October, 17, 2017
By Pranav Desai, Executive Director, Iconic Developments Ltd.
The construction sector has been a highly dynamic and vibrant contributor to national economic growth in post-war Sri Lanka, most recently recording a staggering growth rate of 9.3% in the second quarter of 2017. Naturally, this boom in the construction sector has not gone un-noticed with a recent survey by Kantar TNS, a leading data, insight, and consultancy agency, showing that approximately 70% of participants expressing confidence in the sector’s growth, while 57% believe that the city of Colombo will grow into a world-class destination in the near future.
Particularly in the backdrop of a truly unprecedented growth momentum for the Sri Lankan economy, and taken together with massive pent up demand for vertical living and commercial office space in and around the island’s bustling capital city, it is clear that property values will continue to rise over the short-medium term as more local and foreign investors awaken to the fundamental strengths and immense opportunities present in this market.
The Kantar survey produced another interesting insight, with 21% stating that ‘a lack of finances’ was the major obstacle to aspiring apartment owners in Sri Lanka, despite 86% of those polled stating their belief that property prices were ‘fair’, particularly given the diverse range of real-estate developments coming up in and around the city.
Tried, tested, and found wanting
Another crucial insight from these responses is that – overall –the acceptance of vertical living is on the rise and every day, more Sri Lankans are coming on board with the idea of vertical living. From a lifestyle perspective, there are several factors which are fuelling the shift towards apartments. However, another aspect of this lifestyle is one which everyday Sri Lankans are only just beginning to get engaged with, namely: the idea of an apartment as an investment.
Sri Lankans – like most Asian cultures— are generally a risk-averse demographic and this mentality often translates to rigid strategies on income generation, investment and retirement. In that regard, most take the traditional investment route of working hard, saving as much as possible, and then investing those savings in a Fixed Deposit scheme.
For the risk-averse investor this arrangement provides a stable return that can be counted on to appreciate in value at a steady rate. Unfortunately, while these types of investment strategies may have been sufficient in the past, placing all your savings into a fixed deposit alone is unlikely to suffice over the medium-long term. Interest rates in Sri Lanka last peaked around 2007 at approximately 10.5%, falling to its lowest level in over 12 years in 2016 when interest rates reached 6% and moving forward they are unlikely to fluctuate upwards given the tight monetary control being exercised by the Central Bank of Sri Lanka.
The case for real estate as an investment
Given these varied challenges associated with fixed deposits, investments in real estate are emerging as an increasingly prudent option given their versatility in producing income through rent and effective management. Particularly in the context of the rapid development of Sri Lanka’s urban centres, including the anticipated establishment of major large-scale infrastructure development projects like the Colombo Port City and the Megapolis Project, demand for vertical living in Colombo and its suburbs is only going to increase over the medium term. Already today there are numerous developments that have commenced construction, including our own groundbreaking project: Iconic Galaxy. While these projects are firmly underway, the cost outlook for newer projects - particularly those initiated over the course of 2017 – is challenging.
Recent Government regulations have also taken aim at the real-estate development industry, seeking to leverage to sector’s phenomenal growth to generate greater tax revenue for the state. The proposed corporate taxes will go up to 28% from existing 12% by April 2018, further levies are also being considered as part of a Construction Industry Development Levy aimed at funnelling some of the revenue generated by the industry towards its continued development.
These are certainly progressive steps by the Government that are being taken in a manner that will hopefully support significant and much-needed improvements to the country’s revenue collection, and consequently, its overall macro-economic standing. That being said, the substantial increases in taxation for the construction and real estate sector is likely to result in a major spike in apartment prices for new and future real-estate development projects. In that regard, the most prudent investors will need to act with speed and diligence if they are to make the most of Sri Lanka’s booming real-estate sector.
It is crucial to perform careful research, and to take an extremely realistic view of the different investment options that a given investor has open to them. Above all, the prudent investor must always keep in mind that his investments must be tailored to suit his own needs and requirements after factoring in his own lifestyle, consumption patterns and earning potential. When compared with conventional investment options such as depositing money in a Fixed Deposit or buying shares, investing in real estate is a surefire way to grow your savings, but due diligence must come first.
Photo caption: Pranav Desai, Executive Director, Iconic Developments Ltd.