Socio economic analysis of real estate values for middle class

By Nalinda Heenatigala

Owing to its strength and its contribution towards economic growth, middle class consumers have been brought into sharp focus. The size of this demographic being proportionate to the power it holds over the economy and governance structures, they continue to exert a decisive influence over the key indicators of development.

As Homi Kharas and Geoffrey Gertz, senior Fellows at Brookings Institute, state, in India, the “top middle class consumer” will by 2030 reach a purchasing power of 13 trillion dollars, pushing the US to second place. By contrast, Sri Lanka’s capacity to make at least a slight impact on global consumption patterns has been hampered, as its GDP is 3% of India’s (as of 2010). Nevertheless, the Sri Lankan global middle class may well pave the way for enormous strides in the local markets, in entertainment, travel, and, more importantly, real estate, which will help realise the potential for economy development within the country.

To be sure, Sri Lanka can as of the present wield very little influence on the global economy. As of 2002, it had only 0.63 million people with the capacity of spending more than (PPP) 10 dollars per capita per day. Moreover, the Household Income and Expenditure Survey of 2009/2010 revealed that only around 4% of the population was occupied by the middle class, of which the majority spent just above (PPP) two dollars per capita per day. Interestingly, the global middle class tends to have earnings above (PPP) 10 dollars per capita per day. Therefore, the Sri Lankan global middle class, as opposed to the Sri Lankan local middle class, is more able to bring about considerable changes in the local economy.

In that sense, real estate markets promise good prospects, since it opens the doors to them for investments in the residential, commercial, industrial, public and special purpose sectors in the industry. These include not just plots of land, buildings, and improvements, but also consequential rights signified by real estate components.

The real estate market as a whole is able to influence and manipulate consumer behaviour, for the benefit of the local economy. The immovability of real estate products does limit the market to a certain area. However, one of the biggest influences regarding real estate is the lifetime of the land. Is it indestructible? Can it be preserved? Is it renewable? Most importantly, is it re-tradable? These have a large say in determining the value of real estate land when compared to vehicles, clothing and food. It is unlikely in this market for the final product to become inappropriate or unprofitable due to problems in making choices.

At the same time however, the determining factors differ from person to person. Obviously, the cost of the investment plays a decisive role. Since real estate products involve large economic units, clarity, additional costs, and financial arrangements also influence individual decisions. Even the future value of the property in question is pivotal. All in all however, from a general economic standpoint, in a context where inflation depreciates the value of money, purchase of real estate remains an advisable investment and/or savings plan.

When it comes to land, considerations of infrastructural facilities such as water, electricity, accessibility, sanitation and features like the environment, architectural design, and transportation should be accounted for as well. These are indispensable factors which often affect, control, and shape real estate products. Such factors matter when it comes to the purchase of residential real estate property. Since family oriented purchases of such property presuppose tranquil habitable locations, quality and durability of design and construction and neighbourhoods which preserve and sometimes promote the dignity and social status of the occupier of such property. 

The table below lists out the percentage share of the income received by the poorest and the riches households by sector. According to these figures, the middle class is the first highest sector or demographic. This lends credence to the view that the real estate market must be optimised in terms of facilities and other infrastructural requisites for the global middle class. Disregarding this vital fact may well constrain potential economic growth and in the long term, sterilise a country’s economy.

(The writer is Real Estate Product and Market Analyst.)