Condominium Developers See Silver Lining Despite Covid-19

November, 10, 2021

By R P A Perera

Covid-19 has had a drastic impact on Sri Lanka’s economy. That countries around the world are also reeling with the effects of the pandemic is of little consolation. It is interesting though that condominium developers with completed projects or those nearing completion with full inventory are likely to reap large benefits.

The industry which took a major hit with the Easter Sunday bomb attacks in Colombo, in April 2019, began recovering last year. RIU - a multi-sectoral research company with a global presence with offices internationally - in its Annual Real Estate Market Report 2019-2020 states that the market which remained sluggish in 2019 due to a variety of reasons, began to recover in 2020.

Providing a look into the future, CEO and Founding Director of RIU Roshan Madawala said, “We can note that the industry had performed with tenacity and resilience during the past 1 ½ years, despite the extraordinary economic challenges. Within the next 5 years, Sri Lanka could face an under-supply of apartments and other real estate assets due to a combination of variables which would essentially navigate it towards establishing a sellers' market. This situation would have been somewhat unthinkable even 24-months back.”

“The research and data that we are analysing now suggests that the present time is exceptionally propitious for residential real estate investments,” Madawala continued. “In 2020 and 2021, low-interest rates stimulated the market to enhance the absorption rates of the prevailing stock of apartments in Colombo. Simultaneously combined with the diaspora's interest levels gathering to an all-time high and with airports slowly reopening, the influx of buyers will be significant. The market is more appealing than ever before to persons earning greenbacks, British pounds and most other currencies, due to the weakening rupee. The amalgam of these variables and the novel reality faced by developers, whose costs have spiked due to the new import restrictions and subsequently the overall currency depreciation effect, indicates that developers will find it impossible to supply the next generation apartment projects at prices that tally with the present market. Therefore, the likelihood of an undersupply is real.”

Dr M A K Sriyalatha, Senior Lecturer, Department of Business Economics, Faculty of Management Studies & Commerce, University of Sri Jayawardenepura commenting on the effect of the import restrictions and currency devaluation on the real estate market said, “Restrictions and devaluation affect the prices of imported raw materials and it automatically affects property development such as real estate residential house prices in the short-term. But LKR priced units have become much cheaper making them more attractive to foreign investors. Real estate players with unsold or built-but-unsold inventory will benefit through the sale at higher prices.”

“What’s more, the interest rates are at a historic low, with the real interest rate being negative recently. This makes real estate investments more attractive in 2 ways, i.e. borrowing to invest is more feasible, and the returns generated are more attractive,” she added.

“Share prices and profitability of pureplay residential real estate companies providing high quality products are likely to improve over the price and profitability of commercial real estate developers, given the working-from-home concept being widely used. The larger the projects and the inventory, the higher the profit. A house of one’s own could not only be an asset but could also provide safety,” Dr. Sriyalatha said.

“We live in a VUCA (volatility, uncertainty, chaos and ambiguity) world driven by rapid technological advances that impact all aspects of human activity and markets,” RIU CEO Madawala continued. “However, real estate has traditionally proven itself as a safe haven during such times and in 2020/21, Sri Lanka’s real estate market has proven its resilience. Commercial and retail real estate will however need to navigate a more fluid and challenging environment in the short-medium term.”

Quality and trust are of paramount importance in the residential real estate sector. Naturally, established players with a good track record are at an advantage. The developers' brand, stability and financial strength are all critical since real estate developments generally are long-term developments, (i.e., they take a few years to complete from the launch), investors therefore need to be comfortable with the stability of the developer and the ability to complete the project. Even in the current circumstances, the larger players are more likely to be able to withstand the adverse conditions due to their greater financial stability.

Industry players who have large projects which are nearing completion or where the major portion of the construction and the import of materials is already sourced or procured, are likely to enjoy significant profits and these may be reflected in their share prices.

Mr. Brahmanage Premalal, Group Chairman Prime Lands (Pvt) Ltd, commenting on the demand for condominiums said, “The demand for real estate in Sri Lanka, especially residential condominiums continued to surge throughout the year, as investors were seen rushing to take advantage of the reduction in policy interest rates announced by the CBSL as part of its monetary policy easing measures in the wake of the pandemic induced economic slowdown. Similarly, the ban on vehicle imports and the ongoing devaluation of the Rupee also appeared to be fueling the interest in real estate, which I believe, were a few of the other contributory factors that worked in favour of driving up the demand for condominiums.  Further as it is with the import controls & increase of prices in raw materials the actual benefit is for the buyers as they get much higher returns. We see this phenomenon all over the world as the real investment against the inflation & high money supply is investment in real estate”.

Some industry players are also hopeful that the project developments within the Port City which are expected to commence soon will bring in a higher demand specially for the developments in Colombo and the suburbs, since the expatriates will require accommodation to overlook construction and development.

A handout prepared by the government directed at potential investors outlines various development initiatives supporting the theme, Sri Lanka is the Rising Star of Asia. Among them is the development of beachfront luxury villas at the Port City Colombo. A significant feature is that foreign investors are permitted 100% ownership of the real estate investment. Access to sites and temporary utility facilities (water and electricity) are already available while permanent utility connections are to be provided by June 2022.