High growth rates attract foreign and domestic investors to Sri Lanka's real estate sector


Referred to by one industry stakeholder as one of the most promising in Asia, Sri Lanka’s real estate sector is experiencing unprecedented levels of growth. Although Colombo’s high-end luxury property such as hotels, condos and retail outlets comprise the main draw, other areas – such as Galle and Colombo’s suburbs – are also receiving increased attention and investment from both foreign and domestic sources, as well as from expats looking to return home after the cessation of a decades-long civil conflict in 2009.

A Key Contributor

The Board of Investment (BOI), an investment promotion agency, listed the country’s total foreign direct investment (FDI) in 2015 as $1.6bn. Of this, approximately 18%, or $116m, was tied up in housing and property development, and 24%, or $161m, was related to tourism. The private sector is the main driver in Sri Lanka’s real estate development, with the majority of developers hailing from Sri Lanka, China and India. Encouraged by recent infrastructure improvements to the capital such as the E02 Expressway – colloquially known as the Colombo Outer Ring Road – and ongoing projects such as the Colombo International Finance City (CIFC), property developers have moved in with high-end residential developments that will permanently alter Colombo’s skyline and economy. In addition to this, more grade-A commercial developments are needed to meet demand in the capital.

Meanwhile, investors and developers alike have been flocking to seize a piece of Galle’s sought-after ocean-view holiday and second-home properties, with foreign investors making up a large portion of the buyers there. “Our research highlights the fact that Sri Lanka is on the right path to growth,” Jafar Jafarov, managing director of Lamudi Sri Lanka, told local media in early 2016. “The country’s GDP is growing, as is the amount of international interest in real estate. While Colombo is currently targeted as a luxury area, investors are also looking at the suburbs and growing cities such as Kandy, Gampaha and Galle for property investments.” Although, markets in Sri Lanka’s eastern and northern areas have not been as heated as Colombo and Galle. However, government schemes to provide more housing and infrastructure, preserve the historical area of Kandy, as well as a Chinese-led development in Hambantota, have also been changing the landscape outside of the capital and the southern region.

Development-Friendly Management

A variety of oversight bodies are involved in Sri Lanka’s property sector. The Urban Development Authority (UDA) plans and regulates urban areas throughout the country by providing a bridge between developers and state entities by helping oversee city planning, initiating new policies and, in certain cases, implementing government housing projects. Also, the proposed new Land Bank, to be located at the General Treasury and the Ministry of Housing and Construction, will cooperate with the UDA on housing-related issues and projects, while the National Housing Development Authority focuses on providing low-income housing in rural areas. The Ministry of Megapolis and Western Development; the Ministries of Lands, Transport, and Tourism; the Condominium Management Authority; and the Colombo Municipal Council are all also involved in some degree in development planning, infrastructure construction and the property market at the local or national levels.

Regulations Easing

The country’s real estate regulatory framework is based on a handful of legislative acts. These include the 1973 Apartment Ownership Act, amended in 2003; the 2014 Land (Restriction on Alienation) Act; and the 1998 Registration of Titles Act. A controversial element of the 2014 Land Act prohibited foreign nationals from owning Sri Lankan land or property, including apartments, except under the circumstance in which a condominium unit was situated on or above a building’s fourth floor. In the 2017 budget speech, however, the administration of President Maithripala Sirisena proposed abolishing the freehold right restrictions from the ground floor in order to incentivise investment in the condominium industry while keeping the bar on foreign ownership of land. The proposed changes would also allow foreigners who wish to purchase condominiums to raise 40% of the cost from a domestic bank – as long as debt servicing is conducted in foreign currency. In addition, a 15% land lease tax for foreigners leasing properties was revoked in January 2016, and investment guarantees to protect investors have been put in place, according to statements made by Upul Jayasuriya, the chairman of the BOI, in December 2016.

The budget speech also called for the establishment of a clear land policy in order to attract investment. To do this, the government recommended introducing legislation that would confer freehold right of land to limited liability companies as well as allow private companies with majority foreign holdings to lease land on a long-term basis under certain circumstances.

A Budget For Investment

In the government’s 2017 budget speech, a variety of other real estate-oriented proposals were tabled, each of which could significantly impact the industry in Sri Lanka.

Regarding the introduction of real estate investment trusts, the government proposed that the Securities and Exchange Commission should facilitate the introduction of amendments to the Unit Trust Code 2011. Furthermore, it urged the National Savings Bank (NSB) and the Housing Bank to provide a loan facility for potential homeowners at a 7% all-inclusive rate with a 25-year tenure, with NSB raising around LKR370bn ($2.5bn) to provide such loans.

The government also said it intended to launch a home ownership programme in which 500,000 homes would be built for low and middle-income families. It invited the private sector to develop 100,000 middle-income housing units at LKR5m ($34,000) per unit and 250,000 low-income housing units at LKR1m ($6820) per unit between 2017 and 2019. The proposals also included the establishment of a Land Bank at the General Treasury in collaboration with UDA and the Ministry of National Policies and Economic Affairs, which will have full ownership of all government land. It also directed Sri Lanka Ports Authority to use its extensive property in prime locations for commercial purposes. In order to develop the house renting industry, the government said it intends to repeal the Rent Act, while at the same time ensuring that existing tenants’ rights are upheld.

Urban Housing Squeeze

The current availability of non-luxury housing supplies only a fraction of the demand for accommodation in and around Colombo. Based on increasing rates of rural to urban migration, the demand for housing units in the capital city is set to increase from 12,500 to 21,000 units in 2017.

Meanwhile, increasing land prices and construction costs for high-rise buildings have led to price escalations in the condominium market and a rise in prices of vacant land adjacent to the capital, according to consultancy firm KPMG. Between 2015 and 2018 the supply of condominiums is expected to increase to 950 per year, up from 670 per year between 2008 and 2014, indicating growth of 42%, according to KPMG, which forecasts more than 3800 units will be added to the market by condominium developers by 2018.

Such a large amount of new build in the condo pipeline could indicate of a potential oversupply, but real estate firm Jones Lang LaSalle (JLL) foresees reasonable demand for housing continuing in Colombo that effectively rules out an oversaturation in the capital’s residential market, Steven Mayes, managing director of JLL Sri Lanka, told OBG. Mayes also sees both a gap – and an opportunity – in affordable and middle-income housing, particularly in Colombo. While acknowledging the existence of an excess supply of luxury and high-end residential condominium projects in Colombo’s Central Business District (CBD), Mayes interprets this as a slowing trend in sales pace, noting that developers may have to hold on to inventories for a longer period than was previously the case. In 2015 KPMG estimated that price ranges for super-luxury, luxury, and semi-luxury condominiums cost around $230-385, $115-270 and $92-170 per sq ft, respectively.

According to Lamudi real estate firm, Colombo properties have experienced a steady growth in demand. Iconic developments such as Altair – designed by the architect Moshe Safdie – and Altitude – a mixed-use development dedicated to the winners of 1996 Cricket World Cup – are also set to raise the bar on property prices, especially for the luxury segment in Colombo. In 2015 average prices for high-end apartments at Altair ranged from LKR30m ($204,600) to LKR550m ($3.8m), according to Lamudi, while high-end houses were selling for LKR40m ($272,700) to more than LKR1.2bn ($8.2m) and mid-range homes from LKR10m ($68,200) to LKR30m ($204,600). Furthermore, according to JLL the absorption rate of new residential luxury units stands at 98%. Pradeep Moraes, director at Altair, told OBG, “Over 90% of super-luxury and luxury condominia in Colombo are equity funded, without gearing or borrowing of any form. Therefore, there is minimum speculative buying, so we do not have to be concerned about the formation of a real-estate bubble.”

In June 2016 the BOI signed agreements to develop 11 new apartment complexes in Colombo with Aurum Developers, Barrington Global, Vivesta Constructions, KSK Construction, Blue Ocean Group, STK Developers, Quick Show, City Square Projects, Capital Trust Residencies, Pearl, Decent Homes Japan and Capital Trust Residencies Four. The BOI estimated the total investment by these companies in the Colombo apartment sector would equal $259m and generate around 900 direct job opportunities.

With the upcoming additions, the supply of luxury apartments in Colombo could reach 6000 units by 2018-19, up from 783 in 2009 and 2657 in 2015, according to the Research Intelligence Unit (RIU). Meanwhile, the increasing cost of housing within the city has pushed much of the working population into the surrounding suburbs, where home prices average about a quarter less than in Colombo’s city centre.

Mixed-Use Developments

The BOI agreed to six mixed-use development projects in the Colombo area in June 2016. These developments combine residential housing, supermarkets, shopping complexes and recreational facilities and are highly sought-after in traffic-congested Colombo. The BOI named Havelock City, Southgate Property Development, Abans Land, LupaInvestent and Earl’s Reality as the firms involved in the developments. It said the projects would bring investments of $200m and employ 558 people.

Grade-A Demand

The government’s competitive economic plans are expected to contribute to the increased demand for commercial office space, while increased tourism and the promotion of meetings, incentives, conferences and exhibitions (MICE) activities in the country are also expected to help grow the segment, especially as the latter is known to be a revenue generator. Indeed, market research carried out by JLL in 2015 indicated that demand for quality office space would exceed supply by the end of 2020. Colombo’s commercial real estate segment had occupancy rates of as high as 95% at the end of 2015, up from 60% in 2009. In early 2016 Sri Lanka had eight grade-A office buildings, all located in Colombo’s CBD and all of which were at near-full occupation.

Premium office space thus remains in particularly short supply, according to JLL. The real estate group forecast a shortfall of 1.4m sq ft of grade-A space in 2016, with demand reaching about 3.8m sq ft and the current supply at around only 2.3m sq ft. As a consequence, lease renewals are expected to include markedly increased rental prices. Currently, grade-A building owners and landlords are allowed to increase rents by 10%-15% every other year.

Along with the banking and financial services sector, government agencies have been actively leasing space in new office buildings recently. With the manufacturing sector receiving a major share of FDI, and with IT, business process outsourcing (BPO) and financial accounting outsourcing businesses all revving up their activities, Mayes told OBG it was forecasting more demand for office space from these sectors in the future. Mixed-use developments including Shangri-La’s One Galle Face, Cinnamon Life and Havelock City, as well as the IT park Orion City and the office complex Access Tower 2, are some of the noteworthy projects in the pipeline for the capital city that include commercial real estate space in their plans. Capital appreciation rates are likely to outpace rent appreciation in the short to medium term, estimated to range from 7-8% year-onyear, offering total annual returns in the 11-14% range.

Hospitality Expanding

A divisive regulation for many in the tourism sector since 2009, the government-mandated hotel minimum room rate now looks set to be abolished in 2017, a move that will allow market forces to determine pricing for all hotel rooms – but one that could squeeze small and medium-size hotels. The change will, however, likely be an attractive incentive for five-star hotels that previously chose not to enter the market, in part due to the mandated pricing system. Many such hotels are currently in the construction stage or have recently opened, with well-known international brands such as Sheraton Colombo, Mövenpick, ITC Colombo One and Ozo set to dot the Colombo skyline. With so many new and upscale entrants to the market, there is likely to be pressure on the luxury and upmarket segments, with supply outstripping demand in this segment in the short term. However, the budget and mid-scale hotel segments present a strong growth opportunity in the near term.

JLL Sri Lanka’s hotel managing director, Mandeep Lamba, told OBG that due to a strong pipeline, Colombo’s hotel inventory is likely to double over the next five years. In addition, Lamba said he believes the entry of international brands including Sheraton, Shangri-La and ITC, as well as the development of strategic mixed-use developments like the John Keells Group’s Cinnamon Life project will bring increased visibility to Colombo as a destination and induce additional demand.

A surge in MICE demand is also likely, Lamba said, with Colombo currently having limited capacity and infrastructure to cater to this demand and the future availability of new, international-standard convention space presenting an opportunity to tap into this segment. New attractions and developments in the city, including the entry of integrated resorts, entertainment and recreational facilities as well as quality retail space in the long term, are likely to drive future demand, supported by improved connectivity to source markets. Future growth in the capital’s tourism hotel segment will be linked largely to the successful marketing and development of Colombo as a leisure destination, as well as the level of corporate growth and foreign investment, Lamba added. This is already happening along the south-west coast, where Marriott’s Weligama Bay Resort and Spa is set to be completed by July 2017 and its Sheraton Kosgoda Turtle Beach Resort will also open later in 2017. Adding to the Galle region’s inventory, the Amari Galle Sri Lanka is opening in mid-2017.

Joining a growing inventory of international resort brands already staking claims on the south-west coast’s burgeoning tourism industry are a Club Med, which will open in 2018, along with Anantara Kalutara Resort, the Hotel Riu Sri Lanka, and Shangri-La’s Hambantota Resort and Spa. The presence of these large international chains has reinforced investor confidence. In June 2016 alone, the BOI inked agreements for new hotel projects with Summer Season, Sofia Colombo, Golden Crown Hotel, Galle Heritage Lanka, Marine Drive Hotel, Management and Investment Combine and HurihelaPathana. The projects total an estimated investment of $133m and will create 950 employment opportunities, according to the BOI.

Second Cities Primed

Improvements to Sri Lanka’s road networks are widely expected to accelerate the property markets around the island nation. The most notable instance of this is likely to be seen in Kandy, which will be connected to Colombo by an expressway scheduled to be completed in 2019. When complete, the Colombo-Kandy Expressway could reduce the travel time between the two city centres from four hours to a commutable one hour, which could make Kandy’s residential market highly sought-after for those working in Colombo who have been priced out of the capital’s property market. In addition to stoking mid-market growth, developers are also putting high-end residences and hotels on the map in Kandy. One such is Dynasty Residence, the first phase of a mixed-development project that will ultimately offer both high-end residences and a luxury hotel.

Port City & Megapolis

The CIFC project is already making waves in the sector, with the capital set to be completely revamped and the CIFC the centre of this new orientation. If the project meets all of its goals – one of which is to build 60 new high-rise buildings – Colombo’s real estate could eventually rival Singapore’s and Hong Kong’s in both value and scarcity. The planning areas for the Megapolis project cover wide swathes of the nation and combine sectoral zones with regional development. The Colombo Core Area will include the CBD and will form part of the overall transformation of the capital. Just north of the capital an Aero City Zone is planned for Katunayake, while a tourism and environmental Corridor will be built in Muthurajawela and a logistics city will be located along the Negombo-Colombo north-south axis. Meerigama in the north-east and Horana in south-east will become industrial cities, while to the east, Avissawella will become a plantation city. The outer core will encompass main town centres such as Peliyagoda, Kiribathgoda, Mahara, Kadawatha, Biyagama, Malambe, Kesbewa and Panadura, and a science and IT city is planned for east of the Colombo outer core area. The areas of Agalawatta, Madurawala, Walallawita, Mathugama, Dodangoda, Bulathsinhala, Baduraliya, Ingiriya, Meegahathenna and Palawatha will all lend acreage to what will eventually be a forest city, and a coastal and marine zone will run south of Ma-Oya and Negombo Lagoon, extending to the Bentota Bridge.


With newly passed foreign investor-friendly regulations, low prices relative to its neighbours and a booming market in nearly every sub-segment, there have rarely been more opportune moments during which to invest in Sri Lanka’s real estate sector. Indeed, it seems that many investors have already taken note of this. “In the short to medium term, the Sri Lankan market will continue to attract investors, both domestic and foreign.   There will be some shifting around of investor interest between the different real-estate segments like residential apartments, commercial, retail and leisure,” Roshan Madawela, director at the RIU, told OBG. Successful implementation will lead to a well-rounded development of Colombo, while the development across the western region of the Megapolis project should aid the nation’s goal to become a high-income economy in the medium term, with a diversity of economic zones that preserve the uniqueness that separates Sri Lanka from the rest of the region.


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