Complex land laws-biggest bottleneck, says Iconic MD

By Chandeepa Wettasinghe
Mirror Business recently sat down for a chat with Iconic Developments Ltd Managing Director Rohan Parikh over Sri Lanka’s real estate market and the business activities carried out by his company in the country. Iconic Developments recently concluded its US$ 30 million affordable luxury Iconic 110 project in Rajagiriya, and announced its intentions to launch a second US$50 million Iconic project in the vicinity.

Could you tell us about your past and current projects in Sri Lanka?
We’ve been in Sri Lanka since the ‘80s. We are the largest over dimensional cargo movers in South Asia. So, we move oil rigs, power plants, nuclear plants, all that stuff. So, in the ‘80s when Sri Lanka was getting all these major power capacity installed, our company had come and done all the work. There was this famous shipment for the power plant near the Kelani River. It got stuck in the middle of the river, and at that time, we were called in from Bombay to remove the thing, so most people in Colombo will remember that. 
So, in the ‘80s that was the kind of work we did here. So, my father has come here when I was young, and he had been spending a lot of time and holidays in Sri Lanka. So, it’s been a very close connection. In about 2000 we expanded from transportation to real estate, and I think around 2004 we looked at Sri Lanka as an option to expand our real estate business. As you know, those years were kind of difficult, and despite that, in 2007-2008, we bought the land in Rajagiriya. At that time, Rajagiriya was completely under-developed. They only had 2 buildings. They had Fairway Fairmount and the Royal Park. It was the height of the war and all these problems. But, for some reason, we felt that Colombo had a lot of potential and so we developed the first Iconic building. On that, we started work in 2010, and we completed in 2013. As you know, it was a very successful project. It was sold out. I think it was a game changer, in terms of; nobody in Colombo had ever offered that kind of amenities at the price we were able to offer. 
So, it was an extremely good value for all our clients, and all our investors. I think our clients got a 30-40 percent return on investments, so in general, a very successful project. So we’ve taken one step forward, and we’re launching now the second part of the project, which is also called Iconic, which will be in Rajagiriya also. Again, we’re trying to offer the highest amount of luxury, but, at competitive prices. So, we don’t believe that we have to overcharge for a product. That was our philosophy across all our products, and that’s what we’ve done here also. We’re launching our new project now, and it will have all the amenities of the first Iconic, plus a lot more.

So, you’re now focusing mainly on real estate?
There are not many power sector investments going on which requires large transport, so we haven’t been doing much transportation business here. But, there are tenders from time to time; we do a bit of work. The big industrial investments in Sri Lanka are not going on right now, in terms of what we service.

Can you explain in brief the current state of the real estate market?
I think there’s a lot of oversupply on the high-end of the market. For some reason, people have not serviced the middle and lower segments of the market. As far as that goes, there’s a lot of potential. The problem with Sri Lanka is that the land costs are way too high, and there’s artificial scarcity created due to laws like land tax on foreigners. So, foreigners can’t invest on land. 
For that reason, the price of investment and the costs in the end make the apartments cost more for the consumer. So, it’s a counter-productive law. If the idea is to protect the local land banks, that can be done by preventing foreigners from owning land in the long-term. But, companies coming to invest and develop land should be exempt from this law. Otherwise why would they invest? In the end, the builders and building and giving them back to the locals to create housing, so that’s one big problem with real estate in Colombo. 
Number two, there’s pretty difficult duty regime. Today, in all of South Asia, per square foot cost, Sri Lanka is the highest, by far, for development. But affordability in Sri Lanka compared to booming markets in India is much low. So, you’re stuck in a position where customers have less to spend, but because of the duties and taxes, cost of real estate is more than elsewhere. So, it’s again, in the end, it’s passed on to the consumer. So, if the goal is to create housing stock, the policies need to be more lenient towards developments. So, the two major things I would say is to fix the land laws, and duties on imported goods. Goods that are very cheap abroad are very expensive here, and it’s done to protect I think very few local companies. So, I think it’s not in the interest of the rest of the country.
How will the taxes that were introduced on May 2 affect real estate developers’ operations?
Well, the increases that will have the biggest impact on real estate are the increases in the VAT and NBT rates, and that is going to be a big issue. It’s definitely going to hurt demand.

Have you forecasted to what degree it will affect demand?
It’s very early and difficult to say at this point, but we’re already getting indications from our customers that they want to put off purchase decisions because of the increased VAT and NBT rates.

What are the positives in Sri Lankan policies?
Like I’ve always said, in general, doing business in Sri Lanka has been a fairly good experience. The Board of Investment is very supportive. Most of the levels of government are supportive for development. I think there’s no issue in terms of support of the government. The intentions of the government are correct. I think the problem happens in execution. The intentions are not being converted to policies. I think part of that is confusion at the policy creation level, and a bit of ad-hoc policy making is happening. So, I think the good intentions of the government need to be converted into actual policies, and consistent policies. The policies keep changing.

Q: How has the process of getting permits been?
It’s fairly well streamlined. There’re no real complaints there. I find the bureaucrats in Sri Lanka to be very open, helpful, and they know what the rules say, and they try to promote business, which is good, unlike India, where people are constantly fighting against business. I think in Sri Lanka there is ulteriorities in the bureaucrats that ‘We’re here to help businesses do their jobs, not stop them from doing their job.’ We’ve had no real difficulties in getting permits. Then again, they need to do everything by the book. We have to follow the law.

What about the timeframe of getting permits?
We come from India, so for us, this is pretty good. The only negative point in what is generally great is that the land laws are complex. Due to the lack of an online central land registry, it takes very long time to complete land procurement. That is the big bottleneck in Sri Lanka; the entire gamut of land laws. If those are freed up, development will boom. In general, compared to doing business in India, we’ve had a very positive experience. The system and support for doing business here is good, hence we’re developing here. In fact, we’ve been putting more capital into Sri Lanka than India. So, in general, the regime is good. We have a lot of positives, but the few negatives are around the ones I’ve said. There’s a bit of policy confusion, so there’s lack of clarity, the land laws need to be improved, the customs duties are only going to increase prices for the end user, and the new VAT and NBT regime are going to hurt demand. Those are the major negative points.

Do you think the current developments are linking with the government’s decision to make Colombo a global city?
I think the Megapolis idea is great, but we are yet to see the policy that actually derives from it. So it’s too early to say. The ministry is barely a few months old.

Are the private sector development projects facilitating the vision of Megapolis?
The real vision of Megapolis is the creation of infrastructure. That’s the job of the Megapolis Ministry. They need to fix roads, they need to fix public transport. It’s a major bottleneck in Colombo. That’s the job of the Megapolis Ministry. 
If public transport starts working better, if roads start working better, development will follow. So, in that vision, from what I’ve understood what Megapolis plans and wants to do—I know they’re looking at monorail systems, they’re looking at upgraded trains—those kind of things are what developers need. Once those infrastructure comes in place, housing will boom. If people can’t get to their homes, how will there be homes? That is the basic need. In that line, I think the vision is correct. 
The entire region as a single entity, planning the growth, planning the infrastructure, that is good. That needs to happen. But, how that translates to developers—we’re only driven by demand. So once infrastructure comes, then demand comes. Why is Rajagiriya growing? Because the Parliament Road created greater connectivity into Colombo. So Rajagiriya grew. Why are places further out not growing? No connectivity, so that’s it.

Will the rise in interest rates prompt a slowdown in development, or force companies to seek foreign financing?
Both. It will definitely cause a slowdown. Foreign loans, only the very brave will go for that, because of the fluctuations in the currency, and the inability to hedge the Sri Lankan rupee currently. So, I don’t think any financially astute developer will be developing with foreign loans. They will be extremely difficult.

Given the current affordability of the Sri Lankan consumer, where should real estate development focus on?
The UDA has tried to do that. They had auctioned off certain lands for affordable developments. I don’t know how that scheme went. Frankly, at that moment we were not focused on that. All successful affordable housing projects around the world have only been done when governments have given huge subsidies on the land portion. So it has to be done on a public-private partnership. There has to be government procured land. There has to be a for-profit element for developers to come and develop. If that formula is done right, I think affordable housing stock will come up. A success story is Mumbai, where slum housing has been given a great amount of subsidies, and they built huge amounts of permanent housing for previous slum dwellers.

Do you think the glut in luxury apartments will reduce anytime soon?
No. Well, we don’t know or operate on that end of the market, but they are focused on foreign buyers and expat buyers, and it all depends on how the expat buyers view the market. These aren’t products catering to local needs; so once again, they are dependent on how the global mood is. So, in that particular case, there’s a bit of a risk, especially given the volatility of the currency, and the lingering doubts among the expats still about investment.

What do you see for the future in real estate?
I believe real estate trails the rest of the economy. So, once the economy booms, real estate booms. I think Colombo is in a very interesting point. All the groundwork has been done in terms of building infrastructure to help boost growth, but there still is some way to go. I think what’s really required is clarity from the government on direction. I think there’s a bit of uncertainty in terms of policy which makes foreign investors jittery and scared, but if those issues are resolved; if the government has clear direction and clear support for foreign investment, there’s a lot of potential for Sri Lanka. That’s my view.

What’s the plan for Iconic for the next 5 years?
We’re seriously studying the affordable housing space. We’re also seriously studying this semi-luxury space that we’re operating in. We do want to do a lot more developments in Sri Lanka. We’re constantly in the process of procuring land and building up partnerships for that. We’ll also be very interested in schemes that the government comes up with for affordable housing. So, we’re studying those.