Thursday, March 27, 2008

Sri Lankan real estate holds up in tense times

By Jon Gorvett

COLOMBO: 'Resilient" is the word that almost everyone is using to describe Sri Lanka's housing market - and its economy in general.

Despite a long-running armed conflict and the 2004 tsunami, "Sri Lanka is one of the best countries around in which to have real estate," said Lalitha Saleem, senior manager of Ceylinco Housing & Real Estate, which is developing one of the Sri Lankan capital's largest new developments. "The market can go up very fast, showing high returns."

Specialists say sales have slowed in the last year, but there continues to be widespread optimism that real estate on this island of 65,740 square kilometers, or 25,380 square miles, will be a good investment in the middle to long range.

Many Sri Lankans living abroad have been putting their money back into the country through real estate purchases, and overseas buyers from India, Japan, China and Europe, particularly Britain, also have been taking an interest.

Since the 1980s, Sri Lanka has been torn by fighting between government security forces and the Liberation Tigers of Tamil Eelam, a group fighting for a separate homeland for the island's ethnic Tamil minority. Most islanders are ethnic Sinhalese and mainly Buddhist; the Tamils are mainly Hindu - although both communities also have strong Christian minorities.

Most of the violence has been in the country's eastern and northern areas, although there are occasional attacks within the capital. Foreigners have never been targets, however.

"After a cease-fire in the conflict started back in 2002, you had a great wave of people from the diaspora investing here," said Chanaka Wickramasuriya, country head for Fitch Ratings, the international credit rating agency. "The Colombo district of Wellawatta, for example, saw a boom in apartment building, with 75 percent of all the new apartments in Colombo going up there because the Tamil diaspora was returning."

With a population of about 700,000, Colombo sprawls along the island's southwestern coast, with a long, sandy beach fronting the Indian Ocean. The city has a long history, too, with Portuguese, Dutch and British influences in the architecture of its old quarter.

Spreading out from there, the city takes on a more modern character heading south into more prosperous suburbs like Mount Lavinia.

The interest from expatriates who had left the country during the most intense fighting happened just as Colombo's housing supply was at its most scarce, pushing up prices and, eventually, the city skyline.

"Traditionally, Colombo had been a city of bungalows and houses," said Remaz Ghouse, chief operating officer for Overseas Realty (Ceylon). "But this surge in demand and the shortage of land pushed everything upwards."

At the same time, foreigners began taking an interest in beach properties on the stretch of coast south of the capital.

"Many foreigners wanted a piece of paradise," said John Wilson, a Colombo lawyer specializing in real estate law. "Business really boomed."

Prices - and profits - rose rapidly, too. "In its heyday, you were seeing 80 to 100 percent annual profit margins," Wickramasuriya said.

In 2006, the cease-fire collapsed. The conflict has escalated and, while the market has lost its spectacular momentum, values have remained high.

A new government in 2005 also re-introduced a stiff tax on foreigners buying property.

"Before then, there had been this window of opportunity," Wilson said. "But then it closed, and now foreigners must pay a 100 percent tax at the time of transfer of the property."

There are notable exceptions, however. If an apartment is on the fourth or higher floor in a building, the tax is waived - and certain major projects have been granted tax exemptions.

The tax predominantly applies to houses and bungalows, with the levy effectively preventing foreign ownership of land. As a result, the southern coastal strip has seen little new activity.

Yet, as an indicator of the market's resilience, specialists note that demand is still strong and returns are still high.

"We have three-bedroom apartments in Colombo at the high end going for around 60 million Sri Lankan rupees this year, when last year they were going for 50 million to 55 million," Saleem said, or the current price of $557,000, compared to the range last year of $464,000 to $511,000.

"Middle-range three-bedroom apartments are going for 30 million to 35 million rupees, when a year ago they were 20 million to 25 million rupees," she said.

Ceylinco is developing the luxury Trillium Residences in Colombo 8, one of the city's 15 numbered districts. The first stage of the three-part project is finished, with furnished three-bedroom apartments going for 30 million to 40 million rupees.

"Prices never go down," Ghouse said, describing sales in terms of U.S. dollars. "For a 1,000-square-foot condo apartment, you are looking at a starting price of $200,000, while two years ago it would have been $140,000 to $160,000."

"For four bedrooms, say 2,500 square feet, you start at a half-million now; two years ago, maybe $350,000. With many units now completing, those who bought off plan a few years ago have made a killing," he said.

Many say the market now is about investment, rather than buying homes, with the slower pace of sales still pushing up prices and forcing developments further out from central Colombo.

At the same time, other projects are trying to bring suburbanites back into the center, with luxury apartment complexes like Overseas Realty's Havelock City, incorporating 9 acres, or 3.6 hectares, of parkland to bring a suburban feel to the city's heart. The project, like Trillium Residences, has an exemption to the foreign sales tax.

"We take the longer view," said Overseas Realty's chief executive, Robert Dover. "This is a country that managed 6.7 percent economic growth last year despite all its problems. If those problems get resolved, growth will be extremely rapid. With Havelock City, we're already planning Phase 2. That shows our faith in this country's future."

With most observers saying the conflict will likely escalate this year though, it may be a while before those problems are resolved. Nonetheless, there is a mood of optimism in the sector.

"People are hoping there will be a permanent solution to the conflict here," said Roshan Madawela of the Research Intelligence Unit, a group of economic analysts based in Colombo and known for real estate expertise.

"Things are moving toward this, so I think prices will continue to increase. People are confident of a long-term shift, and calculate that on that basis, you can't really lose out."

Courtesy: International Herald Tribune