Condo sales hit by politics, falling rupee and high financing cost

• Developers say sales dropped from 8-9 units a month to 1-2
• KPMG expects market to recover ahead of 15% VAT coming into effect in April
• Say prolonged disruption in sales could affect condo prices

By Nishel Fernando

Sales in Sri Lanka’s residential condominium sector have experienced a slowdown due to the general uncertainty in the country, devaluation of the rupee and high cost of financing. 

Speaking to Mirror Business, KPMG Principal Deal Advisory Shiluka Goonawaradene said the volumes of sales have dropped partly due to the uncertainty, cost of funds and lack of funds availability. 

Several real estate developers Mirror Business spoke to said their monthly sales have dropped in recent months. Some of the developers have seen their monthly sales declining sharply to 1-2 condominiums in recent months from 8-9 on average.
As pre-sales rates are not available in the public domain, it remains difficult to calculate the actual drop in sales during the past few months. 

However, KPMG expects sales to pick up in the first quarter of next year as the 15 percent VAT on condominium comes into effect from April 1st.

“It might change next year as VAT is supposed to come into effect in April next year. Even if there’s a bit of a slowdown in the market due to current situation, it will pick up early next year,” Goonawaradene said.

He noted that prices of condominiums wouldn’t get affected immediately unless there’s a prolonged disruption in sales. 

“The pricing impact won’t happen immediately, if there’s a prolonged disruption, and then you might see some reduction in prices.” 

KPMG expects that once the VAT on condominium sales would come into force, the prices of condominiums would rise by 8-10 percent. 
Goonawaradene highlighted that the rupee deprecation has been one of the major reasons for the slowdown in high-end luxury condominium sales. 
“Some of the high-end apartments are priced in US$, hence the cost for local buyers has climbed by around 20 percent,” he added.

In a scenario of prolonged slowdown in condominium sales, Goonawaradene pointed out that prices of condominiums may not have an impact, particularly for developers who are financially strong. 

“It depends on how strong the developer is. If you are a big developer with enough cash flow and bank facilities, then you are fine; you can retain a part of the stock and you can even rent it out.

“However, If you are a small developer, who depends on sales to carry out your project, then you have a problem; you might have to be a bit generous in prices and extend the payment terms,” he elaborated. 

Sri Lanka’s luxury residential real estate market remains the most popular option among real estate developers due to high margins, although some analysts have expressed concerns on a possible oversupply in the segment. 

According to Research Intelligence Unit (RIU), the semi-luxury and luxury apartment stock is expected to reach 14,000 units by 2020 when calculating the number of developments that have been approved or are currently under construction, which is significantly high compared to the mere 4,000 units in 2016.

However, the commercial real estate market, particularly the ‘Grade A’ office spaces, remains undersupplied   due to tight margins. 

The global real estate consultancy Jones Lang La Salle (JLL) earlier this year said that there is a shortage of as much as 200 percent in the supply of the grade ‘A’ sector in Colombo.

Goonawaradene pointed out that the high cost of construction and financing has made this segment unattractive for many developers, particularly for investors who rely on local financing. 

“The construction cost has gone up, because of currency devaluation and higher affiliated costs. 

The other problem is the high interest cost. Trying to take a bank loan from a local bank and trying to put up a commercial building is challenging. 

Thus, the returns on commercial properties are difficult, unless you are getting foreign funding.” 

Goonewardene noted that the typical yield of an office building is not sufficient to cover the high interest cost, at least in the short-term. Investment in office spaces is a long-term investment which may take up to 20-30 years, unlike condominiums where the developers can get their Return on Investments  within 3-5 years.