Opinion: Importance of nurturing the condominium industry in Sri Lanka

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By Blue Ocean Group of Companies

The real estate and construction industry in Sri Lanka is one of the major revenue-generating sources with its growth or depreciation directly influencing the economy of our country. It is due to the innovative efforts and elegant constructions of the industry developers, that Sri Lanka has witnessed a commendable facelift and rapid growth in the residential and commercial project sector.

In the context of the residential housing real estate industry, it involves many types of properties for instance single houses, multi-storied houses,  annexes,  twin houses,  lined houses, and condo/apartment units. Amongst these developments, condominiums and multi-family properties have evolved over the past decade in the modern Real Estate industry particularly in Colombo where there is a booming trend in the sector. Condominiums are now a popular solution to the growing housing demand in Sri Lanka, in consequence of land scarcity, escalating land prices, and high population density in urban areas.

Changing demographics and the requisite for sustainability

Today Sri Lanka is one of the most densely populated countries of the world. According to the Economic and Social Statistics of 2018, the population density was 342 persons per square kilometre in 2018. A wide variation in population density exists across the districts.

Colombo, the largest metropolitan city in Sri Lanka is overwhelmingly the most densely populated district with 3,578 persons per square kilometre, which is much higher than the national figure. Colombo has been adapting to the vertical living housing trend rapidly. Its economic development has been significant in the country. Since the city is developed, a large population migrated into the city for better living standards, employment purposes, education, and so on, which created a continual demand for housing and other infrastructure development.

Most of the developable lands in Colombo have already been utilized. There are small individual parcels of land scattered throughout the city which are offered for housing and commercial uses at relatively high prices. Hence, it should be noted that scarcity of land, particularly in the urban areas supplemented by the increase in population density has prompted high-rise apartments to evolve as a higher growing sector in the housing arena.

Condominiums are now a popular sustainable solution to the growing housing demand in Sri Lanka mainly due to the prevailing scarcity and the cost of land. Many aspiring developers have emerged over the years with the changing demographics. According to the certifications issued by the Condominium Management Authority (CMA), the absolute rate of growth of condominiums during the past decade is 34%, while it has increased by an unprecedented 64% in 2017 alone, compared to 2016.

Policymakers must understand that vertical living is the most sensible solution to meeting the housing needs of a growing city. Hence the Government should encourage vertical living and ensure that it can be sustained into the future.

Fortunately, a positive stance towards the government is now reflected through its recent ministerial structuring where local departments and institutions were assigned under relevant ministries as a strategic step towards the development of the country. Accordingly, the Ministry of Urban Development & Housing and the Ministry of Finance would come under the purview of the Prime Minister Mahinda Rajapaksa. Hence, authorities including the Urban Development Authority (UDA), Sri Lanka Land Development Corporation, and Condominium Management Authority (CMA) would belong under one umbrella promoting confidence amongst developers while portraying signs of constructive governance.

Importance of developing the industry

Providing world-class infrastructure in their construction endeavours with stylish features and extremely luxurious facilities, developers in Sri Lanka were able to capture the attention of the foreign investors who have been investing huge amounts of foreign currency in properties in Sri Lanka during the past decade. The location and quality of development play a contributory role in this magnetism. As such, real estate has continued to show a significant contribution to Foreign Direct Investments (FDI) in the past. Overseas investors are attracted to Sri Lanka, due to the robust legal system, high-quality assets offering good long-term return opportunities, and a relatively benign tax environment. These foreign investments in real estate will ultimately lead hopefully to the development of the Sri Lankan economy.

Further, the Gross Domestic Product (GDP) in Sri Lanka was at 3% as of 2018 whilst the construction industry saw double-digit growth, at around 10.3% of the GDP back in 2013. Luxury condominiums and apartments especially within the city of Colombo saw a rise in demand, owing to the high net-worth Sri Lankans, foreigners, and Sri Lankan expats seeking to cash in their earned capital. Many developers demonstrated their confidence in the country’s economic potential, by investing billions of dollars into developing sustainable projects contributing to the growth of the real estate and construction industry.

While developers undertake projects designed to promote economic growth they create manifold direct and indirect employment opportunities in various fields. The industry served as a source of employment in many employment options; not only for architects, builders, and engineers but also for legal and financial advisors, surveyors, facilities managers, and all those that provide inputs for the construction industry. As such they are highly vulnerable to economic ups and downs, which may affect the development and sustainability of the construction industry.

Moreover, Condo investing is considered a safer area of real estate investment and is a perfect alternative for more risk-averse investors. Several factors increase the demand for condominiums. Some of the most common determinants of increased demand for condominiums are the price, income, taste, amenities, location, convenience, and return on investment.

During the last quarter of 2018, Colombo residential housing prices rose by 15.1% (14.9% inflation-adjusted). Land prices too continuously observe an escalation. In Sri Lanka, the average price of a residential lot was up 15.3% y-o-y in 2018, to LKR 1.36 million (US$7,780) per perch (1 perch is equal to 272 Sq. Ft.).

Thus, it is evident that real estate establishments are important sources of growth in the Sri Lankan economy. The fast progress of the real estate and construction sector during the previous years can be attributed to the efforts of such companies that have been successful to bring about a revolutionary change.

While there are more than favourable signs of continued growth in the construction industry, there are still legitimate fears, pushing some to proceed with caution. Some risk factors causing anxiety in the market include Political and regulatory uncertainty, National economic uncertainty, Local and regional economic uncertainty, Rising material costs, Increasing interest rates, and Skilled labour shortage.

A challenging environment for developers

Covid-19 pandemic has no doubt left a trail of destruction in the local as well as international real estate industry landscape with projects facing labour shortages, supply chain issues, and snowballing financial pressures. During the recent past, the demand for condominiums has been severely affected due to the decelerated economic activity. As the pandemic intensified slowing the economic growth, developers and contractors in Sri Lanka have been vastly affected as a result of the consequences of cash-flow disruptions. Consequently, it has been a challenge to manage the risk in terms of capital, liquidity, safety, and supply chain management.

Moreover, the April 2019 Easter Sunday Attack, the adverse effects caused by COVID 19 Outbreak in March 2020, compounded by the rigid Economic and Fiscal policies prevalent in the past had dampened the market sentiment and demand factors. The April 2019 tragedy created political and economic turmoil which lead to the slowdown of the industry as well as the economy. Sri Lanka’s economy was already in trouble, dogged by political crisis, its currency under pressure from a growing national deficit and rising debt. The attacks further discouraged foreign investors from investing in Sri Lanka.

Likewise, the industry massively impacted due to the Constitutional Crisis in October 2018, the escalation of Construction Material Cost as a result of the exchange rate fluctuations adding to the burden. In the modern Housing Construction Cost Index compiled by the Central Bank, it is evident that the housing construction costs have doubled in the last decade.

Moreover, during the previous government, the Central Bank had imposed sudden rigid economic policies to restrict lending facilities on the construction sector, which seriously impacts the new developments and decelerates the progress of the existing projects. The banking industry was enjoying huge profits through imposing excessive interest rates in the past two years compelling business activities to slow down.

These challenges that were often beyond the control of developers, impacted the progress of many projects and resulted in delays in obtaining approvals from government authorities and often reflected a negative brand image since clients saw delays in the execution of these projects.

Developers are compelled to adapt to the prolonged procedure of obtaining preliminary planning clearance and permits from the Urban Development Authority (UDA), Condominium Management Authority (CMA), Ceylon Electricity Board (CEB), National Water Supply and Drainage Board, Municipal Fire Department, Civil Aviation Department, Coast Conservation Department, Central Environment Authority and the Sri Lanka Land Reclamation and Development Corporation. Perceptibly going through this process amidst all macro challenges isn’t a piece of cake and so the efforts of Sri Lankan developers and their determination to support the country prosper should not be underestimated. Therefore not only did the challenges impact the industry efficiency, but it had affected the trust between investors and developers as well.

However, the recent government interventions and support in the form of debt moratoriums and concessionary working capital loans motivated the developers to strive to bounce back and sustain the industry in the short term.

Condominiums— the sustainable housing solution

During the past few decades, apartments and high rise housing solutions have been developed as differing projects at different scales. Accordingly, the trend has evolved throughout the succeeding decades along with the gradual change of human needs and wants and the socio-economic backdrop of the country. In the 60’s and 70’s the government launched apartment projects as a strategic measure to solve the severe housing issues of low and middle-income communities in Colombo where lands are limited in supply. 

Currently, there are over 900 apartment complexes in the country with more than 15,000 residential units while another 200 condominium projects are in the pipe-line with over 13,000 residential units which are going to be completed within the next three-four years with a majority of the projects being in Colombo. Yet, over 90% of Sri Lankans live in single-family detached houses which is clearly not a sustainable way forward. This trend is creating numerous challenges one of which is the traffic congestion with average commute time increasing resulting in loss of productivity.

Thus, a need for government authorities to recognize the importance of vertical living is much needed considering the demographics and social dynamics of Sri Lanka and thereby encourage people of the country to this new shift in living styles. Accordingly, the government should create awareness and instil a multi-family housing mindset amongst the people. Some of the key initiatives and policies the government could implement to support the condominium industry include, providing incentives through attractive finance schemes to make housing affordable, collaborating with the construction industry when creating fiscal policy frameworks, and spreading awareness amongst Sri Lankans on the many benefits of condominium living and the sustainable aspect of Sri Lanka’s future housing demand.