A response to RIU’s ‘Buying an apartment in Sri Lanka’

Dr. Krishantha Piyadasa
As an individual involved in real estate consultancy and a person concerned about the future of the apartment industry, I am writing this response to the article titled ‘Buying an apartment in Sri Lanka’ published by the RIU (Real-estate Intelligence Unit) in the Financial Section of Daily Mirror of March 3, 2016.

First of all, I would like to question the role of the RIU. In the article, RIU describes itself as a pioneer in real estate research in Sri Lanka and having decades of experience. While RIU carries out research it also provides sales and marketing services. As stated on the RIU website, its sales role is described as being able to ‘convert developments into financially 
lucrative projects’. 

Further, the website also states that the RIU “manages project-specific sales team for our clients”. This goes to prove that the RIU is just another real-estate agency, often referred to as a ‘broker’. If one looks at RIU’s website, it is obvious that it is also proactively promoting its services as a ‘broker.’ Therefore, RIU’s role as an independent research agency is seriously compromised and readers should keep this in mind when reading its publications. 

In fact, there is a clear conflict of interest when an entity claiming to be a research organisation makes assertions in the form of findings from their research. I question if the article was written in the interest of the apartment buyers or rather to promote entities of which RIU has a financial interest in. This financial interest could be in the form of entities that engage RIU for market research or entities that engage RIU for their sales services.

In the article, the RIU states that there is a total of 16 developers who are active in ‘high-end’ residential projects in Sri Lanka. An analysis of these so-called ‘developers’ listed by the article is provided below: 

Crescat Residencies/Emperor Residencies/Monarch Residencies - These are not apartment developers, but rather names of some buildings developed by John Keells Holdings and can be classified as ‘high-end’.

Queens Court/Iceland Residencies/Spathodea/Trillium Residencies/Havelock City/Skyline - These are not apartment developers but names of apartment complexes developed by various reputed developers and some of them can be classified as ‘high-end’. 

EH Cooray & Sons - This is a furniture manufacturer and to my knowledge has not developed any apartments buildings.
Sanken is a construction company that is also known to develop ‘high-end’ apartment complexes. 
Ceylinco Homes - This company went bankrupt many years ago. It is difficult to see how a bankrupt entity can be described as being active!

Prime Lands/Blue Mountain - These are companies primarily involved in the business of fragmenting and selling residential land plots. These companies entered the sphere of building residential apartments in the last few years. 

Suncity Developers/Seagull - These companies are correctly listed as developers of apartments.
Therefore, one can see that of the 16 so-called main developers listed by RIU, only four are actually known to build apartment buildings. The other 12 entities listed as ‘developers’ of ‘high-end’ apartments are actually the names of apartment complexes developed by various other developers. RIU however has neglected to name these developers as being ‘main developers’. It is unclear how an establishment claiming to be a pioneer in real estate research with decades of experience could make a mistake of this nature, unless they had some other motive. 

Furthermore, the apartment complexes such as Emperor, Monarch, Havelock City, Queens Court, Iceland Residencies, Spathodea, Trillium Residencies and Havelock City that are listed, of which some could be described as ‘high-end’, are not the same type or class of developments carried out by the four developers listed in the article. This I say with responsibility. Interestingly enough, the rightful developers of these and other buildings, which could be described as ‘high-end’, such as the John Keells group, Overseas Realty, Fairway, Pioneer Homes and ICC have not been included in the list.
Therefore, I propose that RIU, under the pretext of publishing ‘independent’ research findings, is attempting to corrupt the mind of the reader by subliminally implying that the ‘high-end’ developments of other developers are of similar standard to those built by the developers mentioned by RIU. Next I would like to question the classification of ‘high-end’ residential projects and the criteria used by RIU to establish the same. The developers listed by RIU sell most their apartments for around Rs.10 to 15 million per apartment (Rs.10,000 to 15,000 per square feet), whereas the apartments in all of the 12 buildings listed by RIU sell apartments for prices in excess of Rs.40 million (Rs.20,000 to 35,000s per square feet). Surely all these projects cannot be bundled under the same ‘high-end’ tag. Further, it is my understanding that, contrary to RIU’s claims, some of the developers mentioned by them do not even use registered contractors, whether reputed or not! 

Further, if RIU was writing in the real interest of prospective buyers of apartments, it should talk about the sustainability of the building in the long term. It has not touched on this important aspect of apartment buying even once! If it was really an unbiased research organisation as it is trying to make out itself to be, it should have discussed the sustainability of building after the apartment is delivered and the so-called ‘high-end’ developer is out of the picture. This important aspect of choosing an apartment is not referred to even once in their article. 

A fact that every apartment buyer should be mindful is that both the maintenance fee and the sink fund determine the long-term sustainability of the building. If the building is not maintained as it should be, the owners of apartments in such buildings will lose their capital value as the building ages due to poor maintenance. There are two aspects that impact the long-term sustainability of your apartment complex and determines its future its value. They are:

1. Management fee – Small apartment complexes that lack scale will not have enough funds to maintain themselves. There is clearly a significant difference in collecting Rs.15,000 maintenance fee from less than 50 apartments compared to collecting the same fee from 150 apartments. In my experience, an apartment complex needs to have in excess of at least 80 to 100 apartments in order to have sufficient funds to deploy the necessary resources to maintain themselves.

Most of the apartment buildings built by those listed by RIU as being the ‘main developers’ fall short of this mark. A large majority of the apartment complexes developed by the so-called ‘main developers’ listed by RIU develop apartment buildings consisting of around 18 – 48 apartments in a building. Assuming that Rs.15,000 a month is collected from the owners, the management corporations of these buildings will find it difficult to pay their utility bills after paying for their security guard! These buildings will never have the scale to maintain themselves and this is a fact. Larger complexes by more established developers are more likely to have sufficient funds for the long-term maintenance of the building. The recent developments undertaken by ICC and Fairway in the Malabe and Koswatta areas are good examples of sustainable developments simply because they have the scale to maintain themselves 
in the long run.

2. Sink Fund - The sink fund is an important provision in our current legal framework to set aside a portion of the management fee for major repairs such as repainting the building, major repairs to elevators, generators, replacement of gym equipment, etc. If the management corporation of an apartment complex decides to set aside 10 percent of their Management Fees for the Sink Fund, assuming that Rs.15,000 a month is collected from the owners of 50 apartments as opposed to a complex with 150 owners, you do not need to be a mathematician to realize which apartment complex will retain its value and bring dividends to its owners simply because it has the means of maintaining itself due to its scale.

I sincerely believe that in the future, these smaller developments will fall into a state of dilapidation and disrepair simply due to the fact that they do not have the required resources. When major repairs or maintenance work is required, these smaller developments will not have the financial resources to meet these obligations.

This is in contrast to the larger developments, which will have ample resources from their monthly management fees to ensure that the building is maintained well into the future.  Regarding brokerage fees, the article states that the Sri Lankan market currently ‘lacks maturity’. Further, it states that in certain developed markets the brokerage fee is paid upfront. To my knowledge, there are no markets where the brokerage fee is paid upfront. The brokerage fee is paid on a success basis after the deal has been completed. 

I am convinced that this is an attempt by RIU to instil in our minds this point as a fact to convince homebuyers that this is how it is done in developed markets and that Sri Lanka should move towards this. It is my opinion that this is written to promote RIU’s self-interest to promote upfront payment for their sales and marketing services, partially or otherwise, in order to have a greater hold on their customers.