Real estate sector braces for slowdown

• Industry says tough year they expected now going to be tougher
• Expatriate rental market expected to take a hit amid travel advisories
• Repricing of products remains difficult, given high cost of borrowing
• Analysts expect affordable luxury housing market segment to continue growth
• Developers seek moratorium on loans, removal or postponement of VAT

By Nishel Fernando 
Sri Lanka’s real estate sector is bracing for further slowdown in the aftermath of Easter Sunday attacks that have worsened the market and investor sentiment across all segments.

“The slowdown in business activities would flow through into real estate because the rental rates and occupancy rates will be affected. The sector was anyway having a downturn.

However, the recovery period will take a lot longer than we expected now,” KPMG Principal Deal Advisory Shiluka Goonawaradene told Mirror Business. 

The sector was already preparing itself for a slow year, ahead of the election cycle towards the end of the year along with the 15 percent VAT on condominium sales that came into effect from last April. 

“It was going to be a tough year anyway and we were prepared for a tough year but it has now got much tougher. The industry will try to survive this year and hope that things will turnaround next year,” he added.

According to industry analysts, the expatriate rental market will be adversely impacted in the immediate aftermath as they are now less likely to come to Sri Lanka due to the travel advisories, which would lead to pressure on rental rates.

“Even the expats who are coming, they are coming without their families. Instead of family of four, you will now have one person coming. They are likely to stay in smaller units or hotels due to safety reasons. If the travel advisories get lifted, the market will get recovered to some extent,” Goonawaradene said.  However, he noted that the repricing of real estate products would depend on the developers’ holding power.  “If the developers can hold on, they would. However, ultimately if they want to move on, they will have to sell it at a discount. 

The large developers have the financial capacity to hold on and pull it through, especially if their leverage levels are low. However, it would be a different story for the developers who have a high leverage and high cost of borrowing,” he elaborated. 

Speaking to Mirror Business, a real estate developer pointed out that most of the developers are not in a position to reprice their products without making a loss, given the high cost of borrowing, construction and high land prices.

Despite the negative investor sentiment in the market place, Goonawaradene remarked that it might not lead to a drop in land prices as land owners are likely to hold on until the market stabilises. 

“What we are observing is that the seller’s expectation and buyer’s offers are very much apart. Sometimes the difference is quite substantial. If the seller can afford to wait, they will hold on,” he said. 

In terms of new developments, the sector has already seen a marked decline this year, compared to last year.

“There were people who have been talking to us on new projects and conducting new feasibilities last year. However, we are hardly seeing any of that this year,” 
Goonawaradene noted.

The industry analysts also expect pressure on new office and retail developments in addition to the luxury residential developments, which have already been experiencing a slowdown with the oversupply concerns.

“Even in the office space segment, people who wanted to expand might think twice now as everybody is worried about the cost,” an analyst said. 

However, the industry analysts anticipate that the affordable luxury housing market segment to continue its growth in keeping up with the rising demand.

Meanwhile, the industry representatives are expected to meet with the government officials to discuss the possibility of delaying or removing the 15 percent VAT imposed on condominium sales.

The industry is also likely to seek moratorium on loans taken by the industry and other concessions. 

Goonawaradene opined that such relief measures would have notable impact on the affordable luxury housing market to move ahead with new developments.

In addition, he noted that the government’s initiative to bring down the lending rates by 2 percent would also help both buyers and developers.

The analysts expect that the developers might have to offer more flexible instalment payment periods and other concessions to buyers. 

Most of the developers had seen fairly good sales volumes before 15 percent VAT came into effect in April. However, the industry is likely to experience a negative growth this year as the sales volumes are expected to decline during the rest of year. 

Following the New Year holidays, some of developers were planning to resume with advertisements and sales promotions towards the latter part of this month.

“Once the initial shock wears off, it will get back to normal. But the people will be more cautious as the cost of doing business and threat perception has changed. Hence, the things will be much more difficult,” an industry analyst said. 

The real estate industry believes at least a year will take for the industry to recover while security and stable policy direction being key requirements.