The Red Files -Mid Market Report

AT H EAR E D AF I L E S

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AT H EAR E D AP R I N T

AT H EP R EFA C E

The Sri Lankan economy has seen robust growth with an annual growth rate of 6.4% over the course of 2010 to 2015 (World Bank).

There has been a slight loss of post war growth momentum since 2015 due to the challenges faced as a result of the new unity government’s promised reform in governance, economic planning and foreign policy. This change has led to a slowdown of government driven infrastructure initiatives as well as a wait-and-see approach within Sri Lanka’s private sector and international investors.

However, this short-term pain for long-term gain is expected to have an extremely positive outcome and we are already witnessing signs of an impending momentum shift.

Sri Lanka’s real estate industry has been a major beneficiary of the country’s rapid economic development and has grown at an annual rate of 13% over the past six years.

Taking into account the country’s changing dynamics we are pleased to share our research and insights on the overall outlook of the real estate industry. With a specific focus on suburban development as a result of Sri Lanka’s middle class growth and their need for mid-market condominiums.

REZA MAGDON-ISMAILFOUNDER - CEO

AHDIL MARIKARMANAGER - RESEARCH & DEVELOPMENT

SANJEEV DE SILVAMANAGER - OPERATIONS

S R I L A N K A ’ S 2 N D C O M I N G ;S O U T H A S I A ’ S S T R O N G E S T

R E A L E S T A T E S T O R Y

R E A L E S T A T E M A R K E T I NS O U T H A S I A?

M O S T E X C I T I N G

fast growing industry starting to reap macroeconomic benefits ‘‘

Since 2009 Sri Lanka’s real estate industry has grown twice as fast as the nation’s GDP. In 2015 the construction and real estate industry accounted for a combined 14% of Sri Lanka’s GDP, which represented a significantly greater proportion of the economy than most other regional peers.

CONSTRUCTION & REAL ESTATE AS A % OF GDP

This growth trend has been fueled by an increased appetite for residential property among the nation’s wealthy and middle-class population, growing demand for Grade-A office and commercial space from local and foreign corporates, and rising interest in the country as a tourist destination.

Post 2015 we have witnessed a moderate slowdown in growth in the sector owing to the wait and see approach taken by investors as a result of the changing political landscape creating some uncertainty in the economy.

However, we are currently witnessing signs of a momentum shift, made evident by an increase in construction and real estate contribution to the nations GDP in the first quarter of 2016 when compared to the corresponding quarter in 2015 and many substantial projects like the port city development restarting construction, the opening of a number of international resort developments along the southern coast and the continuing development of luxury and mid-market condominiums.

5

10

15

20

25

201520142013

VIETNAM

VIETNAM

VIETNAM

MALAYSIA

MALAYSIA

MALAYSIA

PAKISTAN

PAKISTAN

PAKISTAN

BANGLADESH

BANGLADESH

BANGLADESH

SRI

LANKA

SRI

LANKA

SRI

LANKA

INDIA

INDIA

INDIA

ANNUAL % GROWTH RATE OF GDP, CONSTRUCTION & REAL ESTATE

LKR ‘000’

CONSTRUCTION & REAL ESTATE AS A % OF GDP

The dominant form of Sri Lanka’s real estate boom has taken the form of high end condominiums developed in the prime areas within Colombo city limits.

However, we believe that there is an imminent oversupply of these products as a result of the limited local purchasing power available to sustain this supply, as well as the external demand drivers for these products such as foreign and diaspora investment taking longer than expected to materialize.

Given the above facts, while we are concerned about the high end condominium over supply, we believe there are significant opportunities across all asset classes but strong growth should be expected in:

• Resort Developments - Sri-Lanka tourism has grown circa 16% y-o-y for the first half of 2016.

• Serviced Condominiums / Condotels - An asset class that is in serious un-der supply in Colombo. Jaic Hilton being the only branded operator, has been performing at extremely high occupancy over the last 3 years and we are yet to see a new entrant coming into the market.

• Grade A Office space within the CBD - Sri-Lanka’s Grade A office marketcurrently enjoys 95% occupancy, while new developments of Grade A office space are limited.

The forecast demand for Grade A office space in 2016 is estimated at 3.8 million sqft, with the current supply at approximately 2.3 million sqft, which leaves a shortfall of 1.4 million sqft as at date (JLL).

While there are a number of Grade A office spaces expected to come online in 2019/2020 such as the Shangri-La and Waterfront Developments, with fore-cast growth there is still room for Grade A office developments that provide the infrastructure and amenities focused on improving the productivity and efficiency of their tenants.

• Mid-Low Income housing and condo developments - Sri-Lanka’s urbanization is currently at 18% of the population vs. the global average of 50%. Sri Lanka is poised to achieve higher middle income nation status by 2017, when it reaches expected per capita income of USD 4,000.

The steady rise of land prices in Colombo and its suburbs has led to a significant rise in the number of condominium developments in the city.

While these developments have historically focused within the city limits of Colombo, over the last 2-3 years we are seeing mid-market condominiums within the suburbs of Colombo emerging as the preferred choice for middle-income buyers.

R I S E O F AT H EM I D D L E

urbanization is rapidly driving suburban growth‘‘

As one of the fastest developing countries in Asia, Sri Lanka has a relatively small percentage of urban development, while achieving an exceptional level of human development, in comparison to other nations within the region.

According to the United Nations report of World Urbanization 2014, it is estimated that more than half of the world’s population live in an urban area. This is in stark contrast to Sri Lanka, which holds an urban population of 3.7 million which is only a mere 18.3% of the country’s total population.

Sri Lanka is currently considered a lower middle-income economy with a total population of 20.8 million and a per capita income of USD 3,800 in 2015 (World Bank).

Sri Lanka’s per capita income over the period of 2011-2015 has grown at an annual rate of 9%, when compared to the South Asian average annual growth rate of 5%. At this rate, the country is well on track to achieve upper middle income status of per capita income USD 4,032 in the next two years.

GDP PER CAPITASOURCE: WORLDBANK

The slow urbanization trend in Sri Lanka together with the imminent achievement of the upper middle income-status is a strong indicator of the potential for real estate development in the low-mid income condominium market.

URBANISATION TRENDS

GLOBALLY 50%

SRI LANKA18%

While premium and luxury developments are highly important to attract foreign interest, the mid-market category which provides affordable properties for the middle-income earners should be given a prominent status over the next two years. The net transfer of the population from rural to urban areas will cause the territorial expansion of urban settlements and substantially increase the demand for mid-market housing.

AS U B U R B A NL A N DAV A L U E S

suburban land values in an upward spiral‘‘

The story of land prices within Colombo’s suburbs has been essentially one of continuous appreciation over the past two decades.

The primary factor driving this upward spiral on land prices is the increasing demand for suburban housing as a result of a growing middle class and their desire for urban living.

Market data indicates that the percentage growth of the suburban land prices in areas such as Rajagiriya and Dehiwala have outpaced areas within the Colombo city.

This is likely to be a reflection of the fact that areas within the city may have reached their peak in terms of development potential and the suburban areas are still significantly below their development potential.

LAND PRICES PER PERCH

LKR

A s a collective, middle income buyers dominate a larger segment of theproperty market. However given their individual budget restraints, the areas within Colombo are beyond their reach.

In comparison to surging land prices within Colombo and suburbs, which had an average annual growth rate of 13.5% over the past five years, other assets such as equity and fixed deposits haven’t performed by the same token.

The ASPI of the Colombo Stock exchange has witnessed drastic fluctuations largely due to changing global economic conditions and has grown at an annual average rate of 7.5% over this period. The average fixed deposit rate over the same period has been 9.9%.

ASSET RETURN COMPARISON (2012-2016)WEIGHTED AVERAGE

FIXED DEPOSIT RATE 9.9%

SUBURBAN CONDOS9.1%

SRI LANKA COLOMBO STOCK EXCHANGE 7.5%

SUBURBAN LAND 16.4%

LKR

I N C R E A S I N GAS U B U R B A NR E A LT Y

developers shifting focus away from luxury high-rise‘‘

Condominiums have had a strong hand in shaping the skyline of Colombo, with the key market driver being the luxury condominium market. However, the demand for mid-market condominiums with affordable pricing will exceed the demand for super-luxury and luxury segments in the near future, due to the luxury market facing the risk of saturation.

In the year 2014, the super-luxury and luxury segment had 73% of the total supply in the condominium market while the mid-market had a mere 27% of market supply (KPMG).

Today in terms of new developments the mid-market segment has surpassed the luxury segment. 2,060 mid-market unts are expected to enter the market within the next two years in comparison to 1,350 luxury units.

DEVELOPMENTS IN 2016

DEVELOPMENTS IN 2014

60%MID-MARKET

40%LUXURY

27%MID-MARKET

73%LUXURY

According to the Sri Lankan Condominium Management Authority, in the year 2015, 4,046 condominium units were given preliminary planning clearance. This number has skyrocketed to 4,630 approvals for only the first half of 2016.

The majority of this upsurge has resulted from a rising number of mid-market and lower mid-market properties that attract interest from people looking for affordable homes within the suburbs of Colombo.

UNITS APPROVED

CMA PRELIMINARY PLANNING CLEARANCESOURCE : CONDOMINIUM MANAGEMENT AUTHORITY

the landscapeis changing - The Red Team‘‘

AT H EAAT H R I V I N GM I DAS E G M E N T

higher capital and rental yields up for grabs in mid-market condos‘‘

During the year 2012 mid-market condominiums like The Fairway by Fair-way Residencies were priced at an average of LKR 14,900 per sqft (JLL). The mid-market condominiums had specifications and amenities similar to premium segment condominiums, but were mostly located in the upcoming suburbs of Rajagiriya and Sri Jayawardenepura Kotte. In today’s economic setting mid-market condominiums located in the suburbs are priced at an average of LKR 20,748 per sqft, this outlines an average annual growth of 12% over the four years.

AVERAGE PRICE: MID-MARKET CONDOMINIUMS

LKR PER SQFT

As of July 2016, 64% of the 2,061 new mid-market apartment units have already been sold out in comparison to only 37% for luxury apartment units (JB Securities). This proves that mid-market condominiums are the fastest growing segment in terms of deal closure.

For this reason, developers are addressing the opportunity-to tap into the growing cash assets of middle income earners, who will hit the peak of their earning strides over the next 4–8 years.

In 2011, JLL calculated Colombo’s residential rental yields to be around 3-7%. As property prices soar, the rental market in Colombo and its suburbs, including Borella, Rajagiriya, Dehiwala and Wellawatte is flourishing. According to our research current rental yields for mid-market condominiumswithin Colombo and its suburbs range between 5-7%.

Area Annual Rental Yield

Borella 6.4%

Rajagiriya 6.7%

Dehiwala 7.2%

Wellawatte 5.1%

M I DM A R K E TAA F F O R D -A B I L I T Y

understanding affordability‘‘

It is important to understand how affordable a mid market condominium is to the average middle income earning Sri Lankan. Our research indicates the average price of a two bedroom apartment within the mid market is priced at an average of LKR 17.6 million.

Sri Lankan banks offer 70% of the total housing cost as a repayable loan with an interest rate of 12-13%. Therefore, taking out a loan to purchase a 2 bedroom mid market condominium will require monthly repayment of LKR 155,000 over a period of 15 years.

A household of two income earners who allocate 40% of their monthly income towards the purchase of a property would require, a combined income of LKR 390,000 (individual salary of LKR 195,000). This corresponds to an average salary of a management level corporate employee.

THE ANATOMY OF PURCHASING A PROPERTY

40% LKR 155,000

PER MONTH FOR 15 YEARS

MONTHLYEXPENSES

60% LKR 235,000

100%LKR 390,000

MONTHLY HOUSEHOLD INCOME

AT H ER E DR A N K I N G

In an attempt to fully understand the mid-market condominium segment, an extensive research analysis of 45 new and upcoming developments was con-ducted. In these 45 new mid-market developments there are a total of 2,061 new condominium units.

The research identified price ranges, locational differences, contractor and developer credibility, total number of units and percentage sold, amenities provided, and size of apartment. Through the research carried out on the 45 new and upcoming developments in the mid-market condominium segment, we were able to come up with a unique scoring system to develop The Red Ranking.

All 45 condominium developments were ranked out of six essential criterions that influence buyer or investor decisions.

3 1 2

The rankings were calculated on the basis of a 60 point cap.

Price points were scored out of 10 by taking the average price of the 45 new developments, LKR 17,580 per sqft. Developments with a price of LKR 1,000 below the average were awarded 10 points and for every LKR 1,000 higher than the average price deducted 2 points.

Location points were scored out of 20, taking into account two essential factors – distance to CBD and distance to closest township. The average distance to CBD out of the 45 new developments was 10.3km and the average distance to the closest township was 1.3km.

Developer credibility was scored out of 10, with developers with over 3 completed projects obtaining 10, 2 or more projects obtaining 8 and others 6.

The contractor employed was also scored out of 10 points with Class A contractors scoring 10, Class B contractors 8 and Class C contractors 6.

Lastly amenities offered by the development was scored out of 10, factors taken into consideration were swimming pool, gym, kitchen and room cabinets, function hall and A/C.

60 POINT CAP. PRICE POINTS = OUT OF 10 ,

LOCATION POINTS = OUT O F 20,

DEVELOPER CREDIBILITY = OUT OF 10,

CONTRACTOR POINTS = OUT OF 10

AMENITIES = OUT OF 10

RANKING PROJECT DEVELOPERAV. PRICE (LKR PER

SQFT)

DISTANCE TO CBD

(KM)

DISTANCE TO CLOSEST TOWNSHIP

(KM)

TOTAL POINTS

1PRIME

WRENDALE RAJAGIRIYA

PRIME RESIDENCIES 19,426 7.6 0.30 50

2 VERGE BRIX REALTY 18,257 8.2 0.40 48

3 LAKE MENARA MENARA RESIDENCIES 22,045 7.9 0.50 46

4 ETHUL KOTTE 2: SIXONESIX


5 TREASURE TROVE

HOMELANDS SKYLINE 30,000 5.7 0.70 45

6 DE ALWIS PLACE BLUE OCEAN 14,848 9.9 1.10 45

7

PRIME RESIDECIES

CASTLE STREET


8

URBAN HOMES FAIRWAY

KOSWATTAFAIRWAY

HOLDINGS 19,718 10.9 1.28 43

9 19TH LANE BLUE OCEAN 29,889 3.4 0.24 43


SQFT)

DISTANCE TO CBD

(KM)


(KM)

TOTAL POINTS

10 PRIME SPLENDOUR


11 JAYASINGHE ROAD BLUE OCEAN 17,443 7.4 1.50 42

12 PARAGONGLOBAL

HOUSING & REAL ESTATE

14,442 9.2 0.85 42

13 GLOBAL KINGDOM

GLOBAL HOUSING &

REAL ESTATE12,923 10.5 0.90 42

14 PRIME ETHUL KOTTE


15 RUSH COURT 2 RUSH RESIDENCIES 10,151 7.5 0.90 41

16 HAVELOCK ROAD BLUE OCEAN 20,102 6.9 1.30 41

17 BEACH ROAD BLUE OCEAN 14,705 11.3 1.25 41

18 SOVARANO 39BLUE

MOUNTAIN APARTMENTS

15,362 12 0.75 41


SQFT)

DISTANCE TO CBD

(KM)


(KM)

TOTAL POINTS

19 PRIME AQUA PRIME RESIDENCIES 21,742 8.8 0.70 41

20 LIBRA PRIME RESIDENCIES 16,560 10.8 1.00 41

21 PRIME EDMONTON


22 THE CASTLE SUPERLATIVE PROPERTIES 23,563 5.9 0.75 40

23 RAILWAY AVENUE BLUE OCEAN 16,923 13.3 0.85 40

24 77 ON FOURTH RESIDENCIES JAT HOLDINGS 24,164 8.9 1.00 40

25 RUSH TOWER RUSH RESIDENCIES 12,549 9.2 1.50 39

26 SPAN TOWER 16 SPAN TOWER 23,494 7.2 1.60 39

27 BARNES AVENUE BLUE OCEAN 15,933 11.5 1.32 38


SQFT)

DISTANCE TO CBD

(KM)


(KM)

TOTAL POINTS

28 SPAN TOWER 19 SPAN TOWERS 13,196 10.2 1.70 37

29 PALLADIUMGLOBAL


12,970 13.2 1.40 37


31 LILLIAN AVENUE SPAN TOWERS 15,780 12.3 1.60 36

32 RUSH RESIDENCIES

RUSH RESIDENCIES 12,000 11.7 1.50 36

33 PRIME 194 NUGEGODA

PRIME RESIDENCIES 18,670 14 0.90 36


35 SENIC VIEWGLOBAL


10,150 14.5 1.45 35

36 LAKEFRONT

BLUE MOUNTAIN

APARTMENTS 20,980 10 2.00 35


SQFT)

DISTANCE TO CBD

(KM)


(KM)

TOTAL POINTS


38 MONASHGLOBAL


12,162 11.7 1.35 34

39 DE ALWIS AVENUE BLUE OCEAN 18,327 12.1 2.00 34

40 VANTAGEGLOBAL


13,009 13.8 2.40 34

41 RELIANCE RESIDENCIES RTI HOMES 15,669 11.1 2.70 33

42 REGENT RESIDENCIES

REGENT RESIDENCIES 13,650 12.4 1.60 32

43 FLORA RESIDENCIES

HOMELANDS SKYLINE 13,976 10.4 4.00 32

44PRIME LIVING

THALAWATHU-GODA


45 SUNCITY TOWER SUNCITY 10,817 18.8 1.75 31

R I S KA&R E G U L A T I O N

dealing with risk and understanding regulation‘‘

MARKET DYANMICSSOURCE: CUSHMAN AND WAKEFIELD

TRANSPARENCY

EASE OF OWNING PROPERTY

EASE OF LEASING PROPERTY

SPEED OF LEASE TRANSACTION

LEVEL OF BUREAUCRACY

POOR

0 1 2 3 4 5

EXCELLENT

Profiting from its real estate rise, in global real estate service firm Cushman and Wakefield’s 2015 risk ranking, Sri Lanka is ranked 18th least riskiest out of 42 emerging global property markets ahead of its regional counterparts like Bangladesh, Vietnam and Myanmar within APAC.

Previous regulations restricted foreigners from owning property in Sri Lanka and property leased to non-nationals was subject to 15% tax. The current government has removed the land lease tax for non-nationals and reduced the approval period for foreign direct investment requests which should further enhance foreign interest in investment in real estate.

While real estate investments are currently exempt from capital gain taxes the government of Sri Lanka has indicated the introduction of a capital gains tax, which is expected to range from 5-10% of the capital gain.

This tax is however only expected to have a marginal effect on returns.

AT H EAE N D G A M E

strong fundamentals driving future prospects‘‘

The Red Team trusts you have found our read of the current landscape of real estate in Sri-Lanka informative and well presented. While we are extremely optimistic of the future potential for real estate development, we hope that all stakeholders of the industry will take a responsible approach to ensuring its progress.

Much like any successful business the fundamentals of success for the industry will hinge on well planned and well-built products and services that focus on the operational success of their end users.

Watch out for the next Red File.

BIBLIOGRAPHY

• Bangladesh Bank - https://www.bb.org.bd/pub/annual/anreport/ar1314/full_2014_2015.pdf

• Bank Negara Malaysia - http://www.bnm.gov.my/files/publication/ar/en/2015/ar2015_book.pdf

• Central Bank Statistics, Sri Lanka - www.cbsl.gov.lk

• Condominium Management Authority of Sri Lanka - www.condominium.lk/

• Cushman & Wakefield: Emerging & Frontier Markets, Assessing Risk & Opportunity 2015 - http://bit.ly/2bacghe

• JB Securities: Understanding the Residential Condominium Market in Colombo

• Jones Lang LaSalle: Real Estate in Sri Lanka - Prospects and Potentialhttp://www.jll.com.lk/sri-lanka/en-gb/Research/on-point-sri-lanka.pdf

• KPMG: Vertical Living Beyond 2020 - http://bit.ly/2bPHR6o

• Pakistan Bureau of Statistics - www.pbs.gov.pk

• Reserve Bank of India - https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/00A157C1B5ECBE6984F6EA8137C57AAEF493C.PDF

• State Bank of Vietnam - www.sbv.gov.vn/

• World Bank -http://www.worldbank.org/en/country/srilanka/overview

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The Red Files -Mid Market Report