Cautious optimism for real estate

• Leisure sector outpaces housing as the driving force of the construction industry
• Upward pressure on interest rates, inflation likely to trigger slow down

The country’s real estate and property development sector has shown rapid growth post-war but several new factors have prompted leading consulting firm KPMG Sri Lanka and specialist Research Intelligence Unit (RIU) to have “cautious optimism”.

The latest Real Estate Market Brief Issue 2 – 2012 titled ‘Changing cityscape’ done by the two firms noted that for the first time in Sri Lanka, the leisure sector has outpaced housing as the driving force of the construction industry.

“This is a strong indication of a short-term boom whilst in the long term, the market is expected to settle on a steadier incline that reflects the overall international travel environment,” it added.

The report also confirmed that the first quarter of 2012 witnessed a number of developments in the real estate sector in Sri Lanka, coming on-stream.

“Leisure projects were among the major contributors to activity in the market, with the commencement of construction of several hotel projects and the opening of some recently-completed boutique hotel properties,” KPMG Sri Lanka’s Principal – Financial & Real Estate Advisory Shiluka Goonewardene said in the report.

The steep rise in the number of tourist arrivals signified a potentially increasing demand for hotel rooms in varied categories, with existing capacity still falling short of the anticipated requirement. Selective properties in scenic locations with good amenities continued to attract investor interest.

Ongoing construction activities continued in the city of Hambantota, primarily in the completion of the Ruhunu Magampura Sea Port and in the International Airport in Mattala, which is due for completion later this year.

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.

“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. It is envisaged that the momentum of real estate transactions will slowdown in the year ahead, a result of the rising cost of funds, along with margins also being affected consequent to the increased cost of construction. Hence ‘cautious optimism’ is likely to be the sentiment,” Goonewardene said in his foreword to the report.

The report provides a snapshot of developments in the new city of Hambantota, a glance of suburban property market as well as valuation dynamics based on an interview with W. Seneviratne, former Chief Valuer, Valuation Department. Additionally it also provides an updated assessment on developments in the city, with emphasis on the leisure market.