Sri Lanka's amazing house price boom, amidst surging tourism
Lalaine C. Delmendo | April 17, 2019
Sri Lankan housing market is experiencing an extraordinary boom, amidst a surging tourism sector, coupled with weak residential construction activity.House prices surged 17% nationwide during 2018 (16.3% inflation-adjusted) to an average of LKR 34.03 million (US$ 194,670), according to LankaPropertyWeb.
Quarter-on-quarter, house prices increased 4.9% (4% inflation-adjusted) in Q4 2018.
Average house prices soared 50% y-o-y in Colombo, Sri Lanka's capital city, (45.6% inflation-adjusted) to LKR 165.74 million (US$ 948,124) in 2018.
During the latest quarter, Colombo house prices rose by 15.1% (14.9% inflation-adjusted).
Almost all provinces saw rising house prices, with Sabaragamuwa registering the biggest annual increase of about 40% during 2018, followed by Central (27.5%), North West (27.1%), Western excluding Colombo (17%), and Southern province (0.3%).
Land prices are also rising. In Sri Lanka, the average price of a residential lot was up 15.3% y-o-y in 2018, to LKR 1.36 million (US$7,780) per perch (1 perch is equal to 16.5 feet). Likewise, land prices in Colombo also increased 5.5% y-o-y to LKR 11.56 million (US$66,130) over the same period.
Sri Lanka's booming tourism sector is fuelling property demand. In 2018, Sri Lanka saw a record 2.3 million tourist arrivals, up 10.3% from a year earlier, according to the CBSL. India, China, Britain and Germany were the leading markets last year while Australia registered a significant growth.
Then in the first two months of 2019, tourist arrivals increased again by 4.6% to 496,272 people from the same period last year.
Despite strong demand, residential construction remains weak. In the first half of 2018, the total number of housing approvals in Greater Colombo fell by 11.1% to 5,130 units from a year earlier, according to the Central Bank of Sri Lanka (CBSL). Housing approvals fell by 4.7% in 2016 and by another 6.9% in 2017.
From a US$-based investor's perspective, the Sri Lankan residential market's gains were partially offset by the 15% depreciation of the Sri Lankan rupee against the US dollar from LKR 153.2 = US$1 in December 2017, to LKR 180.215 = US$1 in December 2018.
In 2018, Sri Lanka's economy grew by 3.2%, slightly down from the prior year's 3.3% growth and the slowest expansion since 20o1, according to the Department of Census and Statistics. The economy is projected to grow by 3.6% this year and by another 3.8% in 2020, according to the Asian Development Bank (ADB).
Foreigners can freely buy properties as long as they are willing to pay the Land Tax for foreigners at 100% of the property value. An alternative is to lease the land for 99 years, bringing the tax down to 7%. Almost all property transactions are done in cash, in rupees. Most locals do not accept cash cheques or money transfers.
Analysis
of Sri Lanka Residential Property Market »
High yields of 10% on the West coast of Sri Lanka
Beachfront property along the West coast has the highest yields, averaging 10%; some properties yield more than 11%. Rents are predominantly seasonal, but this figure reflects long-term rental rates. Yields around the capital Colombo are much lower, at about 3.5%.
High progressive income tax rates in Sri Lanka
Rental Income: Net rental income by nonresident foreigners is taxed at a flat rate of 20%.
Capital Gains: Capital Gains Tax was abolished in April 2002.
Inheritance: There is no inheritance or estate tax.
Residents: Residents are taxed on their worldwide income at different tax rates, depending on the source of income at progressive rates, from 6% to 18%.
Sri Lanka impose 100% land lax when foreigners buy
Total roundtrip transaction costs, i.e., the cost of buying and selling a property, are prohibitive at around 107% of the property's value, which includes 100% land tax, 3% to 4% stamp duty, 1% legal fees, and 3% real estate agent’s fee.
It takes an average 51 days to complete the nine procedures needed to register property, according to the World Bank.
It is inadvisable to buy in the Tamil Tiger-controlled North and Northeast, where warfare rages. The Southwest coast is relatively safe and peaceful. Foreigners are generally shielded from violence.
Sri Lankan law is pro-landlord
Sri Lanka’s laws are, formally speaking, pro-landlord for properties not covered by the Rent Act, which generally covers properties constructed and/or rented out before 1980.
Rent: The landlord and tenant can freely agree on the rent, and the security deposit.
Tenant Security: The landlord and tenant can freely agree the length (term) of the contract, in the case of a lease.The court system is extremely slow. Obtaining an eviction decree can take one and a half years or more, and up to ten years or more if there is an appeal. There is a tremendous backlog of cases before the Appeal Courts.
The economic has been slowing
In 2018, Sri Lanka’s economy grew by 3.2%, slightly down from the prior year’s 3.3% growth and the slowest expansion since 20o1, according to Sri Lanka’s Department of Census and Statistics.During 2018:
- Agriculture, which contributes 7.9% share to GDP, grew by 4.8% from a year earlier
- Industry, which contributes 27% to GDP, grew slightly by 0.9% y-o-y
- Services, which contributes 56.8% to GDP, expanded by 4.7% y-o-y
“While the economy is projected to recover over the next two years, for Sri Lanka to sustain and accelerate growth, fiscal and structural reforms remain essential,” said Asian Development Bank (ADB) senior economist Utsav Kumar.
The economy is projected to grow by 3.6% this year and by another 3.8% in 2020, according to. Sri Lanka's budget deficit was 5.3% of GDP in 2018. The government aims to reduce the deficit to about 4.4% of GDP in 2019 and to 3.5% of GDP in 2020, in line with its International Monetary Fund (IMF) programme targets.
“Sri Lanka’s ambitious fiscal consolidation targets - when the country has not had a fiscal deficit below 5% since at least 1990 – will rely on effective tax collection and administration and increases in some taxes,” said Moody’s.
The government was able to increase its revenues to 14% of GDP in 2018 from just 11.6% in 2014 mainly by raising the value-added tax rate in October 2016 and by implementing the Inland Revenue Act (IRA) in April 2018. Government revenues are projected to increase further to 15.8% of GDP this year and to 16.8% in 2020.
In February 2019, inflation slowed to 1.2%, sharply down from 5.4% a year earlier, according to the CBSL.
Unemployment rose to 4.6% in Q4 2018, according to the Department of Census and Statistics.