Investing in real estate in post-pandemic Sri Lanka

By Rohan Parikh

Given both the impact of the pandemic and current economic challenges, it is natural for investors to wonder whether Sri Lanka’s real-estate market offers a viable investment opportunity. As an industry professional who has studied the country’s real estate market extensively, I am of the firm opinion that especially for local investors, prudent investments in residential condominiums are among the best options from among all available alternatives.

If one is to adopt a long-term view and analyse the market fundamentals and key growth drivers, it is clear that these remain unchanged for Sri Lanka’s condominium sector. In addition, certain recent developments, for example rising inflation which reduces the attractiveness of liquid assets, is converging with longstanding growth drivers such as increasing urbanisation, in driving growth. Despite such opportunities however, it is also clear that there is even greater need for prudence, particularly in choosing high-quality developers in the current scenario. 

As investors remain cautious, which adversely impacts cashflows of developers, it is likely that overly-leveraged developers with projects which are targeted at the wrong market segment will find themselves in financial trouble. Issues such as challenges in obtaining raw materials for construction, could further exacerbate such pressure.

A resilient market

Sri Lanka’s overall real estate market has previously bounced back from many downturns. This holds true even at present, considering that the Land Value Indicator (LVI) for the Colombo District as measured by the Central Bank appreciated by 9.5% in the first half of 2021, compared with a year before. Residential LVI for Colombo increased even greater, appreciating by 9.6% during the same period. This reflects the resilience of the real estate market and solid growth prospects, as the economy adapts to the new normal.

Inflation also recorded a 13-year high in January 2022. In Sri Lanka, historically, investing in real estate has provided a hedge against inflation, especially as investments in monetary assets become less enticing since they hold no intrinsic value, unlike real estate. While local interest rates have risen, they still remain at levels substantially lower than that prior to the pandemic, which would benefit buyers who are making investments through bank loans.

Strong fundamentals 

As previously mentioned, the fundamentals remain unchanged. The twin growth drivers of the urban condominium market, cost and convenience, remain relevant. In fact, given recent appreciation of land prices as per the LVI, condominiums are perhaps even more attractive now, in relative terms, as building a house of your own becomes increasingly less affordable. In addition, the greater convenience offered by condominiums, for instance in terms of security, repairs and cleaning, has perhaps increased further, due to ongoing power disruptions, which particularly affect households. 

Increasing urbanisation also remains a key consideration, in terms of which Sri Lanka is still catching up to its peers. According to the 2018 edition of the United Nations’ World Urbanisation Prospects, Sri Lanka’s urbanisation level stood at only 18.5%, while the global average for lower middle-income nations was more than twice that of Sri Lanka, at 40.6%. The urbanisation rates of our neighbours India and Pakistan were reported to be 34% and 36.7% respectively. 

However, the situation is changing. UN Habitat has indicated that Colombo is urbanising rapidly, with urbanisation levels growing by nearly 10% per year between 1995 and 2017. This will fuel the growth of the real estate market, particularly for residential condominiums, with vertical living undoubtedly being the future of urban living, given space constraints and high land prices.

As tourism recovers, prospects could improve for both commercial and residential real estate. Notably, Sri Lanka was identified as one of the world’s best locations for digital nomads in 2021 and the Government is keen on capitalising on this opportunity. This can potentially offer new avenues for investors in condominiums, including for long-term renting of properties to tourists.

The pandemic’s impact

Beyond the ‘economic case,’ following the pandemic, there are also several other factors which are changing the dynamics of the real estate market. High-quality condominium developers are well-positioned to capitalise on this opportunity. During the pandemic, many realised the importance of having a well-designed, attractive and functional living space and easy access to amenities such as pools and gyms. The offering of high-quality condominiums aligns well with these needs. Developers are also making further adjustments in this regard.

Those who are living on their own may also find themselves more attracted towards the sense of community that condominiums provide, which made a vast difference during the pandemic, especially during lockdown periods.

In conclusion, despite short-term setbacks stemming from issues such as difficulty in accessing certain building materials, Sri Lanka’s residential condominium market remains resilient, viable and attractive for both residential buyers and investors. While the long-term fundamentals remain unchanged, the recent developments, when analysed closely, supports the trend towards condominiums. However, given particularly the pandemic-induced volatility, the choice of one’s developer is absolutely critical and developers who lack sound business fundamentals may find themselves in hot water. 

(The writer is the Managing Director of Iconic Developments and an alumnus of the Wharton School of Business and INSEAD.)