingly inadequate in addressing the complexities of modern condominium living. While the law has undergone several revisions, including Acts No. 45 of 1982, 4 of 1999, 27 of 2002, and 39 of 2003, these amendments have largely failed to keep pace with the rapid evolution of urban development and the sophisticated demands of contemporary property management.
One of the most pervasive issues is the reliance on voluntary management committees. In many condominium complexes, the responsibility for managing shared infrastructure and services falls upon these committees, which are often composed of residents lacking the requisite expertise in financial governance, legal compliance, or large-scale property management. This absence of professional oversight frequently translates into a lack of standardised financial reporting, inadequate reserve fund planning, and a complete dearth of independent third-party auditing.
Furthermore, a significant conflict of interest arises from the common practice of property developers retaining operational control over properties long after the official handover period. This prolonged involvement often delays the establishment of independent Owners Associations, which are crucial for representing the collective interests of unit owners. Developers, in their continued capacity, may prioritise their own financial interests over the long-term sustainability and well-being of the community, leading to deferred maintenance, inflated service charges, or a lack of transparency in financial dealings. This dynamic undermines the very essence of condominium property, where collective ownership should translate into collective governance.
Compounding these issues are alarmingly low service charge collection rates and the absence of robust enforcement mechanisms. In Sri Lanka, management fees are typically collected quarterly and allocated to both management and sinking funds. However, poor collection rates are a chronic problem, frequently resulting in critical service interruptions, such as utility disconnections, and a general deterioration of infrastructure. This directly impacts residents’ quality of life.
The broader implications of this weak framework extend to critical urban challenges. In areas with high condominium density, the absence of effective laws and proper management has contributed to issues such as water scarcity, environmental pollution, and inefficient waste disposal.
Why a strong condominium framework is essential
In advanced real estate markets, the correlation between strong condominium frameworks and higher property values, coupled with increased investment attractiveness, is well-documented and widely accepted.
When residents are provided with timely and accurate financial statements, when budgets are meticulously prepared with a clear emphasis on accountability, and when structured processes are in place for the equitable resolution of disputes, the experience of community living undergoes a profound transformation. Such an environment fosters greater harmony, stability, and trust among residents, management, and developers. This structured approach ensures that shared amenities such as lifts, water systems, lighting, waste management facilities, and recreational areas are maintained to high standards, thereby preserving the quality of life and the long-term value of the property. Without such a framework, these shared assets are vulnerable to neglect, leading to rapid deterioration and a decline in overall property appeal.
Economic and social benefits
The economic benefits of a strong condominium framework are multifaceted. It instills investor confidence by providing clear guidelines on property management, financial obligations, and dispute resolution, thereby reducing perceived risks. This transparency attracts both domestic and international investment, stimulating further development in the real estate sector.
By adopting a comprehensive condominium framework, Sri Lanka can unlock several critical advantages:
- Asset preservation: Ensuring proper maintenance and timely repairs of shared infrastructure, thereby protecting the significant investments made by homeowners and developers.
- Investor confidence: Attracting more investment into the condominium sector by providing a predictable and transparent regulatory environment.
- Community harmony: Reducing disputes and fostering a sense of collective ownership and responsibility among residents.
- Environmental sustainability: Promoting responsible resource management and waste disposal practices within high-density urban areas.
- Economic stability: Contributing to the overall stability of the real estate market by mitigating risks associated with poorly managed properties.
Lessons from Dubai
Dubai’s journey in regulating condominium properties offers a compelling case study for Sri Lanka, particularly with the transformative introduction of Law No. 6 in 2019. This landmark legislation fundamentally reshaped the governance of condominiums, moving the responsibility from often informal, voluntary Owners Associations (OAs) to professionally certified management companies. This strategic shift was complemented by the launch of the Mollak platform, a pioneering regulatory technology solution designed to digitalise the entire financial ecosystem of condominiums.
The Mollak platform empowers registered management companies to meticulously submit budgets, track service charge collections, issue invoices, and manage all expenses through dedicated escrow accounts. This critical feature ensures that owners’ funds are not only safeguarded but are also exclusively utilised for their intended purpose: the maintenance and communal needs of the building.
Digitisation of financial documents and operations, as exemplified by Dubai’s Mollak system, enables real-time decision-making, automates routine tasks such as collections, and significantly enhances regulatory compliance. For Sri Lanka, this model provides a compelling blueprint for modernising its condominium framework, leveraging technology to overcome existing challenges and build a more resilient and transparent real estate sector.
A roadmap for reform
The following recommendations outline a comprehensive approach to strengthening Sri Lanka’s condominium sector:
1. Legal Reforms and clearly
delineated roles: The foundational step involves a comprehensive overhaul and update of the Apartment Ownership Law (Act No. 11 of 1973) and its subsequent amendments. This revised legislation must unequivocally delineate the responsibilities and rights of all key stakeholders: property developers, individual unit owners, and professional management entities.
A critical aspect of this reform is to mandate a fixed timeline for developers to exit governance roles post-handover. The law should mandate the employment of Owners Association Management companies by Owners Associations and clearly define the legal standing and powers of these Owners Associations Management Companies, enabling them to effectively manage and enforce regulations.
2. Mandatory licensing and regulation of management companies: To professionalise the condominium management sector, it is imperative to introduce a system of mandatory registration and licensing for all management entities. This regulatory oversight should fall under a newly established or existing national regulator, tasked with setting stringent standards for competence, financial probity, and ethical conduct. Licensing requirements should include proof of professional qualifications, financial stability, and a track record of effective management. This measure will foster accountability, ensure that condominiums are managed by qualified professionals, and protect homeowners from unscrupulous or incompetent service providers.
3. Development of a centralised digital financial infrastructure: Emulating the success of Dubai’s Mollak system, Sri Lanka should prioritise the development of a national digital platform for condominium financial management. This digital infrastructure would significantly enhance transparency, reduce fraud, and improve collection rates.
4. Structured budgeting and robust reserve planning: All condominiums must be legally required to submit annual budgets and comprehensive reserve fund forecasts. An independent regulatory body should be responsible for reviewing and approving these budgets and forecasts, ensuring they are realistic, adequately provisioned for future maintenance and capital expenditures, and aligned with best financial practices. This structured approach to financial planning is crucial for long-term sustainability.
5. Efficient dispute resolution
mechanism: The current reliance on overburdened courts for resolving condominium-related conflicts is inefficient and costly. Sri Lanka needs to establish a fast-track tribunal or a specialised mediation panel dedicated to resolving disputes within the condominium sector.
6. Public education and stakeholder training: Comprehensive campaigns are needed to raise awareness among homeowners, developers, and management professionals about their respective rights, responsibilities, and the benefits of a well-governed condominium framework.
7. Tax integration: Recognising condominiums as distinct tax entities with formal compliance obligations would bring greater clarity and accountability. The government could offer incentives for early adoption of digital practices, adherence to high governance standards, and consistent service charge collection rates. Such incentives might include tax breaks, expedited regulatory approvals, or access to specialised funding for property upgrades.
Implementing this roadmap requires concerted effort from policymakers, real estate developers, legal experts, and, crucially, the residents themselves.
A well-implemented framework can bring:
- Enhanced property values
- Increased investment attractiveness
- Sustainable urban development
- Reduced social friction
- Fiscal responsibility and accountability
Securing Sri Lanka’s urban future
The time for decisive action is now. Policymakers must recognise the strategic importance of a robust condominium framework as an enabler of sustainable urban growth and a protector of significant private and national investments.
The proposed roadmap offers a holistic approach to addressing the multifaceted challenges. Each component is designed to build a more resilient, transparent and equitable condominium sector, fostering environments where communities can thrive and property values can be sustained and enhanced.
(Janitha Chirath is Head of Finance and Human Resources at a reputed real estate owners association management company in Dubai. He is currently authoring a book on transforming the real estate management sector in Sri Lanka, inspired by Dubai’s regulatory and operational framework.)