Basics of real estate investment in Sri Lanka

Sri Lanka’s real estate sector is entering an unprecedented new phase in its development as residential and commercial properties spring up across the island, concentrated primarily in the Colombo district. However, faster paced growth brings with it many notable challenges for the wary investor or aspiring home-owner. 

Delving into the varied opportunities and risks associated with the Sri Lankan market, Iconic Developments Ltd. Executive Director Pranav Desai sat down to discuss how a cautiously planned investment can yield enormous value and some key areas to watch out for when entering the Sri Lankan real estate sector. Following are excerpts:

Q: What is your outlook on the Sri Lankan real estate sector?

A: We at Iconic Developments are very bullish on the real estate sector in Colombo. We strongly feel this is a great time to buy, particularly given that the Government has removed tax benefits for real estate firms which will almost certainly drive prices upwards, particularly on developments that haven’t yet commenced. Even if new projects are launched, particularly over the medium term, we believe that the pace of development that Sri Lanka could result in further obstacles to such developments reaching completion. 

We reiterate however that Colombo has an inherently strong demand for quality affordable luxury housing and so the trend towards vertical living will continue, and it is fundamental strengths in the Sri Lankan market like this that drove us to recently launch our second development in the country in the form of Iconic Galaxy at Rajagiriya.

When investing however, we would advise buyers to really do their homework and pay careful attention to the credentials of a developer. This is a crucial factor for investors and there are certainly examples even over the recent past of less credentialed developers hastily constructing properties and compromising on quality and unfortunately, sometimes even safety standards. The growth that the Sri Lankan market is currently experiencing means that there will be a period of time over which the quality of these kinds of developers will be tested and eventually, only those which are able to truly demonstrate quality in their work will survive. However in the time it takes for this initial period of risk to dissipate, prices are sure to rise, hence we believe that the Sri Lankan market is truly at a very unique point in its development. 

Q: What are some of the key factors that a smart investor should look for when choosing a property to invest in? 

A: Some of the key factors that should first be considered would be the location of the property, price for the size and amenities offered and of course, the credibility of the developer. When making an investment, a home owner or an investor has to essentially put their faith in the developer for a product which in truth, will only be developed and delivered over an extended period of time. This gestation period - which is inherent to every real estate development project – means that the credibility of the developer is absolutely crucial when considering an investment into any real estate project. 

Taking ourselves as an example, Iconic Developments is a subsidiary of ANPG, which was established in the year 1947. We have strong roots which spread out into a diversified range of sectors including Transport, Logistics, Shipping, Hospitality and Education. 

Over the years, our real estate arm has carried out numerous projects across the globe spanning luxury residences, commercial and office developments, clubs and hotels. Iconic Developments Ltd. is a company which is incorporated in Sri Lanka and we have already successfully completed one of Rajagirya’s most impressive residential properties in the form of Iconic 110 Parliament Road which sold out 172 apartments within the span of just two years. 

We were the first in the market to provide luxury at an affordable price and I’m pleased to say that our home owners and investors earned great return on their investment. Our record is the best evidence that we can provide to show that we are passionately committed towards establishing the highest quality vertical living option in Colombo and it is factors like these about a developer’s record which must be carefully evaluated prior to investing. 

Given the relative lack of maturity in the Sri Lankan market when it comes to extensive real estate development, I would also recommend that investors also take the time to learn more about how smart financing strategies can also help streamline the investment process. 

Q: How do you think the high interest rates will affect the real estate sector?

 A: Higher interest rates make borrowing more expensive for owners as well as the developers, which can have a constraining effect on the real estate market. Fluctuations in real estate that are tied to interest rate movements are of course something that is typical in any market.  

That being said, we are also aware that higher interest rates will not last long and this too shall tide over in the coming years. 

Given ANP Group’s extensive experience in this industry across the globe over the past seven decades, we are of course well acquainted with these macroeconomic scenarios and have built up the capacity to absorb the disparity of the volatile market trends. Similarly, we have also worked to assist potential home owners and investors tide over this high home loan rate through a unique 30:70 payment plan. The potential home owner needs to put in 30 % as a down payment and pay the remaining 70% on completion of the project, and this is just one of the steps which we have taken towards mitigating current conditions for our buyers. 

Q: Given that this type of plan has not really been offered in Sri Lanka as it has in other markets you operate in, could you explain how the 30:70 works?

 A: For any investor, this is an ideal deal, as they need to pay only 30% upfront and balance 70% only on completion of the project. Thus, the investor remains stress free from multiple payment plans and has actually locked an asset at a fraction of the cost. At just 30% investment he has created an asset and balance 70% is payable only when the project is completed. He is free from financial stress and can use his extra money for other investments. The investment is safe, secure and the risk is limited to the initial down payment.

 To explain this better – Let’s take a hypothetical scenario in case of Iconic Galaxy home owner, where Mr. X a home owner takes a home loan, he would need to pay 30% of the amount upfront and the balance 70% is disbursed by the bank as per the payment plan which is usually linked to the slab construction. As soon as the 1st instalment is disbursed, the bank starts charging an interest even though the project would take four years to complete. However, with our 30:70 scheme, Mr. X would be paying only the 30% amount upfront and would feel the need for a home loan only towards the completion of our project, as his 70% payment is due on completion. In this case he can push his home loan requirement need by four years. This helps him save on interest costs and gives him enough time to plan and rebuild his finances before the EMI starts.

Q: Overall, how would you compare your experience as a developer in Sri Lanka as compared to other markets around the globe?  

A: The Sri Lankan market certainly presents its own unique challenges, and especially compared to markets like Singapore and the Middle East, it can be challenging from a regulatory standpoint, however we also have extensive experience working in the Indian market, and having established a strong foothold in the Sri Lankan market with Iconic 110 Parliament Road, we believe we are gaining a much greater familiarity with the local market. This combined with the inherent strengths that Colombo to be a truly unique, vibrant, international city means that over the medium-long term, people could well be asking us about our experience as developers in Sri Lanka as a case study for what to do correctly. It all depends on execution and quality.