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Panel discussion moderated by Daily FT Editor Nisthar Cassim (centre). Panellists (from left): Fairway Holdings Managing Director Hemaka De Alwis, Condominium Management Authority Legal Consultant G.T.S. Perera, KPMG Real Estate Advisory Principal Shiluka Goonewardene, Prime Group of Companies Chairman B. Premalal, KPMG Tax and Regulatory Principal Suresh R.I. Perera and John Keells Group Property Sector Chief Marketing Officer Roshanie Jayasundera Moraes
By Kiyoshi Berman
The Chartered Management Institute (CMI) UK’s Sri Lanka branch recently held a knowledge sharing event themed ‘Vertical Living: Beyond 2020’ on 25 March in Colombo, in association with its exclusive knowledge partner, KPMG in Sri Lanka.
The objective of this event was to discuss the challenges, changing trends and opportunities in the growing real estate market and most importantly the emerging concept of vertical living.
This event focused on how residential high-rise buildings made of glass have become symbols of gargantuan excess and privilege. However, the history of vertical living in Sri Lanka emerged as a housing option for the low income segment and re-emerged over the last decade as a high income housing and investment opportunity.
Comparing to the rest of the region, Colombo has yet not reached the state of a vertical city despite the surge in inflow of investments in the condominium market. The discussions highlighted that this requires a lot more planned development, proper use of advanced technology and skilled personnel as well as support from the government in terms of imposing laws and regulations in favour of such developments.
The event kicked off with a special presentation by Fairway Holdings Ltd Managing Director Hemaka De Alwis, who set the background for the discussion. He went through the fundamental reasons for constructing apartment complexes, challenges and how the industry could move forward.
“There is an upward mobile community in Sri Lanka and their housing demands will continue to increase as long as Sri Lanka will develop economically and financially. When it comes to handling this housing demand, we need to do it responsibly because any form of development on land would cause a lot of damage to the environment; so we should responsibly manage the resource of land. This is where houses and apartments differ. Houses require more land than apartments. For example 200 apartments can be built on two acres but if you go to build 200 houses, it will take about 50 acres. For example, in cities like Kandy the natural beauty has been destroyed with unsightly housing burrowing into the hillside and this could have been avoided with large apartment complexes,” he said.
Challenges in developing a vertical city
Speaking about the challenges in developing a vertical city by 2020, he highlighted that some areas in Colombo are already heavily saturated. “For example take Wallawatta where six to ten apartment buildings are congested in a single street. These are really challenging the road infrastructure there and the water and utilities are also challenged. That was really a phenomenon that happened because of the war. These apartments came out very fast, a lot of people made a big industry out of it but today the people who invested in them have not seen their properties appreciate in value and they have a very poor resell value. For these reasons, over development and saturations can have negative effects,” he added.
With several examples he showed that the biggest challenge for property development is the cost of construction and therefore developers need to make apt use of technology, keep up with trends and simply learn to build cheaper.
De Alwis concluded his presentation by emphasising that vertical living is the only way forward and therefore we need to get the basics right.
KPMG in Sri Lanka Principal – Real Estate Advisory Shiluka Goonewardene presented a set of statistics involving apartment and condominium development in Sri Lanka for the past few decades and showed how the industry has developed thus far.
Larger population coming into the cities
“There is a larger population coming into the cities and we are under-urbanised. We have only 15% urbanisation while most neighbouring countries have around 30%. Another interesting fact is land distribution; there is about 16 million acres in Sri Lanka and most of it is gone for agriculture, wildlife a
nd so on and usable land, according to statistics is all urban areas,” he pointed out.
He also mentioned that apartments are the only property foreign investors can buy in Sri Lanka. He showed that Sri Lanka will have an estimated 21,000 units per annum during the next 15 years. Speaking of the development sector in Sri Lanka, he said that according to available information there are eight foreign developers and 10-12 medium scale developers. He concluded his presentation with a few other statistics.
Following that presentation, an interactive panel discussion took place. This was moderated by Daily FT Editor Nisthar Cassim. The panellists were a group of eminent corporate leaders and professionals comprising Fairway Holdings Ltd Managing Director Hemaka De Alwis, Prime Group of Companies Chairman B. Premalal, John Keells Group Property Sector Chief Marketing Officer Roshanie Jayasundera Moraes, Condominium Management Authority, Sri Lanka Legal Consultant G.T.S. Perera, KPMG Principal – Tax & Regulatory Suresh R.I. Perera and KPMG Principal – Real Estate Advisory Shiluka Goonewardene.
Level of regulation
The first question was regarding the current level of regulation that enables industry growth. Perera answered this by stating, “The Apartment Ownership Act 1973 describes the principle of the condominium and secondly the Condominium Authority Act is the management side. In 2003, they introduced three categories of condominiums, these are completed, semi and provincial housing projects.” He explained that the problem is that developers have got people to occupy the buildings but haven’t issued the deeds. According to the Apartment Ownership Act the CMA has the power to investigate this dispute and hold inquiries and file the action in the Magistrate Court.
Cassim brought up a follow up question: In terms of capacity and intelligence is the CMA in a position to manage this situation? Perera justified that by saying, looking at the past a good job has been done. Earlier people didn’t know the powers of the CMA which is a general body that has semi-judicial powers.
Answering a question regarding tax rates a panellist said, “There was a tax concession introduced by developers as a marketing tool. That is when a professional takes a housing loan; the interest thereon to the bank will be taxed at half rate. When a normal person takes housing loan, the interest derived by the bank will be taxed at 28%, whereas the housing loan given by a bank to a professional it will be at 14%. That is a gain to your customers.”
Market segment
To the question; what is the market segment that you can target with these tax incentives? A panellist replied, I think there is a possibility of marketing high luxury level apartments to foreigners because with the new land restrictions law that was introduced, foreigners cannot buy property in Sri Lanka. The entire market segment will be moved to the condominium properties. A foreigner cannot buy any units below the fourth floor but everything beyond the fourth floor they can buy. That is a future target market for developers.
A tax holiday is given to investors providing the investment is completed prior to 31 March unless this is extended and this applies for infrastructure development and urban sprawling. For the last two to three years, we have not been exercising income tax holidays. Depending on the quantum of the investment the tax holiday can run from six years to 12 years, discussed the panel.
Developers do not register condominium plans
There was a concern raised from the audience that most of the developers do not register the condominium plan even though it’s a requirement. If the plan is registered, the stakeholders are safe. Also, most of the developers tend to mortgage the property before the construction is done and they do not mortgage it as an apartment building but as a land. Is there any way the buyer is protected? Answering this De Alwis said, in countries like Australia the money that is taken as advances are kept in escrow by the bank and then the money is taken out when the apartment is launched. But over here, we don’t have such systems because again it drives the price up. There is a cost involved in all of it. So the best you can do is to find a good developer. Adding on to that, Perera mentioned that if a dispute occurs, action can be taken by the CMA or if not a Court case can be filed and if filed under the Magistrate Court there will be no cost to the client.
Further, there were discussions about the importing and production of material such as tiles, sanitary wear, air conditioners and so on. It appears that Sri Lanka has very less production of such items and that is driving costs higher.
Lack of knowledge and expertise can cause dramatic expenses
De Alwis shared his experience about the level of expertise we have in Sri Lanka. He mentioned that he wanted a certain apartment complex to face the Colombo city. It has cost him 160 million to make that turn but apparently it would have been avoided if they had known that the building could have been engineered with that turn. With this he explained that the lack of knowledge and expertise can cause such dramatic expenses.
To a question if developers are targeting markets out of Colombo, De Alwis replied that apartments have to be built in urban areas and very close to the urban centre and can’t be kilometres away. The whole point in people coming in to apartments is for convenience and to be close to the shopping malls, gym, recreational activities and everything. Yes, we’re going out of Colombo but still it’s a learning process.
Moraes was asked if a company like John Keells would want to build apartment complexes outside Colombo. She replied that building outstation is something they would probably consider but at the moment with the projects they have in hand, that’s not something they are looking at.
A participant from the audience shared his views by saying, “We’re talking about vertical living and yet our mindset is still. There are two storey and three storey buildings which need to be promoted to multi storey buildings and funded if the investors cannot afford them.”
Moreover, the valuing of apartments after 25 to 30 years down the line was also brought up. It was noted that compared to countries like Singapore our apartments are built with solid material sometimes incurring more cost than it should have. However, it benefits the owners because the value keeps appreciating and when these apartments are sold both buyer and seller benefits from it.
Overall, the discussion covered the areas such as what is considered a condominium and why more apartment complexes are required in the city, the environmental impacts, the cost and other challenges and finally the Government’s role in aiding the development and expansion of urbanisation through vertical living.
