Are Colombo’s condos in a bubble?

Fears abound that Colombo’s luxury condos under construction won’t have buyers when they are complete. Well, it depends on a number of factors

By Echelon.

Published on April 04, 2013 with No Comments


Bubble theorists abound. They worry that Colombo’s planned multiple swanky apartment blocks where asking prices are beyond even the well-employed herald the arrival of another real-estate bubble. Clearly the events leading to the last bubble around 2007, following which banks foreclosed on numerous unfinished apartment blocks and buyers – who had paid advances – were left holding worthless sales agreements, are fresh in their minds. 

So is Sri Lankan real estate in general and condo development in particular going to create another bubble?
Well, it depends on a few factors. But in the short term (next three years) the market may loosen somewhat but bubble talk is clearly premature. In the longer term demand will depend on Colombo’s emergence as a modern cosmopolitan South Asian hub where Indian tourists will flock for the shopping, entertainment and perhaps some gambling. Reaching this vaunted status in South Asia is however far from certain.
In the three years since the war’s end roughly 780 apartments a year have been sold according to data from the Condominium Management Authority compiled by real estate consultancy and management firm Jones Lang LaSalle. In the five years to 2008 average annual apartment sales were 750 units. However, inventory has been building up with an annual supply of over 1,200 units in the three years to 2012. Jones Lang LaSalle estimates based on CMA data that there are 4,240 unsold developer owned apartments in the market. That will take five and a half years to be absorbed at the current pace of 780 sales per year and less than three years if the pace doubles. That can sound somewhat scary. But sales in the luxury segment (where only JKH development ‘Emperor’ is ranked) and the premium segment (includes six apartment complexes) have been surprisingly strong. Less than 20% of inventory that came in to the market in 2011 remains unsold.
However, unless annual sales at least double (to around 1,500 units) there will be a dangerous inventory buildup. But demand doubling is a real possibility in 2013 as confidence returns to the economy and the quality of life in Colombo attracts more Sri Lankans living overseas to have a residence in Colombo.
Real apartment prices (inflation adjusted) have declined in the last three years as developers waited for a post-war pickup, the first signs of which are now apparent. But the biggest factor against rising prices is the unsold backlog. Developers will like to see this halved before they will be able to push up prices at rates higher than the escalating construction cost.
The bubble metaphor is misplaced because none of the conditions that existed before the 2007 real estate price bubble exist today. Classic bubbles are led by growing speculation followed by a rapid rise in prices. On the sides ambitious estate agents preach the virtues of real estate as an investment option, to families that already own a primary residence. Sharks and tricksters circle potential buyers warning about the impending shortage of real assets. When the bubble eventually bursts it leaves a trail of debts, defaults and despair. All these symptoms – especially speculative buying – were apparent on the eve of the 2007 real estate crisis. But none now exist.
There are grounds, then, to believe the soft demand will make at least the next couple of years’ good ones for condo buyers. The long -term development of projects like the one promoted by Indian Krrish group however are counting on other factors.
Colombo may be one of South Asia’s most cosmopolitan cities but measured against the world’s top metropolises it is a potty little place. But its future doesn’t look as hopeless as the last 50 years has been. Sometimes its residents’ misplaced pessimism about Colombo’s ability to claim a place as a desirable hub city stems from a lack of perspective more than anything else.
Right now, Colombo is as dull as are most other South Asian cities. Its long-suffering residents have few public spaces to enjoy, lack good entertainment options and put up with creaky infrastructure.
To understand the confidence of firms like the Krrish group to invest over $500 million in a mixed development here investors have to believe that Colombo’s bureaucrats will be able to pull-off the type of development they plan. If in five or seven years Colombo does have world-class shopping and entertainment and attracts high rollers to its casinos finding buyers for apartments that cost a $1 million won’t be much of a challenge. Krrish group’s large apartments at Rs34,000 upwards a square foot are only as expensive as the JKH- backed Emperor or Monarch. They are pricier because of their large size, starting at 2,900 square feet for the smallest homes, according to the firm’s website. condos

Rs100 million (less than a million dollars) for an ultra luxury apartment – the type which the group claims it will build – is a steal by international standards. A thousand square foot two-bedroom luxury home costs the equivalent of Rs250 million or more in New York, Paris or Sydney according to the Wall Street Journal. In London or Hong Kong such a two-bed apartment will cost the equivalent of Rs500 million. In Colombo the priciest thousand square foot apartment will be worth no more than Rs35 million.
Of course a couple of casino’s and some shopping malls are not going to be enough for Colombo to match mega cities like New York, London or Hong Kong for lifestyle, cultural pursuits and world-class entertainment. But a residence of similar quality for a tenth of the price may be good enough to tempt thousands of Indians to have a second home here. If indeed India is such an integral part of Colombo’s future it needs to start attracting ideally Indian investors – who will easily see this potential here – in the short term, so that long-term investments can start now.
Quality of life in a city can be directly linked to a number of objective determinants. Things like trust and efficiency of public institutions, the rule of law, health and education services. Subjective determinants also matter like how welcoming the natives are. Visitors will put up with rude Parisians because that city has so much more to compensate for that. But rude and unwelcoming Colombans? Perhaps not!
So in the long term real estate demand and property bubbles will have more to do with linking investments to Colombo’s ambition of creating a great global city and the state’s ability to ensure that when those investments have been made, there is nothing to impede demand from overseas.


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