HAVE YOUR SAY
THE REAL ESTATE MARKET
How do you view Colombo’s real estate boom and do you think the bubble will burst?
Sri Lanka Business Magazine
How do you view Colombo’s real estate boom and do you think the bubble will burst?
It is evident that Colombo’s real estate market has developed in leaps and bounds during the last five years, with several small, medium and large scale players entering this sector. The current trend is for property developers to construct high-rise mixed and residential apartment complexes in the city and suburbs.
As I see it, there are both plus and minus factors. This trend has virtually opened the flood gates for people to move into the city and its suburbs from different parts of the island. The positive factor is that the housing problem has been resolved. Further with this development, the commercial city has been transformed and additional job opportunities have been created.
However, there are several negative factors which come into play, such as excessive vehicle traffic, environmental pollution, sanitary and garbage disposal issues. The utility services available are not geared to cater to the growing demands of the public. Very soon the supply will exceed the demand, and the real estate market will come crashing down.
Therefore I urge the authorities to introduce controls, in order to maintain a balance and thereby overcome a possible crisis.
Commercial buildings are also on the rise, with many office complexes coming up. Office space is marketable, whereas these office spaces usually provide the whole package with facilities such as security, janitorial services and cafeteria. While it is a facelift for organisations which are occupying the space, it is advantageous for customers too since they can seek the services of such companies in decent and safe locations.
Considering the growth of Colombo’s commercial sector and the fact that many spaces are minimising rent and administration overheads, there’ll be a limited number of office spaces. In such a backdrop, there may not be a bubble situation, albeit a boom.
It looks as if many get carried off by trends. Colombo’s real estate sector has become one such trend and investment opportunity and is still basking in the glory. Considering the growth of our economy and other sectors such as manufacturing and services, real estate has become easy in terms of entering. The switching cost may also be negligible, assuming that the property is marketable and is able to fetch a satisfactory market value. Yet, take a newspaper and you will notice many ads for properties for resell or rent.
Property prices are assumed to escalate, where the increase would be subjected to change based on market and economic conditions. There may be many who are caught by herd instincts, and end up paying for an apartment now that many schemes are available. This qualifies for boom, bubble and burst scenarios.
Real estate is one of the most popular and profitable businesses in Sri Lanka. With the lack of available land for construction, apartments are being made vertically to tap the growing demand, as is the case in most developed and developing countries. Currently, the demand for accommodation in Colombo is increasing along with the cost of accommodation. Even though the supply of apartments and houses are at a growth, the demand for housing and rental costs are currently growing at par.
However, there are many upcoming projects in line and many more projects approved to commence construction. It is evident that the housing supply in Colombo will reach an oversupply level in several years. However, with the growing demand for housing in the capital of Sri Lanka, oversupply will only result in a slight price reduction of property and will not result in a burst.
In my opinion, it is too early to predict that the bubble will burst, however, it is subjective to the type of housing (luxury or affordable by the middle class) that’ll take preference in the future.
Apartments and condominiums are mushrooming, especially in the areas between Dehiwala and Colombo 3, in Colombo 6 to be more specific. Being a developing country, the demand for housing in Colombo is at a high, while the supply is picking up with apartments and condos coming up, with at least one project in almost every road or by-lane in Colombo.
When I had a discussion with an international construction contractor, who is currently working on a commercial project in Sri Lanka, he mentioned that Colombo is currently experiencing an oversupply of luxury accommodation. As opposed to the demand for luxury housing, the demand for affordable accommodation is higher, whereas the supply remains stagnant. Luxury apartments are mainly targeted at expats. Compared to expats, skilled workforce from rural parts of the country are currently populating Colombo, with the lookout for better careers in reputed companies. The middle class Sri Lankan cannot afford a luxury accommodation, hence the demand for affordable/average accommodation is higher compared to the luxury category.
With the anticipation of higher prices or rental income, investors are focussed on luxury apartments than the segment which has a higher demand.
As a result, I believe the oversupply of luxury apartments will result in a reduction in price/rent in the recent future and investors will have to focus on affordable housing.
Whether it’s in the stock market or the real estate market, it is human behaviour that give rise to such bubbles and the catastrophic consequences that ensue them. What most buyers fail to realise is the fact that the price of a particular asset – based on its perceived value – cannot increase forever when you factor the finite disposable income of every potential buyer into the equation in a given time horizon.
Colombo’s real estate price keep soaring today simply because the city’s population is growing faster than its real estate. If real estate development was to take place faster than the city’s population, what could happen wouldn’t be hard to predict. Another key aspect of a bubble is the fair value of a piece of real estate and its inflated market value driven by speculators. Price is what you pay and value is what you get. If buyers are willing to pay more for a given piece of real estate than what it is actually worth at a level-headed estimate, that marks the formation of a bubble as it cannot be sustained infinitely. Given the crazy pace of real estate development in Colombo today and the astronomical prices at which real estate gets sold, it’s highly likely that in about five years, the bubble will burst.
But a real estate bubble cannot hurt you if you don’t sell out just when the bubble has burst. This is because bubbles or market corrections cuts the excesses. When a real estate bubble bursts, what plummets is the inflated market value of an asset based on its perceived value, and not its intrinsic value. If your investment horizon is longer than a bubble and you can stomach the volatility and upheavals of the market in the meantime, you’re bubble proof. Also, the bursting of a real bubble can afford you an amazing opportunity to snap up great pieces of real estate for a pittance. And as they say, one man’s meat is another man’s poison.
Some upmarket commercial spaces are about to make their debut in Colombo. Some of these are joint investments by local and foreign companies. These shopping spaces are waiting to tap the upmarket segment of high spending and fashion/brand conscious consumers.
Shopping malls offer stores with brands and designer wear, selling original products. Consider the bargaining power of the majority of local citizens, even the existing shopping malls which house similar shops doesn’t seem to attract customers and be profitable. Unlike in a country that has large tourist arrivals as a shopping destination, it is likely that these shopping complexes would struggle to breakeven and earn the expected return on investment. So in this case, would there be a bubble?
Generally in Sri Lanka, apartment life is still new and revolves around an elite lifestyle. This is quite different in our neighbouring Asian countries which are more prosperous than us, where, in some, apartments are relatively affordable than houses. Apartment living requires a heavy investment in both pre and post phases, where the latter requires significant amounts of maintenance monthly. This amount is a substantial percentage, based on various income levels in this country.
It may take some years for us to gauge the repercussions of the apartment sector. There are many who occupy an apartment mainly for convenience, access to hospitals, schools and offices and for security purposes. However, they may eventually resent apartment life, for cultural misfit or dislike for the local community after some time. They may even find that their investment is not worth it, as it was in the beginning.
Perhaps that may be when the bubble will burst.
Residential buildings have lent to create a real estate boom. When the concept of vertical living was new, there were only a few players in this business and even fewer people who demanded for such a lifestyle. As such, this market segment was operating in a sphere that was small and limited. It is noteworthy that such construction in the real estate sector has brought about quality. Many projects are governed by the condominium act, at the approval level/commencement, although their intervention and the presence of price control are doubtful.
The situation as at now has mushroomed, spinning into several directions, without much control and even without the presence of a government watchdog. Demand and supply appear complex, the nature of demand has changed with buyers with varying purposes (for occupancy, investment, or capital gain) with more and more people demand for residential apartments and construction taking place everywhere in all available blocks of land. The locals have still not undergone the firsthand experience of living (as a majority of them have moved a few years back) and the secondary market. These residents may probably not know in reality, the pros and cons against their expectations. Value for money in this high priced real estate property market is another area of concern.
While everything is based on the market mechanism which operates sans control, a reasonable guess would be that at this current pace, this real estate bubble is bound to burst soon.
The same was said for the high rise properties in Melbourne about three years ago. The burst is nowhere to be seen, prices are going up every year. Over 150 high rise buildings have been approved. Maybe the burst will follow this.
I agree with Anton. The bubble will burst very soon, and we, including the banks will be in serious trouble. It is good that Colombo is starting to look like a mini Singapore, but like the Dubai debacle some years ago, we might be hit hard and we don’t have an Abu Dhabi to save us, only the IMF! And they will tell us exactly what to do, and that will mean more hardships for the people.