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Are foreigners missing out on investing in Sri Lankan real estate?

Along a stretch of coast in Sri Lanka’s capital, sand dredgers furiously spew jets of debris as they prepare the ground for one of the country’s most ambitious real estate projects to date.

October 26, 2018

Sri Lanka has relatively good economic growth, beautiful beach areas, and a robust construction sector that is developing appealing new luxury homes at very affordable price points

Along a stretch of coast in Sri Lanka’s capital, sand dredgers furiously spew jets of debris as they prepare the ground for one of the country’s most ambitious real estate projects to date.

Port City Development, a 269-hectare “futuristic city” costing USD1.4 billion, will be a shiny new mini-metropolis in Colombo, featuring financial and commercial districts, housing, a marina, and a Formula One racetrack.

The brainchild of a consortium of Chinese companies led by state-run China Harbour Engineering Company Ltd (CHEC), the project is another impressive example of how new cities, bridges and roads are growing out of nothing in countries where China is pouring money to realise its Belt and Road economic dream.

“Colombo Port City is a key project in South Asia under the Belt and Road Initiative and it has well matched Sri Lanka's Western Megapolis development strategy,” Chairman Liu Qitao of China Communications Construction Company Limited, the parent company of CHEC, told Xinhua.

China has been committed to rebuilding infrastructure in Sri Lanka since the island’s decades-long ethnic war ended in 2009. But with China’s economic and geopolitical future riding on the success of its Belt and Road plan, set to link its land and sea trade routes to Africa, Europe and the rest of the world, money is flowing thicker and faster into Sri Lanka and the rest of Asia.

China has invested USD1.3 billion in the development of the southern deep-sea port of Hambantota, a deal marred by concerns that the port could be used by the Chinese military. It is also developing the 114.5km Matara-Kataragama railway extension and has funded most of the construction of the Mattala Rajapaksa International Airport.

Carrie Law, CEO of Chinese property platform Juwai.com, said that big-ticket investments like these “reassure Chinese consumers that Sri Lanka will continue to have strong economic growth.”

Political ties between the two countries are strengthening. Last month, Sri Lankan President Maithripala Sirisena vowed to deepen relations with China. “It is my firm belief that our collective resolves to further deepen our relations at all spheres will continue under your esteemed leadership,” the Chinese Embassy quoted President Sirisena as saying.

Yet despite China’s redoubled efforts to fund major infrastructure and property projects in Sri Lanka, individual Chinese investors have yet to take a shine to the country’s real estate market as they have in Cambodia, Malaysia and Thailand.

“Sri Lanka is still a marginal market for Chinese buyers—little is known or understood. Chinese still account for a small share of total offshore buying, with Sri Lankan expats making up the biggest offshore buyer group,” Law said.

But Sri Lanka ought to be more attractive to Chinese, Law pointed out. “What the country has going for it is its vital position along the sea route of the Belt and Road Initiative, relatively good economic growth, beautiful beach areas, and a robust construction sector that is developing appealing new luxury homes at very affordable price points.”

It’s not just the Chinese that have yet to commit to Sri Lanka’s real estate market.

Steven Mayes, managing director of JLL Sri Lanka, said 95% of buyers in Sri Lanka are locals, 90% of whom buy in cash. “Developers rely upon one source of buyers with a national average salary of US$4,500—there are only a certain number of buyers in the market at any one time,” he said, adding this makes Sri Lanka a less sustainable market than other countries in the region.

Since the late 90s when condominiums were first built, Sri Lanka has witnessed strong growth. The past three to four years have seen around 4,000 new units added annually, and about 10,000 more is expected in the next few years.

Landmark luxury developments are rising in the capital, with notable ones including the Colombo City Centre, a 47-storey retail and residential complex; Dynasty Residency, an 88-unit high-rise; the curiously designed Altair, and Astoria, developed by the Aviation Industry Corporation of China.

Areas outside Colombo are also heating up—at least four new luxury developments expected to launch in the beachfront between Galle and Matara in 2019. Along the south-west coast, new high-rise blocks will launch along with residential gated communities and resorts.

While undoubtedly in an upswing, Sri Lanka may face a critical situation particularly for the luxury sector, in which demand needs to keep pace with supply.

“The residential sector has seen increased average absorption of luxury condominiums, though Colombo is displaying early signs of oversupply in this segment. However, this is mitigated by opportunities in medium-cost and low income/social housing,” JLL said in a report last year titled Sri Lanka - Land of Real Estate Opportunities.

Managing Director Daham Gunaratna of Lanka Property Web said new markets must be tapped to keep the industry healthy. “Sri Lanka [needs to] get more foreign buyers into the country. There are more apartments coming up and we need that foreign market to absorb those apartments,” he said, adding that the Chinese and Indian markets would be key to sustaining this growth.

So why hasn’t Sri Lanka, with its idyllic beaches and low cost of living, become more of a hit with foreign property investors?

A lack of investors’ confidence is the case. “The market lacks structure, regulation and transparency, there is no public access to land registry information, and foreigners cannot access the mortgage market in Sri Lanka,” JLL’s Mayes pointed out, adding Sri Lanka would draw more foreign investment if a better regulatory framework was in place to engender confidence and trust. “Without underlying confidence, the market is left to speculators and open to exploitation by those wishing to take advantage of the lack of regulation.”

This and consistent government policy, said Mayes, will create a sustainable property market. “It could even open up the market in similar fashion to, say, Dubai, and create a buoyant investment market not only from Chinese investors but from buyers all over the world.”

The present laws that govern foreign ownership of land are far more foreign investment friendly than those of comparable Asian countries such as Thailand and Bali

As it is, foreigners cannot own property in Sri Lanka—they either have to accept leasehold tenure or create a corporate structure with Sri Lankan partners, making the whole process time-consuming and costly than competing markets. Equally restrictive is the law that allows foreigners to only buy condo units on the fourth floor or above.

Ivan Robinson, director of Lanka Real Estate, sings a different tune. Robinson doesn’t see the laws around foreign ownership as restrictive, pointing to the fact that a foreigner can own freehold land after 20 years of part ownership (49%), and can also buy freehold property from another foreigner who bought their property when there were no restrictions on freehold ownership.

“The present laws that govern foreign ownership of land are far more foreign investment friendly than those of comparable Asian countries such as Thailand and Bali,” said Robinson.

The good news is the government seems to be moving in the direction of making buying property easier.

Last November the Sri Lankan government announced in its 2018 budget that it would allow majority-foreign-owned companies listed on the Colombo Stock Exchange to purchase and build on freehold land. It was also proposed that foreigners would be able to buy from ground level up.

Such regulatory changes serve to paint a rosy picture of the future of Sri Lanka’s property market.

Other bright spots include the country’s burgeoning wealthy class. There are 3,400 dollar millionaires and 170 multi-millionaires, and Colombo is likely to see a 160% growth in the super rich (those with more than USD30 million) to 182 individuals over the next decade, according to the 2017 Wealth Report by Knight Frank. 

Sri Lanka’s thriving tourism industry, the arrival of major shopping malls, and better health care and education are set to draw foreigners looking for a comfortable place to live that has the trappings of a prospering economy.

With such booming prospects, even a potential change in government looks unlikely to give the industry much trouble.

Local elections in February have seen the opposition Sri Lanka People’s Front—a new party backed by former strongman Mahinda Rajapaksa who ruled from 2005 to 2015—make great gains, showing the unpopularity of the Sirisena government.

Eduard Hempel, a director of Pearl Sri Lanka Real Estate Company, said whether the incumbent government stays or goes after the next general election in 2020, the property industry’s growth looks set to continue. “The present government has set out to slightly improve [the laws around investment] and even if the opposition got in, they wouldn’t rock that boat too hard. So long as there’s no negative news between now and the next few months, the next year will see some pretty strong gains.”

This article originally appeared in Issue No. 148 of PropertyGuru Property Report Magazine