While the construction sector witnessed substantial growth in the 24 months leading up to 2018, domestic market forces including a falling rupee, warnings of an asset bubble and political instability have stymied growth of late. However, despite market disruptions, a number of key projects forged ahead in 2018, including Port City Colombo and the Hambantota Industrial Zone.

While the landscape of Sri Lanka continues to be altered by new developments, the industry remains shackled by a cumbersome approvals process and a lack of skilled labour. On top of these shortcomings, heavy taxation on construction materials and hefty land prices weigh heavily on profit margins. Nevertheless, despite a number of considerable challenges, there are reasons to be optimistic as major infrastructure projects gather pace. “We expect massive infrastructure developments to offset the decline in retail developments in both urban and rural areas,” Nandana Ekanayake, CEO of INSEE Cement, told OBG.

Size & Performance

According to estimates from the Department of Census and Statistics (DCS), the construction sector grew 2.5% in real terms during the third quarter of 2018, compared to the same period in 2017, with nominal growth at 7.5%. Total government expenditure on infrastructure development declined from LKR354.92bn ($2.2bn) in 2017 to an estimated LKR250.44bn ($1.6bn) in 2018.

The end of a three-decade civil conflict in 2009 signalled the rejuvenation of construction activity, as developers began considerable efforts to narrow housing and infrastructure gaps. While construction activity retracted briefly in 2015, when the newly elected government halted a number of high-profile projects, the sector’s contribution to GDP has expanded over the last decade. On the back of accelerating migration of labour into cities and increased demand for condominiums, it averaged LKR138.26bn ($870.7m) between 2010 and the end of 2017, reaching an all-time high of LKR190.36bn ($1.2bn) in the fourth quarter of 2017. Construction activity contributed 7% to GDP in the third quarter of 2018, according to official data published in December 2018 by the DCS.

Given the limited availability of land and high population density in urban areas, condominium developments are the primary solution to housing demand. Certifications issued by the Condominium Management Authority for new developments that have completed the lengthy official approvals process grew by 64% in 2017. In the decade from 2007, the absolute rate of growth in condominium certificates was 34%. Some 92% of new condominium developments approved during 2007-17 were planned for the Western Province.

Cautious Market

In an effort to mitigate the risk of an asset price bubble, the Central Bank of Sri Lanka (CBSL) explored the use of macro-prudential tools to slow credit growth. Among the mechanisms mooted in 2017 was a sector-specific limit on the loan-to-value ratio, with a special focus on the construction and real estate sectors. This came after record-high levels of lending in 2015-17. However, the Condominium Developers Association has publicly emphasised that the CBSL later rowed back on imposing sector-specific limits on credit, following engagement with sector stakeholders.

While a more cautious market saw official lending to the construction sector reduce in the first quarter of 2018 compared to 2017 levels, the second witnessed an uptick. According to official statistics from the CBSL, a total of LKR66.4bn ($418.2m) in new loans was distributed to the broader construction sector in the second quarter of 2018, of which LKR63bn ($396.8m) was for the purchase, construction or renovation of houses, while LKR1.8bn ($11.3m) was for condominium purchases, up 66% compared to the first quarter of 2018. CBSL data also showed that 78% of loans to the construction sector were absorbed by new horizontal suburb projects. However, lending to the real estate sector declined by LKR2.1bn ($13.2m) overall in this period, which includes lending to new condominium developments. This slowdown can be attributed to some extent to banks’ concerns about exposure to the potentially risky luxury segment. As political uncertainty increased, public infrastructure projects slowed in the first half of 2018. With lawmakers gearing up for a new election campaign in 2019-20 amid an atmosphere of political acrimony, an emphasis was placed on small, short-term projects which could be completed before the date of the election.

While public infrastructure projects saw a decline in activity across the first two quarters of 2018, private sector projects in and around Colombo, particularly those driven by Chinese investors, continued to gain traction. Valued at $1.4bn, the Colombo Port City development, which will serve as an extension of the central business district, is the largest foreign direct investment (FDI) project to be implemented in Sri Lanka, and will lead to additional investments being made in real estate projects on the site once the land is fully reclaimed. In January 2019 the land reclamation phase was declared complete.

Under the umbrella of China Harbour Engineering Company (CHEC), CHEC Port City Colombo is a company approved by the Board of Investment and set up for the specific purpose of developing the Port City project. China Communications Construction Company (CCCC), which is the parent company of CHEC, is also planning a number of other major infrastructure investments that are set to alter the physical and economic landscape of Sri Lanka, including a $500m, 400-MW liquefied natural gas-fuelled power plant at Hambantota (see Energy chapter).

Structure & Oversight

Chinese investment and multilateral agencies, including the Asian Development Bank (ADB), the World Bank and the Japan International Cooperation Agency are by far the largest sources of financing for public infrastructure projects. In addition to supporting government projects, the ADB and the International Finance Corporation under the World Bank also lend directly to the private sector to finance construction projects by way of equity and long-term debt financing.

While commercial bank loans are the most widely used credit instrument in the country, industry data suggests that around 70% of private investment is sourced from retained profits, while short-term borrowing, the stock market and the corporate securities market all make an important contribution to the financing of private sector projects.

Sri Lanka has a history of progressive lending schemes. In a bid to stimulate FDI into the property segment, the CBSL has allowed foreign firms to access credit on the local market as well as raise foreign currency loans. In addition to promoting FDI, policymakers have tried to ease access to credit for local firms by allowing local companies registered in Sri Lanka to borrow money abroad. The CBSL also removed the maximum borrowing limit, with a minimum loan tenor of three years.

In terms of oversight, the Ministry of Housing, Construction and Cultural Affairs formulates national policy for the construction industry. It also plays a vital role in meeting housing requirements and implementing financial support programmes. In an effort to generate eco-friendly and cost-effective benefits, the ministry also guides rural communities on technical methods of housing construction. There are a total of 10 government institutions operating under the purview of the ministry, including two government departments that oversee government factories and buildings.

In Sri Lanka areas are either declared by the UDA or not. In UDA-declared areas, buildings lower than four floors or less than 4000 sq ft are approved by the local council; those that are taller or larger is approved by the UDA. In non-UDA declared areas local municipal councils are in charge of approvals. The municipal councils, especially that of Colombo, seeks to approve these buildings within 44 days. The processing fee is calculated based on the floor area: LKR1 ($0.006) per sq foot for an area of up to 1000 sq feet; LKR2 ($0.01) per sq foot for an area of 1001-3000 sq feet; and LKR3 ($0.02) per sq foot for an area larger than 3000 sq feet.

Major Players

According to the Ceylon Institute of Builders (CIOB), Chinese firms accounted for approximately 40% of all construction work across Sri Lanka in 2018. With estimates suggesting that Chinese market share could grow to 70% in the coming years, the CIOB officially submitted a Cabinet paper in mid-2018 requesting the government make local company participation a requirement for all future construction investments. To strengthen the prospects of local firms partnering with Chinese investors, the Chamber of Construction Industry (CCI) signed a memorandum of understanding with China International Contractors Association (CHINCA) in June 2018. Under the agreement, CHINCA and the CCI aim to promote private construction ventures between the two nations, in an area that has historically been dominated by government-to-government deals.

Public Procurement

Public procurement reform has been a top priority for the government in recent years, and is seen as particularly pressing given current macroeconomic dynamics. As such, improving public financial management, particularly procurement-related government spending within the construction segment, has been highlighted as an essential factor in achieving long-term economic and social development goals.

In broad terms, public procurement is decentralised in Sri Lanka. In the past Sri Lanka has been criticised for a lack of procurement planning, contract management and transparency. According to the public finance department under the Ministry of Finance, a number of contracts have been awarded in the past without observing the fundamental principles articulated in the government procurement guidelines. As a result, a number of construction-related projects were commissioned without adequate allocation of funds in the annual budget. Furthermore, the lack of a competitive selection procedure has led to a number of irregular contracts being awarded for large-scale infrastructure projects.

To improve matters, the National Procurement Commission (NPC) was established at the end of 2015. The NPC was tasked with formulating fair, equitable, transparent, competitive and cost-effective procedures and guidelines for the procurement of public goods and services. With the assistance of the US Agency for International Development, the NPC published its first action plan for 2016-18.

Since then, the NPC has played a pivotal role in all matters related to public procurement. In June 2018 the NPC announced that it was replacing the 2006 procurement guidelines with an Electronic Government Procurement (e-GP) system, which will be followed by an Open Contracting Data Standard (OCDS) that is expected to cut costs by 10% and improve overall public financial management.

Building Materials

Total domestic cement production amounted to 2.82m tonnes in 2017, up from 2.7m tonnes in 2016 and 2.29m tonnes in 2015. Meanwhile, total cement imports reached 5.68m tonnes in 2017, up from 5.3m tonnes in 2016 and 4.09m tonnes in 2015. In a bid to boost cement production, in June 2018 INSEE Cement announced it was to invest a further $20m in cement production in Sri Lanka. This is on top of the $200m investment it had already made over the previous two years. Major INSEE projects include the construction of three ready-mixed cement plants in Peliyagoda, Ratmalana and the Colombo suburbs, and the opening of a new $50m grinding plant in Galle Port.

In light of the limited availability of raw materials in Sri Lanka, the importation of construction materials represents the largest portion of project spending, accounting for an average of around 30% of total construction costs. This figure highlights the fact that, while the construction sector has played a pivotal role in job creation and GDP contribution, high taxes on construction materials imports are keeping development costs high and has the effect of limiting the sector’s potential.

According to a survey published by property consultancy group Research Intelligence Unit in mid-2018, duties on ceramic tiles, sanitary ware and steel weigh heavily on construction costs. Steel bars and rods are taxed at 89.66%, ceramic tiles at 107.6% and sanitary ware at 72.4%.


Given Sri Lanka’s rapidly ageing population and limited pool of skilled workers, labour shortage is a major problem, particularly in the industrial and construction sectors (see analysis). However, while there is a severe shortage of workers, both foreign and local companies have reported a strong commitment from employees, in addition to rapid adaptation to quality standards.

While general labour is available at a relatively low cost, the net labour cost within the construction segment is high, as the industry as a whole is hampered by low labour productivity. Investors struggle to find sufficient employees with the required skills. For instance, the demand for engineers outpaces supply. In the most recent OBG Business Barometer: Sri Lanka CEO survey, engineering was the third-most-popular answer given by Colombo-based CEOs asked to pinpoint which skills were most needed in the domestic workforce, with 15% choosing this option. As a result of this shortage, developers are forced to bring in workers from China, Bangladesh, India and Nepal.

The employment of expensive foreign workers leads to higher local construction salaries, thus causing overall construction costs to rise. In addition to the limited talent pool, there are concerns that workers who have been brought in from overseas for certain construction projects are engaging in other projects in contravention of their work visas. In 2018 the Department of Immigration and Emigration launched an investigation regarding the role of foreign workers within the construction segment, as well as looking into how it could better regulate the importation of expat workers.

According to the Construction Industry Development Authority there are more than 2500 registered local construction firms. The DCS estimates that the total number of people employed in Sri Lanka was 8.39m in the third quarter of 2018. Of this, construction-related activities, including construction, electricity, gas, steam and air-conditioning supply, water supply, sewerage, waste management and remediation work, accounted for some 748,483 employees, up from a total of 701,729 in the second quarter of 2017, with statistics from the third quarter not yet being available.

To alleviate these issues, the government has initiated educational reforms (see Education chapter) aimed at better equipping the workforce with the skills required in the modern economy.

Major Projects & Demand Drivers

The construction of affordable housing has served as an important driver of construction activity in recent years. It is expected to face demand-side pressures for the foreseeable future. In addition to affordable housing, major Chinese investments are set to drive sector growth in the coming years, reshaping Colombo into a global city in the process.

Port City Colombo aims to attract $13bn in primary investment to the city. It will serve as the centrepiece to the broader Western Region Megapolis Master Plan (WRMMP), which forecasts 140 bigticket developments will take place over a 15-year period, at an estimated cost of $40bn. Thus, while construction activities experienced a contraction in 2018, the industry is expected to increase its contribution to GDP in 2019, provided that government-initiated construction projects materialise, among them extensions of the Southern Expressway and Outer Circular Highway, and a new terminal at Bandaranaike International Airport, as well as various projects proposed under the WRMMP.


From a macro perspective, a number of risks could be highlighted that may influence the progress of construction activity in the near to mid term. Uncertainty in global crude oil prices may result in an increase in domestic energy costs, which would thereby increase the input cost of local industries such as construction. Meanwhile, a fluctuating rupee will continue to weigh heavily on the import of construction materials. While developers will need to mitigate a number of risks, the NPC’s new e-GP and OCDS will reduce corruption and promote efficiency across the industry.

Government infrastructure projects and private sector developments are set to go on transforming the landscape of Sri Lanka. While the industry as a whole has a number of challenges that it needs to overcome, the sector is poised for long-term growth. From an investment standpoint, construction of condominiums and commercial real estate will still be driven by private funding.

“Sri Lanka is ready to cater to future homeowners. Sri Lankans abroad have always invested in real estate in their home country but we are seeing a growing trend of Sri Lankans moving back,” Zhang Bo, director of condominium development AVIC Astoria, told OBG. “As more opportunities become available due to steady economic growth, both Colombo and its surrounding areas will attract the type of investments needed to drive the industry.” Government spending, meanwhile, will remain focused on infrastructure projects aimed at supporting wider economic growth going forward.