Sri Lanka’s Housing Market Remains Healthy

Sri Lanka's house price rises continue, as security issues get sorted out. There's no official house price data in Sri Lanka, but developers and homebuyers confirm there have been double-digit property price rises.

The Valuation Department's Former Chief Valuer, W. Seniviratne has said that the noteworthy upward trend in 2010 and after was made possible not only due to restored peace, hut by government policies to attract investors, which had a huge impact in the tourism sector, transforming the leisure property sector.

Residential land prices started to increase in June 2009, after a sharp decline which reached its peak in 2007, according to the Central Bank of Sri Lanka (CBSL). Robust remittances in 2011 pushed up the Land Price Indices. Areas outside Colombo municipality may have had sharper price increases, but price levels still remain lower than in Colombo.

Higher construction costs, as well as the increased lending rates are expected to slow real estate sector growth in the following months. The weakening of rupee from 110 in 2011 to around 132 in September 2012 has increased the cost of raw materials, especially imported ones. Meanwhile, Sri Lanka's repo and reverse repo rates are currently at 7.75% and 9.75%, respectively.

Demand for housing, however, remains strong with the help of the emerging IT-BPO and tourism industries. Residential properties in the Greater Colombo area, as well as its adjacent suburbs have been a hit for IT-BPO employees amounting to 63,000 Sri Lankans. Meanwhile, demand, especially for leisure properties, is high with tourist arrivals increasing by 7.8% to 90,338 tourists during the year to July 2012.

Since 2004, it has been expensive for foreigners to own properties in Sri Lanka, as they are required to pay a 100% tax on landed properties they purchased. The 100% surcharge is also imposed on apartments below the 4th floor. However, new legislation on foreign ownership is expected in 2012 that could relieve the 100% tax imposed on foreign buyers.

In July 2012:

• The average sale price of houses in Sri Lanka was LKR 17.63 million (US$ 133,831), according to Lanka Property Web, one of the country's leading property portals.
• The average price of apartments was LKR 25.36 million (US$ 192,511).
• The average price of land was US$213 per sq. m. or LKR 710,000 (US$ 5,390) per perch in July 2012 (1 perch = 25.29 sq. m.).

Peace after a 3-decade civil war

In January 2010, Mahinda Rajapaksa was re-elected for a second and supposedly final six-year term as president. His closest challenger was Gen. Sarath Fonseka, the Armed Forces Chief (who ran a campaign criticizing the Rajapaksa's authoritarianism). Fonseka was defeated, court martialled, imprisoned, and stripped of all military ranks (he has just been released). In September 2010 Parliament changed the constitution to allow Rajapaksa to stand for an unlimited number of terms.

The civil war in Sri Lanka lasted 30 years and resulted in at least 100,000 deaths. Eleven years ago there was hope that it would end soon, with the 2001 ceasefire agreement with the Liberation Tigers of Tamil Eelam (LTTE). Confidence in the economy revived, and there was strong demand for luxury apartments from expatriates who had left during the intense fighting. Developers experienced lucrative profit margins. Local investors followed, as these properties earned high yields.

However in November 2005, the conflict resumed when Rajapaksa was first elected president. A strong supporter of a unitary state, Rajapaksa swore to defeat the Tamil Tigers. In 2006, the ceasefire totally collapsed, with bombings and attacks on government officials.

After intense fighting the LTTE's main stronghold was captured and its leaders killed, with talk of a massacre by government forces. In May 2009, Rajapaksa officially declared the end of the insurgency. A UN report in 2011 said that tens of thousands of civilians had been killed in the final phase of the war, most as a result of government shelling. It also said that hospitals, UN centres and ships belonging to the international aid group the Red Cross were deliberately targeted by the army.

Since then, peace has held, peace has held, call centres are opening, and tourism is returning.

Rapid economic growth

GDP growth of no less than 7.2% is projected for 2012 by the CBSL, which is a slight slowdown from the previous year's 8.2% growth. Recent interest rate hikes, weaker international demand, and rising inflation are already reflected in the latest Nielsen Consumer Confidence Survey, with the consumer confidence index at an all-time low of 57 in August 2012.

Still, with the recent improvements in sectors like finance, service and tourism, as well as the IT/ITES-BPO industry boom in Colombo, demand for residential houses remains healthy.

There's also a shortage of housing supply. The housing shortage in 2010 was estimated at 650,000 units. Demand for new houses is estimated by the central bank to increase annually by around 50,000 to 100,000 units. However, only half of that demand is now being met, according to the National Housing Development Authority (NHDA).

After the war in 2009, a major bump in housing construction approvals was experienced, which helped meet the shortage. Housing approvals in Colombo rose in 2010 by 21.9% to 9,614 units, after a major dip of 28.1% in 2009. Approvals were up by another 11% to 10,669 units in 2011. Around 76% of Sri Lanka's housing stock is owner-occupied.

To aid Sri Lanka in reducing its housing shortage, the Asian Development Bank (ADB) approved last August a US$ 15 million loan to DFCC Vardhana Bank (DVB). The fund is available for relend to Sri Lankans, especially those living in tsunami-hit and post-conflict areas, for house purchase or rehabilitation.

Tight mortgage market

The Bank of Ceylon, Sri Lanka's largest bank, had housing loan interest rates of around 13.5% to 15.5% in August 2012. Rates were raised last April from 11% to 12%.

During the same period, the CBSL's repo and reverse repo rate remained unchanged at 7.75% and 9.75%, respectively. The CBSL's key rates were raised twice in 2012, by 50 basis points in February and by 25 basis points in April. The February hike was the CBSL's first for 5 years, and was a policy measure designed to control Sri Lanka's worsening trade deficit by reducing lending.

Sri Lanka has a very small mortgage market, which amounted to LKR 159 billion or around 2.4% of GDP in 2011. Private commercial banks, which control about 75% of the market, offer adjustable-rate mortgage loans. State-owned banks offer only fixed-rate mortgage loans.

Mortgage loan maturities range from 15 to 25 years. The average commercial bank loan is LKR1 million (US$8,987); state-owned company loans are on average smaller.

Low yields; luxury segment dominates the rental market

Sri Lanka's small rental market - only 5.4% of the total housing stock is rented - is dominated by high-end luxury apartments. The market for middle- and low-income renters is almost non-existent.

In recent years rents have risen by an average of 11% annually, according to local real estate analysts. Rents for a three-BHK apartment ranges from LKR 250,000 (US$ 1,898) to LKR 350,000 (US$ 2,657) per month in completed projects such as Iceland Residencies, Crescat Residencies, Empire Residencies and The Empire.

Rental yields in Colombo range from 3% to 7%, according to local developers. These yields are low, considering the 13.76% prime lending rate and mortgage interest rates of around 13.5% to 15.5%.

Slower growth in 2012

Economic growth has intensified since the war ended in 2009. GDP rose by 8% in 2010, followed by an even higher growth of 8.2% in 2011. The newly regained peace in the country spurred foreign investments, agricultural growth and a huge boost in infrastructure development and tourism.

Although still relatively strong, GDP growth in 2012 is expected to be slower at 7.2%, according to the central bank. The expected slower performance is due to weakened aggregate demand, higher energy prices, lower imports, and lower credit increases brought by the tight policy measures implemented this year.

Strong credit growth has resulted from lower interest rates in recent years, most especially in 2011. The result of this and of the unsustainable rupee peg, has been a wide trade deficit.

To address the situation, CBSL and the government have:

• Raised the benchmark rate twice this year;
• Limited the Commercial Banks' loan growth to 18% in 2012 from over 34% in 2011;
• Allowed more flexible exchange rates from February; and
• Raised fuel and electricity prices

These measures have successfully reduced the deficit, which narrowed by 33.8% y-o-y to US$ 534.6 million in July 2012, according to the CBSL.

The rupee hit LRK 120=US$1 in March 2012, making imports more expensive. Combined with the surge in food prices due to a drought, this has driven up inflation to 9.5% in August 2012.

Tourism is booming!

Since the 30-year civil war ended in 2009, tourist arrivals have gone up steadily - up 46% in 2010, and up 31% in 2011, to 855,975. To help boost tourism, the government has legalized gambling despite religious protests.

Sri Lanka used a global communication campaign "Visit Sri Lanka 2011" to promote the country as a peaceful destination. Sri Lanka also co-hosted the Cricket World Cup from February to April 2011. The tourism department aims to achieve at least 2.6 million tourists a year by 2016.

Tourist arrivals rose 7.8% during the year to July 2012. Business Monitor International (BMI) forecasts that tourist arrivals will rise another 55% to a total of 1.42 million tourists in 2016.

An IT-BPO industry is emerging

The growing Information Technology (IT) and the IT Enabled Services (ITES) industry in Sri Lanka has been one of the reasons that prompt an increase in demand for residential properties especially in the Greater Colombo area. More of premium condominium developments are currently visible in the Central Business District, according to Jones Lang LaSalle. Meanwhile, middle-income buyers have lots of options, with villas, row houses and sub-divided developments emerging in the suburbs.

Sri Lanka has been one of the world's emerging IT-BPO destinations. It is among AT Kearney's Top 50 Global Outsourcing destinations, and Global Services Magazine's Top 20 Emerging Cities.

IT exports have risen from an estimated US$ 275 million in 2006, to around US$ 392 million in 2010. The IT-BPO industry is aiming for US$ 1 billion in exports by 2015. Around 300 IT and BPO companies now operate in Sri Lanka. In 2011, around 63,000 Sri Lankans were employed in IT or BPO related jobs, almost double from 34,000 people employed in 2006, based on the latest ICT Workforce Survey. The industry's workforce is estimated to be growing by 20% annually, and it aims to increase direct employment to 100,000 in the next 5 years, according to AT Kearney.

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