Making the grade: Developers are meeting demand for high-end office space


In recent years Sri Lanka’s real estate market has experienced intensifying demand for grade-A office and commercial space from both domestic and foreign establishments. Such space is scarce in the capital and almost non-existent outside Colombo. Although several projects expected to supply a large amount of premium commercial space are in the construction pipeline, most will not open their doors for months or years. The lack of supply is exacerbated by an environment in which grade-A space commands a premium price point making construction a key priority.

Incoming Supply

Grade-A commercial real estate is generally classified as recently built office or retail space located in a prime area that, has a high standard of maintenance as well as an array of modern conveniences such as high-quality furnishings, and facilities – internet connectivity, security, air conditioning, on-call maintenance, elevators, escalators and such – and excellent accessibility. In terms of the country’s total number of commercial buildings, grade-A developments make up only a small percentage of the total, according to real estate consultancy Research Intelligence Unit (RIU), which identified only four buildings – the World Trade Centre (WTC), HNB Towers, Access Towers and Parkland – as fitting the bill in 2016. However, with 1.95m sq ft of retail and commercial space currently planned or under construction, 3.1m sq ft of cumulative supply is expected to be available for use by 2020.

This incoming supply will take various forms, such as standalone buildings, mixed-used developments and retail malls. In a September 2016 report, the Sri Lankan branch of real estate consultancy Jones Lang LaSalle (JLL) said it expected the Colombo market to be at the receiving end of 2.6m sq ft of high-end office space in the medium term. JLL also anticipated that more than 10 retail malls totalling about 1.6m sq ft would be ready for occupancy by 2020. Until then, the demand for grade-A commercial space in Colombo will likely remain high and the supply insufficient as the existing upscale commercial buildings are at or near 100% occupancy – a situation which is highly profitable for property owners and landlords, who can legally increase rents 10% to 15% every two years.

Average rents for such office spaces have jumped from between LKR70 ($0.50) and LKR100 ($0.70) in 2007 to between LKR200 ($1.40) and LKR270 ($1.80) per sq ft in 2016, a 15-20% annual growth rate, according to the RUI report. Space at the WTC remains the highest-priced, at more than LKR350 ($2.40) per sq ft, followed by Rainbow at just under LKR350 ($2.40) per sq ft and Parkland, Access Tower II, Carsons-Colombo, and the Land Mark rents cost between LKR275 ($1.90) and LKR200 ($1.40) per sq ft.

But with several high-quality and high-occupancy developments in the pipeline, real estate analysts expect a narrowing of the supply gap in the near term, even as demand continues to expand in correlation with economic growth. In the first quarter of 2017 the RIU estimated that grade-A office space comprised a total of 2.5m sq ft – a number that has remained largely unchanged over the past decade. “With GDP growth to continue at about 6%, it is likely there will be sustained demand for commercial offices, in particular grade-A office space, from the banking and financial services, and even government agencies over the course of the year,” Steven Mayes, managing director of JLL Sri Lanka, told OBG.

New Developments

Upcoming commercial real estate developments in Colombo include the 240-metre-high Altair, which will include two towers and 40,000 sq ft of retail space due for completion in 2017; Access Tower II, with 200,000 sq ft of space; Orion City Phase 2, with 450,000 sq ft; Colombo City Centre with 200,000 sq ft; the John Keells Holdings (JKH) Waterfront Project with 500,000 sq ft; the Renuka Building with 200,000 sq ft; Shangri-La with 650,000 sq ft; and Havelock City with 600,000 sq ft. Several of these will be integrated developments that incorporate condominium units, retail stores, and office space. The RIU estimated the scale of these new developments would contribute around 53% to Colombo’s cumulative stock of commercial space.

Money To Spend

In 2016 per capita income in Sri Lanka was one of the highest in South-east Asia, standing at a total of $3912, up from $3504 in 2014 and $3638 in 2015. A large number of Sri Lankans now have disposable income and this is reflected in rising consumer spending. Despite this, the retail sector has not kept pace, remaining well under capacity in terms of both offerings and the retail space, and set for a large expansionary phase.

Despite the shortage of malls and major high-street shops, consumer spending in the country has remained robust, hitting an all-time high of more than LKR8trn ($54.5bn) in 2016, up from LKR7.6trn ($51.8bn) in 2015. The size of the retail market was estimated to range between $25bn to $30bn in 2016, and JLL reported expecting double-digit growth in the short term. This lack in supply has not gone unnoticed by stakeholders. The 10 new malls scheduled to open by 2018 will add an estimated 1.5m sq ft of retail space to the current supply. These include the Shangri-La Mall to open in Galle Face, the Havelock City shopping centre and the JKH shopping centre.

Colombo’s retail establishments have until now been dominated by traditional markets such as Pettah, or concentrated in upmarket areas such as Bambalapitiya, Kollupitiya and Wellawatte. But the lack of high-quality retail mall space is pushing newer top-tier retailers, including international and luxury brands, to consider opening on the high streets – mainly Galle Road and Duplication Road – and in new sub-markets. This trend could result in new retail corridors opening up in Colombo in the near future, which would in turn create new opportunities for the commercial real estate sector. There is, without a doubt, much pent-up consumer demand for both international and domestic retailers to set up shop in Sri Lanka. AT Kearny’s 2016 global retail development index ranked Sri Lanka at number 12 of the top-30 developing countries, right behind regional competitor Vietnam, calling it a “strengthening economy with retail growth” and highlighting its strong economy and few restrictions on foreign investment. Modern retail grew by 4.5% in 2015, according to AT Kearny, while total retail sales hit $31bn and retail sales had an annual compound growth rate of 6.6% from 2013 to 2015. Retail sales per capita are forecast to grow 6% annually over the subsequent two years, fuelled by rising incomes. Although, the country is not without its retail weaknesses, such as its current domination by domestic players and its limited available retail space, especially in Colombo.


Indeed, those looking for undiscovered real estate bargains may be wise to seek it outside the confines of Colombo City proper. With the government planning to redevelop an entire region, many opportunities for retail and commercial real estate may be located outside the capital. “We see opportunity in the hospitality market, particularly outside of Colombo, to cater for growing tourist numbers, but also within the commercial capital for business class hotels. Although retail malls are on the drawing board and scheduled for delivery around 2018 in Colombo, the retail sector remains fragmented, and opportunities remain for food and beverage operators and international brands,” Mayes told OBG.

JLL identified Kandy, Gampaha, Kalutara, Galle and Matara as cities with similar population density and spending habits to Colombo where new shopping and retail developments could realise considerable profits. Projects are already under way in some of these cities. The Gampaha Development Company is moving forward on the Orex City and Ward City developments in Gampaha, for example, which enjoys some of the country’s highest per-capita incomes.

The government’s $40bn Western Region Megapolis Planning Project (WRMPP) will almost definitely act as an impetus for commercial real estate growth both inside and outside Colombo. Home to 5.8m people, or 29% of the country’s population, the Western Region contributed 40% of Sri Lanka’s total GDP in 2014, according to the WRMPP Master Plan. The project, which covers a total area of 3600 sq km, is expected to serve as a blueprint for redeveloping both Colombo City and its sprawling suburbs. It is therefore widely expected to have substantial consequences for every part of the region’s economy, with commercial real estate one of the many to benefit from increased opportunities for investment and expansion. Nihal Rupasinghe, secretary to the Ministry of Megapolis and Western Development, told local media that many investment opportunities will emerge as a result of the project. With it the government hopes to bring forth a major urban transformation in Colombo.

The project has already stimulated some interest abroad, with participants such as International Enterprise Singapore and South Korea’s Ministry of Land, Infrastructure and Transport both having already signed agreements to collaborate in the project. This is alongside the WRMPP’s higher-profile $1.4bn project, Colombo Port City, now the Colombo International Finance City (CIFC). In collaboration with China Harbour Engineering, it is expected to be completed by the end of 2019. When it is finished, CIFC will offer investors and consumers an estimated 5.7m sq metres of built-up office, retail, hospitality, residential and leisure space estimated to bring in over $13bn in foreign direct investment. Another opportunity on the horizon is the introduction of real estate investment trusts (REITs). Reportedly in their final stages, the on-going discussions to introduce REITs would see small and medium-sized investors in the Sri Lankan real-estate market able to invest in large-scale commercial projects for the first time.

Investment Opportunities

Discussion at a September 2016 forum organised by unit trust management firm Guardian Acuity Asset Management (GAAM) centred on just which of the investment opportunities to grasp – and which to avoid – of those that are expected to arise as the WRMPP goes from planning to construction and its final stages.

At the GAAM discussion, participants debated land prices and ownership issues, with some participants arguing for the release of more government land to even out the market. The government holds more than 93 sq km of land around the prime areas of Colombo 1, 2, and 11, as well as land surrounding Beira Lake, which could in theory be set aside for investment under the WRMPP. In terms of commercial real estate issues, Ashok Pathirage, chairman at Softlogic Group, identified the current lack of retail space as posing the biggest obstacle to the retail industry’s growth in Sri Lanka. Thilan Wijesinghe, chairman at property investment and development management company TW Corp, told local media that during recent years, as interest rates have been kept artificially low and income has increased, real estate has become an attractive investment for many. Wijesinghe added that, in his opinion, real estate was overpriced and in need of correction in order to be more in line with Sri Lanka’s current phase of economic development. However, there are still some concerns in regards to investment property in the capital city. “There is a great need for the country to focus on the production of goods and services within the country to enable the wider economy to grow and sustain a high growth rate, which in turn will continue to spur higher demand for property in Colombo” Anand Sundaram, CEO of Colombo City Centre, told OBG.


Building, owning and leasing grade-A commercial property in and around Colombo seems set to be a safe bet for investors in the country’s real estate sector. With consumers having more disposable income and ready to leave the privations of the civil war behind them, the new malls, high-street shops and office buildings will likely be highly sought after.