SL’s housing market slump likely to persist on higher rates, increased costs: Fitch

• Turnaround not expected till second half of 2024

Sri Lanka’s housing market weaknesses could persist at least through the first half of next year, after the once red-hot sector was beset by the economic crisis, causing a slump in demand amid the heavy mortgage rates, cost overruns and project delays coming from runaway prices and shortages in construction materials. 

Fitch Ratings last week revised the rating outlook of home builder Home Lands Skyline (Private) Limited (HLSL) to ‘Negative’, from ‘Stable’, due to the deteriorating operating conditions, which led to weakened sales and thereby slower cash collections and tighter liquidity in the next 12 to 18 months.

The rating agency estimated the company would become dependent on bank borrowings in this scenario while the banks’ appetite for the sector could diminish, if the conditions persist and worsen.

Fitch expects the new sales to remain below 200 units, significantly less than the 400 to 500 units sold in prior years.  

“A sustained weakening in HLSL’s liquidity could lead to a multi-notch rating downgrade,” Fitch added. 
The home builder is currently rated at ‘A’, with a ‘Negative’ outlook.

The company is in the business of development and sale of lands, houses and apartments, mainly to middle-income customers. 

Sri Lanka’s housing market was running at red-hot levels in 2020 and 2021, as the housing prices soared amid strong demand after the Central Bank cut rates to historically low levels, made liquidity abundantly available and capped the housing mortgage rate at 7.0 percent for the first five years in 2020 December. 

The rising global commodities prices and shortages in the construction materials also added to the prices in the latter part of 2021, as the country was facing acute foreign currency shortages. 

However, the euphoria ended when the economy crashed in April 2022, sending inflation and interest rates through the roof while the prolonged foreign currency shortages left the developers in limbo, as they could not bring down the required imported materials they needed while the construction cost rose to exponential levels. 

Fitch estimated the rise in construction cost at around 75 percent, due to the rise in global commodities prices and rupee devaluation. 

However, the rating agency said HLSL had been able to manage the cost impact to a larger extent, due to passing down of costs to the buyers. 

“Challenges in importing construction materials during FY22 have eased following special approval to import such products and improved foreign-currency liquidity within the banking system,” Fitch said. 
“HLSL also has access to foreign-currency revenue through sales to expat buyers, which helps pay for part of the imports,” it added. 

The broader construction and real estate activities shrank most in the three months through September 2022.
The appetite for apartments as an investment has also fallen sharply. Sri Lanka’s Condominium Property Volume Index compiled by the Central Bank showed a 64 percent slump in new sales in 3Q22 over the same period in 2021, similar to the trend seen with HLSL.

The mortgage rates rose sharply to 25 percent, from less than 10 percent, shaving the affordability of housing. 
Fitch however sees limited risks to the ongoing projects of the company, as it has only 250 unsold units, which are valued at Rs.9.0 billion at the end of 2022, which the rating agency believes HLSL would be able to sell in the next 12 to 18 months. 

The company has 1,200 units under construction, of which 800 slated for handover by mid-2023 and the rest by the end of 2024. 

“We expect fewer challenges in collecting dues from the ongoing projects, as the buyers have settled more than 70 percent of the value,” Fitch added