REAL ESTATE SECTOR
Compiled by Tamara Rebeira
PROPERTY MARKET IN FLUX
Minoli Wickramasinghe expects real estate upside with policy consistency
Q: How has the local real estate market evolved in recent years and what are the trends driving the sector?
A: I have always been bullish about the real estate market in Sri Lanka. At the height of the economic crisis, I was asked at a forum if there was an oversupply in the market. To everyone’s surprise, my answer was “no, we are heading toward an undersupply for several reasons.”
Firstly, construction costs escalated by over 200 times, making it unfeasible for developers or investors to enter the market. Secondly, banks were not lending for real estate or development; and at the time, demand was also low.
We are now facing an undersupply of commercial and residential properties. Real estate offerings are insufficient when considering the nation’s economic expansion especially with foreigners seeking employment here.
Trends driving the market mainly relate to commercial and residential real estate. Companies that experienced pent-up demand throughout the pandemic and implemented work from home (WFH) policies are returning to offices.
As the country recovers from the economic crisis and since it is one of the most peaceful nations in the world, we have seen Sri Lankans living overseas wanting to acquire second homes, which is a positive sign that we’re on the right track.
We’ve also witnessed the foreign residential rental market improving drastically. Rental yields for tier 1 and 2 apartment complexes increased from four percent to seven percent between 2020 and 2024.
Q: What factors are influencing real estate investments in Sri Lanka today?
A: As with most investments, economic and political stability has played a pivotal role in the fate of the real estate market.
In 2019 and 2020, demand diminished due to the repercussions of the Easter Sunday attacks; and with COVID-19, the rental market nosedived, particularly in the commercial sector, as WFH and flexible arrangements were introduced.
In 2021, drastic policy changes arising from the economic crisis caused conservative home buyers to refrain from considering new investments. However, more financially savvy investors took advantage of hedging opportunities against inflation and exchange rate risks.
By 2021/22, interest rates surged from nine percent to 30 percent within weeks, adversely affecting SMEs and home buyers who rely on borrowed funds, leading to a slump in residential sales.
Years 2019 to 2024 presented numerous challenges for real estate, largely due to inconsistent economic policies and significant political changes. Policies such as the introduction of VAT – rising from zero percent to 20 percent in 2021, charged retrospectively on new developments – affected our already depressed residential apartment market.
As a result, many new apartment buyers diverted their investments to tax havens such as Dubai and other markets including Australia, leading to a loss of inflows from realty to our economy in favour of tax revenue.
There is a stamp duty of four percent and consideration should be given to reducing it as that could help the real estate sector grow while also collecting more taxes. This underscores the importance of sector participation in policy decisions.
Q: How do you see the market attracting local and foreign investors?
A: Since 2019, we have experienced pent-up demand for both residential and commercial real estate. Demand was subdued among foreign investors due to uncertainties surrounding the political and economic landscape, resulting in very few investments in real estate.
With the economic recovery, we have witnessed commercial real estate absorption rates reaching 80 percent occupancy in Grade A commercial spaces as of August this year. Residential rental absorption rates are also high at about 90 percent for Tier 1 and 2 apartment complexes.
Absorption rates for other commercial properties such as warehousing are also at 90 percent while rental yields for Tier 1 and 2 apartments have risen to around seven percent.
Although rental absorption rates are high across the board, we see that commercial and residential sales are still not performing as well as they should.
Ways to attract real estate buyers include ensuring policy consistency going forward, providing better incentives to invest in Sri Lanka and avoiding excessive taxes that could harm the sector. Foreign investors will also look for exchange rate stability when investing in real estate.
Q: What are the main challenges faced by the real estate sector – particularly in terms of regulatory changes, infrastructure development and the economic environment?
A: Economic conditions have a huge impact on real estate demand and supply. During the economic downturn and with interest rates spiking, we saw developers going through hardships and some even ceased to exist.
During this period, inflation reached 70 percent and economic policies including the ban on imports had a negative impact on real estate as 90 percent of our materials are imported.
Furthermore, the IMF’s intervention and imposition of a 20 percent tax on new apartment developments led to a further impact on the demand for apartments.
Infrastructure development was at a standstill and this has had a direct impact on construction companies.
