Bank loans to construction sector slightly up in 2Q

• Loans for condominium buying accelerates to Rs.1.8bn
• But  loans to real estate activities down by Rs.2.1bn
• Rs.66.4 billion in new loans to construction sector

Lending by Sri Lanka’s banking sector to the broader construction sector has edged up during the second quarter of this year, but substantially down from the 2017 highs when the Central Bank particularly flagged concerns about the rising concentration of loans into the sector amid speculation of a possible bubble in the luxury apartment market. 

However the loans for condominium buying continued unabated and accelerated during the second quarter, Central Bank’s latest data showed. 

Sri Lankan banks gave Rs.66.4 billion in new loans to the broader construction sector, but the loans to real estate activities, including the development of condominium projects, declined by Rs.2.1 billion, reflecting some slowdown in building high rise apartments during the year. 

However, this sector has an exposure of Rs.39 billion in loans by the end of the first half of 2018.  

Meanwhile, the share of construction sector loans from total loans edged up to 14 percent from 13.5 percent in March, although the exposure is down substantially from 17.8 percent at its heights in 2017.

During last year, economists and the Central Bank voiced concerns over the rising exposure of banks into the luxury apartment sector fearing a possible bubble caused by oversupply of condominium units. 

Since then, the banks treaded cautiously and cut exposure to the high risk segment. As of late, the banks appeared to have given more loans for apartment purchase by end buyers. 

The end buyers of these condominium units have continued their upward trajectory, quite substantially during the year. 

The banks have loaned some Rs.1.8 billion new loans for condominium purchases during the second quarter with an increase of over 66 percent over the preceding quarter. 

The trend demonstrates the clear shift towards vertical living with migration of labour into cities.

However, horizontal living is still the preferred choice in the suburbs and accounts for over 78 percent of the total construction sector loans. 

During the second quarter alone banks have loaned a whopping Rs.63 billion in new loans either to purchase, construct or renovate houses. 

This is a growth of 9.0 percent over the March quarter. 

The numbers are a close proxy for the still vibrant housing market in Sri Lanka due to an emerging middle income class that is moving into cities and suburbs seeking better living conditions. 

However, the loans for purchasing of lands recorded a negative growth of Rs.538 million during the second quarter compared to the first quarter. 

With the recently liberalized property market, Sri Lanka could see higher housing and property prices in the years ahead as wealthy foreigners could look at investing in prime domestic properties, analysts opine.