Mixed sentiments over possible property bubble

By Chandeepa Wettasinghe
Construction sector stakeholders recently expressed mixed sentiments over the possibility of a real estate bubble forming in the Colombo district amid concerns being voiced from various quarters, including the country’s banking sector. “In real estate, I think we need to be a bit careful, because there are currently 49 towers being built. I don’t know whether we have reached the bubble. For the ongoing ones, there’s demand. Most are sold out, but we have to see whether there’s demand beyond that,” Chamber of Construction Industries (CCI) CEO/Secretary General Nissanka Wijeratne told Mirror Business.
Central Bank Governor Dr. Indrajit Coomaraswamy  recently said the Central Bank is closely observing the construction sector for a possible bubble, given how private credit, which grew at unhealthy levels in the past year, was mostly absorbed by the construction industry.
CCI President Elect Ranjith Gunatilleke said if a bubble were to form, the pressure would most likely come from the luxury apartments segment, which account for around 10 percent of total constructions.
“But as long as the economy continues to grow like in the past, with the Port City, Megapolis, tourism and other developments, there won’t be a problem,” he said.
However, the economy has been on the decline in the past 2 years due to weak exports, adverse weather conditions and a lack of investor confidence in 
the country. 

The recent fiscal and monetary tightening measures have also started to contribute towards a lower, but more sustainable growth path, in the absence of growth-friendly reforms.
Further, experts in the past have noted that given Sri Lanka’s construction costs—which are the highest in the region—real estate companies could only achieve high returns on investments through luxury apartments in Colombo.
Meanwhile, Ravi Abeysuriya, a director of Candor group, a fully-fledged financial services group, told Mirror Business that rental yields and affordability of properties, two key determinants of a bubble, have not been experiencing positive momentum in recent times. “How many can buy Rs.50 million apartments?” he questioned, and said that most luxury apartments have been purchased by foreigners or Sri Lankans 
living abroad.
The economy has been growing at less than 5 percent in recent years, and property prices in some Colombo suburbs have tripled over the past year since more companies have been eyeing apartment construction in those areas. Abeysuriya said a significant volume of speculative buying may have taken place, which eventually would slow down once the capital gains tax on immovable objects comes into effect on April 1.  He further noted that rental yields of luxury apartments, which have been experiencing downward pressure recently, will face further complications given the introduction of value added tax next month.
“Rental income will attract VAT from April 1. Either the buyer will have to bear it, or the seller,” Abeysuriya said. However, he stressed that the state needs to step into correct an asymmetry in information available in the market, in order to ascertain whether a bubble is forming. “I strongly advocate the government to maintain statistics. Somebody has to do a study without vested interests. We don’t have the capacity to collect the data, so the government has to collect the data and publish, without waiting for a bubble to burst and for people to lose their money,” he said.
He said that the market currently has to rely on information from the suppliers on the price of land, as well as their claims that apartment complexes are sold out. As reported on Mirror Business recently, another section of experts believes that a bubble has already 
been formed. 
Blaming the government for selling state land to foreign companies at high prices in order to ease strapped state finances, they called for further intervention to release more state land at lower prices to burst the bubble before it inflates further. Meanwhile, Abeysuriya said that semi-luxury apartments, which the middle class could afford, has more potential compared to luxury apartments, and that areas within the Western Province near highway exits could become prime land for such use.