PROPERTY SECTOR
Compiled by Yamini Sequeira
REALTY IN NO MAN’S LAND
Hiroshini Fernando underscores the multiple challenges facing realtors
Q: Could you elaborate on how the real estate sector has been affected by Sri Lanka’s multiple crises over the past several years?
A: The construction and property segments constitute two significant components of the real estate sector. And the challenges faced as a result of the COVID-19 pandemic and economic crisis over the last couple of years have resulted in a stagnant property market.
Although fewer transactions were recorded overall, real estate values have more or less been maintained during this time.
The unprecedented economic crisis has also affected the cost base of most if not all projects – both small and large scale. Meanwhile, multiple policy changes that have been enforced in recent years have added to the turbulence in the domestic real estate sector. Most projects have faced delays; and only projects that were completed prior to the pandemic were able to reap the expected returns.
Naturally, only a minimal number of new large-scale commercial projects have been launched in view of the present economic situation.
Q: In your estimation, to what extent will new commercial space come into the market in the medium term?
A: We will perhaps witness only about 120,000 square feet of new commercial space coming in over the next few years.
Q: Could you cite a few more examples of how and why the realty sector has struggled to gain ground in recent years? And how would you assess the impact on the rental sub-sector?
A: The economic uncertainty followed by the pandemic led to a contraction in many business operations. And this in turn prompted many entities to shift to a work from home (WFH) model while a large number of organisations downsized their business operations.
It was also evident that some companies were moving out from the central business district (CBD). As a result, commercial and office space rentals have been impacted.
Q: Do you see greater overseas investor interest in Sri Lanka’s real estate sector? And what has been the response to the Port City Colombo, in your assessment?
A: Foreign investors are exploring opportunities in Sri Lanka’s real estate sector but their expressions of interest aren’t translating into hard commitments.
There is still so much uncertainty in the country – especially with the upcoming elections. This sentiment is also echoed by local investors.
The main requirement for ushering in investments is long-term political stability and policy consistency.
Meanwhile, the migration of skilled and unskilled labour has created a vacuum in the real estate sector in this country. Until there is a clearer long-term picture therefore, I don’t foresee any substantial foreign investments in the real estate sector.
While it should attract investments from overseas, the Port City Colombo has so far mostly seen local investors pledging to invest. However, the Colombo Port City Economic Commission is driving investments into the sector. Moreover, the required infrastructure has to be in place in the Port City Colombo to facilitate large-scale investments.
Quite apart from this, based on the downsizing of operations seen in the market, we feel that existing investors in consumables and apparel are shifting their factories to other markets because of the tax structure in Sri Lanka. At the end of the day, businesses will first look at their financial feasibility.
Q: So in your opinion, what can be done to attract and encourage more foreign investors to invest in the local real estate sector?
A: Political stability is a key requirement but with elections looming, and a question mark over whether a new government will continue to engage with the IMF and its Extended Fund Facility (EFF) framework, these sensitivities serve as deterrents.
Other necessary factors would be the availability of foreign currency, relaxation of import restrictions and lower lending rates. Moreover, financial institutions must have the risk appetite to overcome adverse market conditions.
Q: In big picture terms, how has the commercial real estate market performed in recent years?
A: The commercial real estate sector is categorised from Grades ‘A’ to ‘C.’ Grade A properties are located in the central business district; they’re multi-tenanted spaces used by large-scale organisations.
During this period, there has been a clear shift of some of these entities downgrading to Grade B and C spaces. Having said that, there would be clients who prefer Grade A spaces, given the value they offer clients.
Q: A lack of construction labour has been cited as a major issue impacting the real estate sector. What is the solution to this impediment, in your view?
A: The dearth of skilled and unskilled construction personnel is an ongoing issue since many of these workers migrated when construction sites shut down over the last couple of years. They took advantage of the demand for their services in overseas markets.
It’s only when some of the stalled large-scale projects recommence that the lack of construction labour and personnel will be felt. What’s more, any investor will want there to be availability of labour when investing in the local real estate market.
