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Last Updated: May 02, 2008

Colombo’s worrying condominium boom

Sri Lanka has experienced a condominium boom, especially in the luxury sector, which is now beginning to worry the market - as higher interest rates bite. That boom has of course excluded foreigners, who since 2004 have been required to pay a 100% tax on landed properties purchased in Sri Lanka (and on apartments below the 4th floor).

Middle-range three-bedroom apartments in Colombo are going for 30 million to 35 million rupees (US$550,000), when a year ago they were 20 million to 25 million rupees (US$465,000 to US$510,000), according to local industry sources.

New launches are daily expected. There was 35% increase in the number of condominium certificates issued in 2007, compared to last year, according to the Condominium Management Authority, a private sector group. According to the developers, over 90% of the buyers of these luxury apartments are ethnic Sri Lankans.

The BOI has approved the construction of a $150 million mixed use 59 floor ‘Diamond Tower’ on Darley Road, Colombo, which will be the tallest building on the island. Also planned are a US$30 million planned apartment complex in Nugagoda, and of a luxury Ceylinco project, Trillium Residences in Colombo 8.

The expatriates return

The ‘condominium boom’s’ first phase was driven by Sri Lankans living overseas, after the implementation of the ceasefire agreement in 2001. The interest from expatriates who had left the country during the intense fighting blossomed just when Colombo's housing supply was at its scarcest.

During the years that followed there was strong demand for luxury apartments. Developers experienced lucrative profit margins. Local investors followed, as these properties earned high yields.

The Colombo district of Wellawatta, for example, saw a boom in apartment building. A large proportion of all the new apartments was built there, because the Tamil diaspora was returning.

Local wags began to say that prices of Colombo condominiums were comparable to Dubai and even New York - a bizarre result of unleashing pent-up demand from expatriates.

But while the market has lost its spectacular momentum, values have remained high.

However, the country’s worsening security situation does affect investors.

Another problem is inflation and therefore higher interest rates. Consumer price inflation has risen over 5 years from from 2.6% in 2003 to 17.5% in 2007.

Higher interest rates and the escalating cost of living are all casting a pall over the market. Bank interest rates have gone up from 11% to 22% per annum.

Despite the serious security situation and natural disasters, Sri Lanka has experienced strong economic growth with an average 5-year GDP growth rate of 6.3% (2003-2007). GDP growth in 2007 was 6.5%.

Though momentum continues strong, nervousness is mounting.

There are plenty of doomsayers. “In classic bubble style more players jumped in because earlier developers had made exceptional profits,” said Imran Furkan, an independent market analyst, in a press conference announcing a recent report.

Furkan estimates that four thousand mostly unsold luxury condominium are under construction and believes that condominium and land prices in Colombo carry a 40% speculation premium. “The bubble will burst for the simple reason it was created on borrowed cash,” he says.

The South Coast waits for change

The South Coast beachfront market has gone through an almost opposite trajectory. In some areas, land values doubled and even tripled after the 2002 ceasefire - especially for beachfront properties - as investors anticipated the return of tourists and expatriates. The return of Aman Resorts in 2003 also boosted confidence.

Yet in October 2004 a draconian 100% property tax was imposed on the purchase of land or property by foreign nationals (4th or higher floor apartments are not subject to the tax). The levy effectively prevents foreign ownership of land. As a result, the southern coastal strip has seen little new activity. Tourism also received a setback in 2004, when the Asian Tsunami killed more than 30,000 Sri Lankans.

True, some foreigners continue to invest by buying companies that own specific plots of land and property. But the fizz has gone out of the market.

Tourism has slumped as the peace and order situation has deteriorated. The conflict has intensified since November 2005’s election of president Mahinda Rajapakse, who campaigned on a promise to take a hard line with Tamil Tiger rebels, and believes the solution lies in a unitary state. Since then, there has been a barrage of bombings and successful attacks on members of the government and army installations by Tamil Tigers. In January 2007 Rajapakse’s position was strengthened when 25 opposition MPs defected to the government, giving it an absolute majority for the first time.

In March 2007 the Tamil Tigers launched their first-ever air raid, casting doubts on government claims to be winning the war. In January 2008 the government finally pulled out of the ceasefire, by now a dead letter. The human rights situation has deteriorated. In March 2008 an international panel invited by the government to investigate alleged human rights abuses left the country, with panel members saying the authorities were hindering its work.

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