Impressive economic growth since 2009 has bolstered Sri Lanka’s property market. More employment opportunities, rising salaries and rapid rural-urban migration have all played a part in the expansion of housing and commercial properties. In recent years, increased investor appetite and a maturing economy have transformed Colombo into a dynamic modern city that still retains a sense of its past.

More recently, the government has been faced with a number of impediments to economic growth, among them high public debt and currency volatility. Despite these challenges, concerted efforts continue to be made towards urban development, with a host of mixed-use projects popping up across the central business district, including Cinnamon Life and Shangri-La.

Size & Performance

While 2018 was characterised by political turmoil and warnings of an asset bubble, Sri Lanka remains an attractive destination for global real estate investors. Macroeconomic shortfalls notwithstanding, the property market continues to perform well on a number of key measures.

According to “Paradise Island – Luxury living in the tropics”, a report published by professional services provider KPMG in 2018, condominium investors who entered the property cycle during the primary market phase – the period from drawing board to completion – have historically earned a return on investment of around 17% per annum, with rental yields reaching a maximum of 9%. Investors entering during the secondary market, meanwhile, have historically earned yields of 5-7% per annum. The secondary market provides an average 40-45% increase in the price of high-end condominiums in the first three years after completion.

While the KPMG report highlighted the generally positive performance of Colombo’s property market, it also advised investors to proceed with a sense of caution, particularly with regard to property valuation and risk management. According to the report “there is a disconnect between the sheer volume of capital raised and the opportunities in the market to deploy it effectively in assets that can withstand a downturn”.

Indeed, uncertainty around government policy had a major knock-on effect on property transactions during 2018. “Talk of oversupply led to less-than-buoyant investor sentiment,” Roshan Madawela, founding director and CEO of the real estate-focused Research Intelligence Unit, told OBG. “High interest rates and political uncertainty also played a part in a downturn in Tier-1 activity,” he added.

When the government announced that 15% value-added tax (VAT) for apartment purchases was to be introduced on April 1, 2018, investors and home owners rushed to sign their purchase agreements before April. However, the government later took the decision to postpone the introduction of VAT on apartment unit purchases by one year. Whilst this delay only added to market uncertainty it also resulted in a brief pickup in Tier-1 property sales. At the time of writing, there was still a degree of speculation as to whether the VAT on apartment purchases would finally be imposed as scheduled on April 1, 2019.

Structure & Oversight

In a bid to boost investor confidence, the government has passed legislation that removed the previous restriction on the transfer of freehold land to companies that have more than 49% foreign shareholding. Certified on July 30, 2018, the renewed Act No. 21 of 2018 amends Section 3 of the Land (Restrictions on Alienation) Act No. 38 of 2014. This enables foreign companies to acquire and hold freehold land, as long as they are listed on the Colombo Stock Exchange (CSE). It also removed a limit that prevented foreign nationals owning condominium real estate below the fourth floor.

Market analysts have predicted that the amendment of the Land (Restrictions on Alienation) Act will lead to increased liquidity on the CSE through greater share purchases by foreign investors (see analysis). Nonetheless, the general sentiment is that the new act will have a minimal impact on property demand, at least within urban areas. Given the limited amount of high-rise building in coastal areas, however, the new act is expected to supplement property sales in tourist destinations such as Galle.

There are a number of other regulations and advantages that make Sri Lanka an attractive investment destination. Some of these include the freedom to repatriate capital and profits, a transparent legal and regulatory framework, secured foreign investment policies, bilateral investment agreements with 28 countries, double taxation agreements with 38 countries and the allowance of condominium ownership on a freehold basis for foreign nationals.

General Trends

With a national average salary of $4500 and a workforce of around 8m, local buyers play a leading role in the residential property market. While amendments to the Land (Restrictions on Alienation) Act may alter the share between domestic and foreign investments in the future, the residential property market is currently dominated by resident Sri Lankans. According to property consultancy company JLL, 95% of property purchases are made by locals, 90% of whom buy with cash. Home to the greatest amount of existing condominium stock, Colombo is the prime choice for condominium developments, with 727 projects built between 2007 and 2017. In a bid to solve the growing housing deficit, developers have acquired land within the central and secondary submarkets of Colombo in recent years. With available land limited across the city, these submarkets witnessed annual growth in land prices of around 7-8% on average.

While the ongoing trend of urbanisation has bolstered the rental market, there are concerns about overcrowding. “Road infrastructure has not kept pace with population growth in urban areas,” Suresh Rajendra, president of property group John Keells, told OBG. “If the government can successfully address congestion issues, then pockets of Colombo will become very attractive property investment destinations.” Sri Lankans returning from stints working abroad, mainly in Middle Eastern countries, have also played a significant role in property purchases.

Chinese Investment

Given the island’s strategic geographic location, Sri Lanka has long attracted the attention of global superpowers seeking to expand their influence and create new trade and investment opportunities. China has become the most significant driver of infrastructure development across key coastal areas in recent years. Under the umbrella of the ambitious Belt and Road Initiative, Sri Lanka is well placed to strengthen maritime trade routes between Africa, Asia, Europe and the rest of the world. As a result, China has committed billions of dollars to transforming the landscape of Colombo, which in turn has strengthened political ties between the two nations, even if it has alarmed some Sri Lankans concerned about debt and China’s long-term ambitions. At the forefront of these investments is Port City Colombo. Spearheaded by the state-run China Harbour Engineering Company under a 99-year lease, the Port City development will stretch across a reclaimed land area of 269 ha, at a build cost of $1.4bn. The futuristic smart city development will feature financial and commercial districts, residential housing and a marina. China has also invested in a number of other large-scale projects, including $1.5bn for the development of the southern deep-sea port of Hambantota, a project that proved controversial after the Sri Lankan government was unable to afford the repayments and ceded 70% control of the port to Chinese state-owned interests on the long-term lease, in return for debt alleviation. China is also funding the 114.5-km Matara-Kataragama railway extension project, and provided the majority of financing for Mattala Rajapaksa International Airport, another controversial project in the former president’s home district, which has operated severely under capacity and generated significant losses since it opened in 2013.

International Players

In addition to significant Chinese investment, a host of other international developers increased their stake in Sri Lanka’s property market in 2018. Among them is Iconic Developments, a subsidiary of the Indian Apurva Natvar Parikh Group. Iconic announced plans in September 2018 to invest an additional $50m across luxury, semi-luxury and affordable housing units in Colombo. The planned investment follows the developer’s ongoing Iconic Galaxy construction project, a 33-storey tower with 272 super-luxury apartments slated for completion in 2021; and 110 Parliament Road, which opened in 2008 and contains approximately 170 homes.

Local Developers

In addition to international investors, a number of local developers are playing a major role in the country’s property market expansion. With over 70 subsidiaries across seven sectors, John Keells Holdings is Sri Lanka’s biggest conglomerate and the developer of the Cinnamon Life complex near Beira Lake in central Colombo. Upon completion in 2020, this mixed-use development will comprise two residential towers with a combined total of 427 units, an 800-room, five-star hotel, 30-storey office tower and an entertainment complex. The Blue Ocean Group of Companies is a Sri Lankan conglomerate with a major real estate portfolio. The group has completed several condominium and other residential projects, and was working on 14 projects in Colombo alone as of the first quarter of 2019. Maga Engineering, another local player, has completed more than 400 real estate projects since it was founded in 1984. It is the current lead engineer on the Iconic Galaxy project. Meanwhile, Walkers CML Properties, best known for their infrastructure and engineering projects, ventured into residential real estate in 2015, when they acquired Wincon Development Ceylon. Since then the firm has gone on to complete six apartment buildings.

Other notable developers include Homelands Skyline, which won the Best Housing Development Award in Sri Lanka at the PropertyGuru Asia Property Awards in 2018, for Ariyana Resort Apartments. Indocean Developers, which is developing the 240-metre-tall Altair project, is another leading local firm, as is Trillium, known for its high-end, mega-residential projects, among them Trillium Tower.


Since Sri Lanka’s population is expected to increase from 21.4m to 24m by 2030, residential real estate developments will remain a focal point of the industry. Similarly, growth in per-capita income will drive the demand for luxury real estate during the next few years. According to KPMG estimates, population density in the Colombo district is expected to rise from 3495 people per sq km to 5722 per sq km by 2030.

KPMG estimates that 6827 new apartment units will come on-line by 2020, also noting that super-luxury apartments were priced between $400 and $550 per sq foot, while luxury apartments in prime city-centre locations had a price tag in the range of $200-399 per sq foot, and those in suburban areas cost around $120-199 per sq foot. In terms of investor profile, 61% of luxury condominium purchases are made by local investors, while local end users, expatriates and institutional investors account for 17%, 18% and 4%, respectively. According to real estate search engine LankaPropertyWeb, which based its findings on advertised prices, the average price of houses in Sri Lanka as of December 2018 was LKR34.03m ($214,000). At the upper end of the scale, homes in Colombo were the most expensive, selling on average at LKR165.74m ($1.04m); on the other side of the coin, homes in Sabaragamuwa province had the lowest average sale price of LKR14.7m ($92,600). Colombo house rental prices averaged LKR354,000 ($2230), while Colombo apartment rental prices averaged LKR274,000 ($1730).

Mortgage Financing

Sri Lanka’s highly segmented loans market currently operates under a system of directed credit, although the country is moving towards an integrated, market-driven housing finance system. As of the first quarter of 2019, of the 11 commercial institutions offering home loans, the lowest repayment rate on offer was 12.5%, from Sampath Bank. This includes a maximum repayment period of 25 years or until the borrower reaches the age of 60, whichever is earliest, with the maximum loan amount determined by the repayment capacity and the forced sale value (FSV) of the property, as stipulated by the bank. On the upper end of the interest scale, Mumbai-headquartered Housing Development Finance Corporation Bank was offering a rate of 15% over a maximum period of 30 years, varying according to age. In terms of value of the loan, the bank was offering loans upwards of LKR50,000 ($315), with house loans at 70% of the FSV, and construction loans at 80% of the FSV.

While credit growth has moderated since mid-2016, a number of institutions, particularly the Central Bank of Sri Lanka (CBSL) and the IMF have raised concerns over a possible asset bubble. As a result, the CBSL floated the prospect of imposing restrictions on lending to the real estate sector in 2017 to mitigate risks to the financial system, although it eventually refrained from imposing such restrictions following close engagement with the industry.

In a “Country Report” published in June 2018, the IMF said credit growth was curbed overall, but in the real estate sector it was “excessive”. According to this report, the real estate market accounted for 11.2% of outstanding loans. It noted that rapid construction could result in oversupply, which may in turn result in lower prices and a slowdown in construction. This could lead to a negative wealth effect, following a steep fall in nominal and real house prices. Despite the warning signs, however, some industry experts remain optimistic. “Contrary to popular opinion, I do not see the real estate market as a bubble,” Zhang Bo, director of AVIC Astoria, told OBG. “With major projects in the pipeline like Port City, the trickle-down effects will have lasting benefits, especially for the luxury segment.”

However, while the rate of credit growth has caused some concern, access to affordable credit still continues to limit the ability of mid- to low-income households to purchase homes, particularly within Colombo.

Affordable Housing

With 100,000 units per annum required to fill the housing gap by 2030 but only 25,000 units coming on-line each year, a major challenge for the Ministry of Housing, Construction & Culture Affairs (MHCCA) is overcoming the housing deficit. For the most part, borrowing costs have made apartment prices unaffordable for the lower income group. Another factor that has led to an affordable housing gap is the high cost of building materials such as steel, which places pressure on margins. This is further exacerbated by high import duties. Under the current loan schemes, the apartment market is largely restricted to high-income families, non-resident Sri Lankans and foreigners. According to statistics from the MHCCA, only the top 20% of high-income-earning families can afford to purchase homes in and around Colombo. The ministry also estimates that even the top 10% of high-income families with a mean monthly income of around LKR300,000 ($1900) can only afford a two-bedroom property in secondary suburban locations, while families outside the high-income-earning bracket generally opt for properties that are at least 20 km outside of the city limits.

Supply Deficit

The government seems to understand the disequilibrium that has led to the housing deficit and is set to increase its affordable housing promotion schemes. According to Sri Lanka’s Urban Development Authority, in a bid to offset rural-urban migration, the number of affordable houses is set to double. However, as of February 2018 the authority has yet to specify a clear plan or timeframe for this.

Sri Lanka’s private sector is also gearing up to reduce the housing deficit. In September 2018 Millennium Housing Developers (MHDL), a Colombo-headquartered publicly traded company, announced it was investing LKR5bn ($31.5m) to develop both luxury apartments and affordable housing. “This shift in the urban landscape is predominantly influenced by location and convenience factors related to employment and business proximities,” Harshith Dharmadasa, chairman of MHDL, told local media.


Over the middle to long term, mixed-use developments will continue to transform Sri Lanka’s landscape, with the proposed International Financial Centre at the Port City alone expected to add more than 5m sq metres of new mixed-use real estate. Given the limited availability of land and high population density in urban areas, condominium developments will continue to be the primary driver of housing supply.

In addition, with the country receiving 2.3m overseas visitors in 2018 alone, an increase of 10.3% from 2017, tourism will continue to be an important enabler of real estate development going forward, and a host of luxury hotels are opening across Colombo.

Meanwhile, the easing of the Land (Restrictions on Alienation) Act could potentially expand foreign property ventures while generating greater foreign direct investment inflows. Outside the luxury market, demand for low- and middle-income housing will continue to increase alongside rural-urban migration. Reducing the housing deficit and promoting access to affordable credit will remain a top priority for policymakers.