Real estate realty check

Rising interest rates and inflation hurt Sri Lanka’s property market but there is value for money quality deals up for grabs, and investment in land remains attractive

“When interest rates are high together with inflation, it tends to inflate real value. I feel that the property market still reflects the real value. Thus, for anyone looking for real value, investments in property would be a best option…” Deputy Chief Executive Director Ceylinco Homes International, Chryshantha Jayawardhana	Architect Surath Wickremasinghe points to reducing location options for future projects in the city. He recommends that steps be taken to remove the many thousand slums and shanties in Colombo to make way for real estate and other development work.	General Manager of Kelsey Home, Adel Hashim feels that whilst there is a drop in apartment sales, the individual housing market remains somewhat stable. “Now is the time to buy really, as prices have come down,” he says.	Rienzie T. Wijetilleke, the Chairman of Hatton National Bank states, “there’s nothing that banks can do about the current state of affairs, due to high lending rates”. He agreed that borrowers for housing requirements are faced with numerous problems during repayment.

By Darshana Abayasingha
Sri Lanka’s high inflationary regime rendered bank savings useless and investments in the stock exchange and real estate were the saving grace for the investing public. The result – land rates rose to absurd proportions and apartments blocks sold out well before the first brick was laid. Investors and property owners were making treble the value within a short space of two to three years. The failing macro environment put paid to that growth – just like all good things must come to an end.

Financing issues
The industry is affected by high project finance, interest rates, high home loan rates, plus, Sri Lankan expatriates less willing to invest in property due to the unstable political environment developers say. Though realtors point to a fair amount of stock left in the market, these are difficult to sell due to these market factors. Booming land values ground to a halt, whilst some areas in fact recorded drops. Prices of property in Colombo-central and Colombo 7 have reportedly plummeted close to 25 per cent from around Rs. 6.5 million to just above Rs. 4 million. The ballooning rates have held in some sub-urban areas and their growth potential less affected, resulting in a growing number of proprietors looking to dispose of marshy and abandoned paddy lands. Local politicians and authorities are reportedly cashing-in on the situation when affording elusive land-filling permits.

The impact of high lending rates has been adverse. High project financing translates to higher cost of development, which is passed on to customers. The real ‘killer’ is exorbitant home loan rates, realtors say. For example, a house sells for Rs.12 million; the buyer borrows 75 per cent which amounts to Rs. 9 million. Then, 18 months back when the interest rate was 12 per cent the loan payment would have been Rs.90,000 a month. With the increase in rates – close to 18 per cent – it would now be Rs.135,000 a month. Affordability has literally gone through the roof. In order to get an additional Rs. 45,000 loan, an individual would have to earn at least Rs. 80,000 more!

Banks unwilling to help
With property values soaring to astronomical proportions banks have become unwilling to fund home loans. Prior to the downturn, rising land rates made apartments a viable option as individual housing was too costly – a common trend in most cities around the world. Thus, in order to meet the public’s housing requirements banks must be willing to fund apartment projects. Yet, lending institutions have demonstrated their unwillingness, developers lament, and this refusal stems from higher interest rates, which raises risk of potential default. How many people in Colombo have savings of Rs. 25 million to buy an apartment? Not too many! So, how do these people buy homes without the support of financial institutions?

Speaking to The Bottom Line, Rienzie T. Wijetilleke, the Chairman of Hatton National Bank states, “there’s nothing that banks can do about the current state of affairs, due to high lending rates”. He agreed that borrowers for housing requirements are faced with numerous problems during repayment. “It is indeed a sad state of affairs, and there is really no relief that banks could give at this moment,” Wijetilleke said. He points out that some banks were even offering deposit rates of up to 18 per cent, and expressed concern over the future of his industry. The government must do something to control inflation and money supply, and there would be no short-term answers; only long-term solutions, Wijetilleke asserts.

Construction costs
In addition to the above issues, construction costs too keep rising, driven by inflationary pressures at home and overseas. An Institute For Construction Training And Development report shows that price of building materials have increased by 4 per cent per quarter or 16 per cent per annum over the last two years.

The President of the Chamber of Construction Industry (CCI) Architect Surath Wickremasinghe, told The Bottom Line that with inflation at over 15 per cent, the construction industry has no choice but to pass on the increased costs to its customers, which trickles down to the purchaser. He described property rates in Colombo and its suburbs as “absurd” and added it hurt the viability of development projects and consumer purchasing power. The industry has sought relief from authorities, but these requests have fallen on deaf ears. With money supply in the market at a low, Wickremasinghe feels that developers must focus on attracting the Sri Lankan expatriate community in the Middle East and Europe.

Despite available stock, Wickremasinghe also points to reducing location options for future projects in the city. Thus, he recommends that steps be taken to remove the many thousand slums and shanties in Colombo to make way for real estate and other development work. He explains that the removal of over 2,000 shanties from the Panchikawatte area – and shifting occupants to alternate housing – would provide an additional 26 acres in Colombo north for development activity.

Expatriates still interested?
Deputy Chief Executive Director Ceylinco Homes International, Chryshantha Jayawardhana, asserts that Sri Lankan expatriates are still interested in the value for money segment. He says projects like Trillium and Eden Gardens which have focused more on high-net-worth expatriate clients offering high value have done well, and described that segment as “still strong, with continuing interest”.

“When interest rates are high together with inflation, it tends to inflate real value. I feel that the property market still reflects the real value. So, ultimately when interest rates do come down property rates would continue to hold. Thus, for anyone looking for real value, investments in property would be a best option. One should always have a mixed portfolio (investments), and people shouldn’t run because of high interest rates and not feel shy to invest in property,” Jayawardhana feels.

General Manager of Kelsey Home, Adel Hashim feels that whilst there is a drop in apartment sales, the individual housing market remains somewhat stable. “Now is the time to buy really, as prices have come down,” he says. With scarce land resources closer to the city, one could think that it is right to buy as it would most probably increase in value, Hashim points out. “If someone says that property market is going to crash; I wouldn’t quite think so. With apartments; there has been a reduction in expatriate interest due to the country situation, but internal interest is very much there. There is no issue of units not selling – if there is then thats an issue with the developer,” he avers.

Taxing approvals
From a legislative perspective obtaining approvals has always been difficult. Slow bureaucratic procedures coupled with inefficient officials have always been – and would continue to be – a bane to industry. Plus, regulations with regards to construction need to be re-looked at, particularly within the city. For instance; how to achieve optimal floor area on a plot of land, as realtors complain certain regulations stifle efficiency. These regulatory concerns at times are valid, and it would be better for the authorities to individually assess each case. Developers must also meet all environmental and other legal criteria, including statutory requirements at Pradheshiya Sabha level.

Also, laws and procedures need to be straightforward, clear cut and standardised! Despite some existing regulations – which are somewhat fair – the Pradeshiya Sabhas would inevitably invent those of its own, and hamper development work during and even after construction. What is needed is a strategy to see how best to optimise land usage in terms of floor area with a standard clear cut procedure, realtors say. It is a waste of time for developers to go behind numerous officials at council level, when nothing – seems – to be wrong with the plan. Local councils also need to have time frames for granting approvals. There are too many instances of people having to wait 7 – 9 months for approvals for projects in which nothing seems wrong

The new construction tax passed through gazette requires construction projects above certain floor area to pay a 5 per cent construction tax. Considering the work done by government related agencies is administrative in nature, developers claim it is not necessary to levy a 5 per cent tax. Industry margins are rather small – given the times, developers say. Again, it’s the customer who would incur 5 per cent more costs, which could vary from Rs. 600,000 on a Rs. 12 million apartment – this would attract further interest payment and cost close to Rs. 100,000 per annum (at a 17 per cent rate). Also, a 4 per cent stamp duty on land purchase price, and a further 5 per cent on construction drives projects to financially unviable levels.  

Hashim says that almost every developer is keen to comply with rules and regulations, but stresses that it is absurd for a developer to have to visit 17 different points to find if his or her project has been approved. “If the UDA sets out some guidelines, then it is the task of the local councils to see them implemented. Some matters should not be left in the hands of individuals, and sadly there are too many such instances. Good governance is a priority for top companies and it becomes very difficult in dealing with these people,” he says.

The Public’s Options…
Bad news for developers, bad news for contractors and more bad news for us – the investing and home-seeking public. But there are those who are happy that the current crunch has infused some sanity into property rates which went out of control. The sentiment is shared by realtors and buyers alike save a few grumbles from those looking to dispose land – particularly in Colombo. In our Motor Special last week, we demonstrated how vehicles have fast become an unaffordable luxury in sunny Sri Lanka. Slowly but surely housing and property has reached that same sphere. For the time being, it seems better we say no to cars and no to housing. Oh… and there’s no point saving either, with astronomical inflation. People gripe about the brain-drain, but why live like this?