Commercial real estate market has high potential for ROI: analysts


Oct 26, 2015 (LBO) – The demand for Sri Lanka’s commercial property is growing and there will be high potential for return on investment, experts said.

“Sri Lanka’s commercial real estate has high potential for return on investment (ROI),” Ravi Abeysuriya, group director of Candor, a financial consultancy service said.

“Retail rental yields for commercial property average around 10 percent.”

The demand for commercial property is growing strongly in Sri Lanka where the focus was previously in residential properties.

He was speaking at the second annual real estate conference organized by Lamudi Sri Lanka held in Colombo recently.

Experts say that there is a strong demand for good commercial space in Colombo and this demand is not expected to slacken given the island’s macro-economic outlook.

“The commercial property market had been ignored for many years because developers were getting good returns on residential properties,” Roshan Madawela, managing director of Real Estate Intelligence Unit (RIU), a real estate consultancy said.

“However now international investors are showing interest and we see the entry of more commercial projects.”

RIU data shows that Sri Lanka’s top end of commercial space offers around 2.5 million square feet of space in total provided by around a dozen developments with the World Trade Center topping the list for aggregate capacity with a total of over 700,000 square feet available for commercial purposes.

“The prevailing rental rates show that the WTC is still well ahead of the pack,” he said.

“Looking at the overall rental price levels, we see that the market has enjoyed exceptional price hikes over the past five years.”

This price surge Madawela says is due to the fact that the market has been dealing with an acute shortage in supply of grade A space in and around the city for several years.

“With occupancy at the top facilities close to 100 percent, those seeking large space have had to settle for the middle market, both in the city and in the suburban areas.”

However Abeysuriya says that the island still lacks innovative financing options for commercial real estate, but can expect improved financing options.

“Soon we will see new financing options such as REITS and CMBS becoming available for commercial real estate developers,” he said.

A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock while a commercial mortgage-backed security (CMBS) is a fixed-income security, typically in the form of a bond, which uses commercial real estate loans as collateral.

“They provide investors with an extremely liquid stake in real estate and receive special tax considerations and typically offer high dividend yields,” he added.