During the first quarter of this year, a number of real estate developments came on stream, mainly related to the leisure industry, KPMG Sri Lanka, a financial advisor, said in its latest real estate market brief.
International chains have joined local leisure operators to start work on building numerous hotels, while some boutique hotel properties completed construction work during the first quarter.
However, KPMG tips caution, as rising interest rates and inflation could dampen real estate activity.
"The recent increases in interest rates and the likely consequences of inflation as a result of price increases of a number of essentials, are likely to have both demand-side and supply-side implications for the real estate sector," the 10-page report said.
Sri Lanka raised borrowing costs in February and April, after the rupee came under pressure from sterilized foreign exchange sales by the Central Bank which pushed credit to unsustainable levels.The rupee has fallen from 110 to around 131 sharply raising the cost of raw materials, especially those that are imported.
The central bank’s reverse repurchaserate stands at 9.75 percent, while the repurchase rate remains at 7.75 percent.
The rupee has lost some 17.00 percent of its value over the past year, against the US dollar, after the central bank allowed the currency to move more freely in February.
The weak currency has also stoked consumer prices to rise to 7.00 percent in May, over 6.1 percent a year earlier. The island’s export earnings fell 9.2 percent in April, the central bank said last week, as the Euro debt crisis dampens demand for Sri Lankan goods.
"It is envisaged that the momentum of real estate transactions will slowdown in the year ahead, as a result of the rising cost of funds, along with margins also being affected consequent to the increased cost of construction," the report said.
"Hence cautious optimism is likely to be the sentiment," warned KPMG Sri Lanka.
However, the leisure industry could expect some demand, as there is a demand for more hotel rooms to meet an ongoing influx of tourists.
"The steep rise in the number of tourism arrivals signified a potentially increasing demand for hotel rooms in varied categories, with existing capacity still falling short of the anticipated requirement."
Tourist arrivals from January to May rose 18.2 percent to 387,622 over the same period a year earlier, dominated by visitors from India, UK and Germany, according to Sri Lanka Tourism figures.
In 2011, the Indian Ocean Island welcomed a record 855,975 visitors and earned 830.3 million dollars from the trade, according to Central Bank of Sri Lanka figures.
The tourism authority hopes to attract about a million visitors this year, and tips earnings to hit about one billion dollars.
"Selective properties in scenic locations with good amnesties continued to attract investor interest," KPMG said.
The study said ongoing construction activity around the seaport and airport in Hambantota have created a demand for property in that region.
"While there is still a wide disparity in the price of property in the region, it is likely that properties in areas allocated for housing projects as well as properties in proximity to commercial developments, will appreciate in value."