When asset allocation chatter features at school reunions and the office water cooler, it’s clear rising asset values are driving up net worths. Two asset classes dominate the conversation: stocks, which are at record highs and property, where over a few years values have more than doubled.
Earnings largely back rising stock prices. Also, houses and shares are real assets and would be expected to rise in value in line with inflation and GDP growth over the long term.
Statistically sound data about property sales is not available because there is no central database of transaction values. In addition, undervaluing is widespread to minimise tax when property is transferred.
However, anyone at a dinner party will confirm that in the city and Colombo’s suburbs, property prices are racing ahead. Central Bank’s quarterly Real-Estate Market Analysis and its new Land Valuation Indicator, provide a series of indexes, showing a 12% year-on-year increase in Western Province property prices. Colombo’s suburbs lead the surge, with owners demanding an average of 20% more for land. Piliyandala prices rose 16% and in Athurugiriya and Homagama, land owners demanded prices that were 14% higher compared to a year ago.
By contrast, Lankapropertyweb, a marketplace, says sellers demanded 7% higher prices within Colombo, underscoring the increased appeal of the suburbs with good infrastructure.
In contrast, changes in condominium prices shadowed inflation according to the Central Bank’s data, which surveyed 16 condo developers in the second quarter of 2025. In Colombo, prices were 0.2% to 2.8% higher and rose 2.9% in the suburbs during the last year.
Already, the proportion of condo units purchased for purposes other than occupation is high according to Central Bank survey data (Chart 1). The survey, where the earliest available data is from 2020, consistently finds that less than half of those buying a condo expect to live in it.
Condos as Investment Assets
Drawing a distinction between consumption and investment assets is important in Sri Lanka, where many people are counting on their house to fund their kids’ education and retirement and regard property as superior to savings. Their home, a consumption asset, switches to an investment asset later in life.
Land is a limited resource; when demand grows, prices rise. In contrast, condo supply has fewer constraints. An estimated 8,200 new condos will be added to the 37,000 existing units by 2027, reckons Lankapropertyweb.
“A condo valued at Rs100 million will struggle to attract a long-term tenant paying more than Rs300,000 a month.”
Lankapropertyweb says 25 new developments with 2,500 new units launched over the last year. In addition, several stalled projects are expected to reach completion, adding a further 3,600 new apartment units.
Supply constraints, in particular the shortage of land in the economic hotspots, like Colombo’s central business district, will not push up prices. The Port City, a new downtown for Colombo built by reclaiming an area the size of Monaco from the Indian Ocean, is expected to add 21,000 apartment units at its completion.
Plentiful supply is the first reason why condos will be a poor investment asset for the next five years.
Yield Hungry Investors
For several decades, stocks were a poor investment, and for a class of investors with capital, real estate in general and condos in particular were a favourite investment asset class. A condo that is an investment asset will usually not be occupied by the owner but rented. Before the 2020 pandemic, condo rental yields in Colombo were a healthy 4% to 6%.
At present, net rental yields are below 3%. Data is hard to come by, but a condo with a market value of Rs100 million will struggle to attract a long-term tenant at more than Rs300,000 monthly (a 3.6% gross yield). Condo owners must account for service costs, furnishing and maintenance, which in combination will push the yield below 3%, before income tax. Even when they are performing poorly, equity market dividend yields are 3%. Poor yields are the second reason why condos will make a poor investment asset class.
Record Levels of Tax
The third factor is high taxation. Taxes are several-fold; the first is a 10% capital gains tax on sales, which disadvantages the market for real estate flipping in comparison to listed stocks, where capital gains are tax-free.
Condominium sales are also subject to VAT. A 2018 report by investment bank CAL estimated that VAT adds a net 8% to condo prices. In 2018, the VAT rate was 15%; in 2025, the VAT rate is 18%.
Unlike a house where the underlying land, depending on the neighbourhood, can account for as much as 70% of the property value, the cost of the condo is mainly three things: the superstructure, the interior finishings and the services (MEP). Land is only a fraction of the unit’s value. In Sri Lanka, construction is one of the highest taxed industries.
One of Sri Lanka’s top real estate developers, Prime Residencies’ founder Premalal Brahmanage, says Sri Lanka’s construction costs are the highest in South Asia. High costs due to protection offered to industries like steel, cement and tiles, put decent housing beyond the reach of many families. Brahmanage estimates that direct and indirect taxes can account for up to 40% of each property transaction.
The fourth reason is that condos in Colombo are no longer affordable to middle-class families. This partly explains why the current supply is skewed to high-end and luxury units. Developers can’t make the economics work to develop a 1,000-square-foot unit in Colombo at a completed price of Rs25-50 million.
Leveraging 70% of the cost of a Rs50 million condo for 15 years at a 9% interest rate will be a monthly instalment of Rs354,000, far out of the reach of a middle-class family that also has to deal with a vehicle lease, and kids’ education on top of the costs of running a household.
Condo flipping was successful for a couple of decades because the conditions were exactly the opposite. There were a few asset-specific taxes, construction costs were reasonable, supply was limited, and yields were healthy.
An investment asset’s performance must be stacked against alternatives, like listed equity and fixed income and condo flipping no longer looks like it can beat other asset classes.
GDP Contribution
The real estate industry contributes around 7% of the country’s GDP and generates substantial tax revenue. Colombo also needs housing. The population is growing, but the affordable housing stock has not kept up. Yet relief for the housing market, in the form of lower taxes to drive down construction costs, may not be on the horizon.
The past decade has been very kind to Sri Lanka’s homeowners. Condo flippers, a small minority, enjoyed the party the most. Aspiring home buyers are due a break. If that were to happen, condos may also become a viable investment asset class again.