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Boom or Bust – The Apartment Conundrum

Boom or Bust – The Apartment Conundrum

By Chrys Gunatilaka

 

Whilst winding ones way through the congested streets of Sri Lanka’s main cities and their peripheral suburbs, one cannot but notice the sheer quantum of Apartment Developments that appear to mushroom, as if by magic, at potentially the most prime of locations.

 

With nearly 7000 Apartments expected to add to the market by 2020, it is indeed prudent to pause and contemplate if this sizeable inventory has a targeted group of buyers who are both willing and able to keep this market alive and to ensure any decline in current trajectory is averted. Depending on whom this question is posed to, one can expect a split opinion with the forbearers of doom and gloom prophesizing an imminent catastrophe with hollow whispers of the many developers who are now in deep trouble.

 

On the flip-side of this coin sits the more rational and invested parties, having poured scores of research hours and millions of dollars into their projects, who boldly contend that the 7000 Apartments that will be part of the available units in 2020 will in fact be insufficient to meet the demand which will prevail by then.

 

It is undeniable that more and people converge on the main cities for various commercial and personal advantages like jobs and schooling which supports indications by a recent KPMG report that high density living would rise exponentially by 2030 due to these domestic migrations. This would also be a result of available land for construction diminishing rapidly, causing developers to rush in to erect mini townships dominated by vertical living structures competing with each other to reach furthest into the heavens.

 

Approximately 60% of these units would ultimately be absorbed through homegrown mechanisms such as urbanization and changes in buyer behaviours determined mostly by fast paced lifestyles and careers which require more time for work and less for simple life pleasures such as weeding a garden or trimming a hedge. Despite this, the Government should not be lulled into a sense of apathy on the issue. Much that can be done to increase demand patterns and stabilize any negative market forces that could potentially bust the proverbial property bubble, and create disastrous repercussions by cascading the country into an Economic Downturn.

 

Tourism, Foreign Investors and the Sri Lankan Diaspora are key market drivers that should receive a lot more Government intervention to attract and encourage investments in this sub sector of the industry. Investments from these categories of investors should be more aligned with policy and operational ease. A step in the right direction to this end was achieved with the recent relaxing of the Land Alienation Act that now permits direct non-Sri Lankan investments into Apartments.

 

To further stimulate the sector, a close review of costs should be undertaken to encourage reasons for foreign investment dollars to be hedged on Sri Lanka’s upside potential. Most countries, including one of Asia’s most robust; Singapore – leverages off its’ stability in the region and the ensuing confidence by Global investors as a safe place to invest, by having fees and taxes which could increase the property price by up to 16%. Sri Lanka on the other hand, despite having extracted itself from the clutches of terrorism has squandered precious time by indulging in several political upheavals that create a strong sense of insecurity and does in no way galvanize buyer confidence.

 

The Government can also take strong policy measures to introduce and foster implementation mechanisms to strategic budget provisions already announced in previous budgets, such as REIT’s (Real Estate Investment Trusts), which could potentially draw foreign fund investments to mixed developments such as shopping malls as well as housing and apartment developments.

 

Either way, the key to manoeuvre the inherent risks within Sri Lanka’s burgeoning skyline dotted with an explosion of Apartment constructions, will undoubtedly be, the ability of policy makers to demonstrate sustained consistency of policy with a strong focus on investment encouragement as opposed to short-term tax benefit. For all this, time is fast running out and the World is watching.

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Boom or Bust – The Apartment Conundrum

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