Consistent income growth, urbanisation, the expansion of both domestic and foreign businesses, and the burgeoning appeal of property as an asset class among local investors have all contributed to the dynamism of Sri Lanka’s real estate sector. Developers have responded to this rising demand by investing in a substantial expansion of supply. The real estate sector’s contribution to GDP grew by 2.7% year-on-year in the first half of 2017, according to the Central Bank of Sri Lanka (CBSL), up slightly from 2.5% growth over the same period in 2016. However, this rate has been considerably higher in the preceding years, with real estate activities growing by 4.2% in 2016, 10.2% in 2015 and 6.5% in 2014.

Favoured Asset 

Real estate and land have increasingly been favoured by well-off Sri Lankans, and investors have become less enamoured with other asset classes. The Colombo Stock Exchange, while performing well, is still relatively small and illiquid, and the repercussions of a 2012 correction have burned some investors. Rising interest rates made local currency bank deposits more attractive in FY 2016/17; however, a history of rate volatility and currency risk remain downsides. Currency risk has also affected government debt, which is usually perceived as a safe investment. Along with tourism, the real estate sector has been one of the two dominant drivers of foreign direct investment in Sri Lanka over the past 10 years. The higher levels of foreign investment in property derives centrally from the Sri Lankan diaspora, high-net-worth Sri Lankans and investors of other nationalities looking to buy and develop residential and tourism property.


One of the defining features of the sector in the last couple of years has been the surge in land prices in Colombo in particular. A supply-demand mismatch has driven this inflation, with available land in the heart of the city and its inner suburbs becoming increasingly limited. “Most have positive expectations for real estate,” Shiran Fernando, chief economist at the Ceylon Chamber of Commerce, told OBG. “There is a real demand for housing in Colombo and its suburban areas, and as a result we are seeing a number of new real estate companies cropping up.”

The problematic transport network in Colombo is one factor contributing to the soaring values of land in central areas of the city. Insufficient public transport links and worsening traffic congestion make commutes from more peripheral areas a challenge, leading residents and businesses to crowd around the centre. The rise in real estate prices – which have outstripped the performance of most other asset classes – has fuelled a degree of speculative investment, adding further upwards pressure.

The CBSL’s land price index for Colombo and four neighbouring districts registered a 10.4% year-on-year increase in the second half of 2017, down from 12.8% in the same period in 2016 and 14.5% in the second half of 2015. Land zoned for residential use saw value rise by 9.7% in the second half of 2017, while commercial land appreciated by 11.2% and industrial land by 10.1%. Growth may be further trimmed by the forthcoming launch of Port City Colombo, a $1.4bn Chinese-financed project on 269 ha of reclaimed land adjacent to the Port of Colombo (see Trade & Investment chapter). While construction activity at the new city ramps up in 2018, there are indications that land prices within Colombo’s central business district (CBD) may have already peaked in the fourth quarter of 2017, according to the Sri Lankan office of international property consultancy JLL.

“Land prices have been rising steadily in the years since 2011, but at some point that will come to an end, because it will no longer be affordable,” Ravi Abeysuriya, group director of Candor Group of Companies, a financial services group, told OBG.

Office Market

As of mid-2017 the Colombo office market had 900,000 sq feet of grade-A property in the CBD, and a further 100,000 sq feet in secondary business districts (SBDs), according to JLL. Occupancy rates of 95% indicate that demand is strong, and with multiple factors driving business growth in Sri Lanka, there is substantial scope for further expansion in the segment. The rents of CBD offices ranged between LKR250 ($1.63) and LKR375 ($2.45) per sq foot. “Currently, finding suitable space for major international companies can be very challenging,” Steven Mayes, managing director of JLL Sri Lanka, told OBG. “Demand exceeds supply by some distance, so developers with a plot of land in central Colombo would be wise to build office space.”


Arguably, there are only two grade-A office towers up to international standards: the World Trade Centre in Echelon Square and Access Towers in nearby Colombo 2. The latter saw all its units taken up almost immediately on launch in 2017. The capital has a larger supply of grade-B offices, with 1.4m sq feet in the CBD, 1m sq feet in SBDs, and 200,000 sq feet in Rajagiriya, east of the centre. Grade-B office space in the CBD rented for LKR180-225 ($1.18-1.47) per sq foot as of mid-2017. Some SBD properties were able to rent for above this, within a range of LKR165-250 ($1.08-1.63) per sq foot, while peripheral areas rented for LKR150-200 ($0.98-1.31) per sq foot. The wide price range indicates that factors such as service provision, maintenance and location have a significant effect on pricing. Tight supply in grade-A offerings has had the knock-on effect of boosting demand for grade-B offices. However, many businesses are still located in converted villas and other ad hoc buildings. “Colombo lacks proper office space,” Suresh Rajendra, president of the property group at John Keells Holding, a major Sri Lankan conglomerate, told OBG. “Around half of the offices are in non-purpose properties, which often lack basic amenities, such as parking.”

The coming Port City Colombo is already transforming the market landscape. According to Liang Thow Ming, head of marketing and sales at China Harbour Engineering Company (CHEC) Port City Colombo, the development will add 1.5m sq metres of office space. “The added supply will increase the grade-A space in Colombo five-fold,” Ming told OBG. “We are already seeing a lot of offers, as many companies want to try and reduce commute times.”

Market Dynamics 

Strong demand saw rental appreciation average 6-8% over the 2013-16 period, well above GDP growth, while investors are yielding around 6% a year. This rate is not as sky-high as some emerging markets, but still indicative of a lively sector. “With high occupancy rates in Colombo’s commercial real estate segment, premium office space has become a lucrative business opportunity for investors and real estate developers,” Mayes said.

The segment is dominated by lease transactions, with few outright purchases. This is partly because a number of rapidly growing industries require flexibility while they undergo expansions, and as such, many companies prefer leases. With prices in the CBD remaining high and space for new properties restricted, it is likely that more firms will move towards the more affordable outer areas of Colombo or even to secondary cities. Banks, which are increasingly under cost pressures from rising capital requirements and the need for investment, may also move back-office operations out of the centre and only keep some functions in the CBD. This trend may further push up rents in the more attractive SBDs and encourage the development of new grade-A and grade-B offices in these districts.

Demand is fairly diversified, with a wide variety of private and public sector organisations – ranging from garment companies to tech start-ups – looking for offices. As a result of this diversification, the sector is less vulnerable to downturns in specific industries. Over the coming years, JLL expects demand to be driven by professional services, start-ups, the textiles industry and financial services. In addition to increased activity from new players, JLL forecasts that some of the more established companies will look to upgrade their office space. Increasingly, firms are searching for offices in tech parks, which offer unique features, such as recreational areas, green spaces and large, open floor plans.


Robust income growth, with Sri Lanka rising up the ranks of middle-income countries, has provided a big boost to the retail sector. Sri Lanka’s incomes are now among the highest in South Asia, with a gross national income per capita of $3850 in 2016. This is higher than India ($1670), Pakistan ($1500), Bangladesh ($1300) and Nepal ($730), according to World Bank statistics. With GDP growth expected to be around 5% in 2018 and 2019, this trend appears set to continue. JLL has forecast early double-digit growth in the retail segment over the coming years and a compound annual growth rate (CAGR) of 17% in consumer spending.

Colombo currently has eight operational shopping malls, with around 800,000 sq feet of built-up area, according to JLL. Vacancy stood at just 2% in mid-2017, indicating robust demand for retail space, likely due to the success of existing mall retailers. Rents vary widely, ranging LKR211-1000 ($1.38-6.53) per sq foot per month in the CBD, and LKR120-800 ($0. 78-5.22) in SBDs. Rent has been appreciating by around 10-15% a year over the past few years.

Shopping Mix 

Despite a number of new developments in recent years, there is still a shortage of quality mall space. The majority of mall complexes lack adequate parking and leisure and entertainment facilities, important elements of malls today. Moreover, mall design in Sri Lanka tends to differ from the international practice of using a major international retailer as an anchor tenant. Investors willing to develop malls – including “destination malls” – could benefit from following international models that have an anchor tenant and an attractive entertainment offer. The current tenant mix in large malls is led by clothing (25%), mobile phones (18%), food and beverage (16%) and computers (16%). As global exposure increases and lifestyles change, the market is becoming more brand conscious, driving customers towards modern retail districts and malls that offer top international labels, which in the past have only had a minor presence on the island.

The budding tourism sector should also provide a notable boost to the retail market. Foreign visitor exports – including accommodation and money spent in the country – totalled LKR725.2bn ($4.9bn) in 2017, according to the World Tourism & Travel Council. The organisation estimates spending will grow at a CAGR of 6.6% over 2018-28. However, taking into account the proximity of major international shopping destinations such as Dubai and Singapore, as well as the challenges of marketing luxury malls to the domestic market, retail spending from tourism or shopping destinations is likely to remain limited.


Driven by rising incomes and a trend towards urbanisation, demand for residential property is set to remain high. World Bank estimates for 2016 placed Sri Lanka’s urban population at around 18.4% of the total, which is a relatively low level for the country’s stage of development, though the bank has also said that “urbanisation data in Sri Lanka are much debated”. Regardless, urban migration is likely to continue for the foreseeable future.

At the high end of the market the preference of the affluent Sri Lankan diaspora for real estate as an asset class is leading to a steady growth of supply. The luxury housing segment has seen capital appreciation of 10-15% in recent years, according to JLL, with rental yield of 4-6%. This is an acceptable return given the rapid growth of prices. Supply in the segment has historically been low, with only 714 units sold in 2015 and 2016 combined. JLL forecasts that 3740 luxury units will come on-stream in projects launched in 2017-19. Most of these units are in the central Colombo 2 and 3 districts and the CBD.

Although Sri Lanka’s economic outlook is positive, there are concerns that the large number of upper-end properties coming onto the market could result in an oversupply and put downward pressure on prices. Abeysuriya warns that a significant downturn in rental yields could lead to a broader drop in the market, as speculators who have invested on the basis of potential yield rush to the exit.

Cooling Effect 

Looking ahead, fiscal and monetary policies may dampen some of this demand. Effective April 1, 2018, the government is introducing a capital gains tax of 10% on the sale of housing and other property over a 10-year period, payable within one month of the transaction. This may deter some investors from seeking a quick turnover of property holdings, though it could also have the positive effect of discouraging market speculation.

A value-added tax of 15% on property transactions has been suspended for the time being. The Ministry of Finance has said this tax will be implemented soon, but no exact date has been given. Inconsistent policies by the government may damage the industry’s credibility, which could lower foreign direct investment, which is essential for market absorption of unsold units and growth.

In addition, the CBSL has been taking a cautious stance. In FY 2016/17 the regulator hiked interest rates by 125 basis points and the statutory reserve ratio by 150 basis points. However, from March 2017 to March 2018 the CBSL did not raise either rate. Lending for housing and construction has been a major driver of credit growth, and in August 2017 ratings agency Moody’s lowered its outlook for Sri Lankan banks, partly because of issues in the real estate sector. The industry is divided over the outlook, with some seeing little risk to capital values, while others have warned that a correction is in the offing. “People say that there is oversupply, but I really don’t see it,” Nitesh Khirwal, managing director of property website, told OBG. “There is a natural progression in the market as people upgrade, with better construction quality. People are willing to invest in the country, including the diaspora in the UK, Australia and Canada.”

According to Dimantha Mathew, senior manager for research at investment advisory and financial planning firm First Capital Equities, only the super luxury market – defined as properties worth more than LKR40m ($261,000) – was oversupplied as of late 2017. “The LKR20m-40m ($131,000-261,000) luxury range has not slowed down yet, and the LKR15m-25m ($97,900-163,000) segment is starting to attract larger players,” Mathew told OBG.

The absorption of the most expensive units in a market that still has a relatively small number of high net-worth individuals and has yet to attract large-scale real estate investment from foreign investors is a concern. Nonetheless, developers are confident that well-designed projects in the right places will attract buyers. “The key to satisfying demand in the high-end segment is to develop quality products,” Rohana Wannigama, managing director of local firm Capitol Towers, told OBG. “There will always be demand in the luxury segment, as long as the products, services and timely delivery meet or surpass the expectations of property seekers. When investing in real estate, it is important for developers to conduct quality research and to become knowledgeable about what they are producing, as the outcome of their projects will affect the sector as a whole.”

Robust Demand 

The lower- and middle-range residential segment is expected to see sustained demand growth. Higher personal incomes and the end of the civil conflict have accelerated urban migration, with the supply in Colombo particularly insufficient. The Urban Development Authority estimates that over 50% of the population lives in shanty towns, a high proportion for a middle-income country. One challenge, as in many other emerging markets, is that relatively low returns make private sector developers reluctant to invest in affordable housing, a problem exacerbated by high input costs. However, some stakeholders believe this is starting to change. “Residential real estate projects are attractive to foreign investors,” Roshan Madawela, founder and CEO of real estate consultancy Research Intelligence Unit, told OBG. “The mid- and low-income housing segment is steadily growing, with numerous opportunities for investors and developers.”

Even so, there are some constraints on the demand side. For one, high interest rates have impaired the development of a mortgage market. The regulator has historically maintained high rates to fight periodic bouts of inflation and protect the value of the rupee, with the series of hikes in FY 2016/17 designed to cool credit growth. In addition, commercial rates of 13-14% for mortgages can prove particularly challenging for young people, even for those with sizeable earning potential.

A cheaper alternative to houses, which is becoming increasingly popular, is condominiums. “In Kuala Lumpur and Bangkok, around 60-70% of the population live in apartments. By comparison, it’s around 5% in Colombo, but this is changing as land prices rise,” Rajendra told OBG. Several factors are supporting the trend of relocations to apartments, such as the higher costs of maintaining houses as well as the ease and security of apartment living for the increasing number of residents who travel regularly.

School Run 

A key factor contributing to residential demand is the concentration of top schools in the CBD of Colombo. This has led to “reverse migration”, where upwardly affluent families are selling properties outside the city to move closer to the centre, in order to be within the catchment areas of prestigious schools. Indeed, the daily school run for students travelling in and out of central Colombo has noticeably worsened the city’s traffic situation.

Often, this trend has meant that families move from houses located on the outskirts of the city to smaller units located in the central suburbs of Colombo. In some cases, affluent families live downtown during the working week, moving back to their larger suburban properties on weekends. It is hoped that the planned development of light rapid transit and mass rapid transit systems will change the situation over time. Additionally, the government is being pressured to encourage school development outside of the city centre. Nevertheless, demand for properties near top education institutions is unlikely to fall in the short or medium term.


Forecasts indicate 2018 will be a formative year for the sector. New tax laws may lessen demand in the residential segment somewhat, while a wave of new supply will test the upper end of the market. However, the main factors shaping the sector over the long term derive from Sri Lanka’s significant demographic changes, economic growth and investment appeal. These characteristics should continue to support growth across segments, such as grade-A office space, middle-income housing and tourism.