By Rohan Parikh
Sri Lanka is currently going through what appears to be a ‘once in a generation’ crisis, both economically and politically. How would this impact the country’s real estate market, particularly the market for residential condominiums?
Firstly, it’s important to understand that unlike, say, manufacturing or services, the impact on condominiums will be complex and mixed. This is because the current situation has both positive and negative implications and will impact both demand and supply.
First, exploring the positives, real estate and residential condominiums provide investors a buffer to protect their wealth from unpredictable and rampant inflation – which has been one of the most prominent outcomes of the current crisis in Sri Lanka. Inflation is at record levels already and by all indications will remain high in the immediate term.
Since real estate is a long-term asset class, nominal values of properties generally rise to match inflation, ensuring that the investor gains in real terms. Hence, real estate assets like residential condominiums represent a safe and long-term store of value, which can offset the impact of inflation and can be sold profitably, once normalcy returns.
This is in sharp contrast especially with financial assets classes such as stocks and bonds that carry high levels of risk and can be very volatile during a macro economic crisis like the one we are experiencing currently. Hence, real estate can perform far better in protecting your wealth, compared with typical alternatives like cash or savings accounts, that could lose value substantially and rapidly due to inflation.
Overall, real estate represents a tangible and solid asset that can provide security and stability to investors at a time when the value of items and the stability of companies and industries are in flux.
However, the current crisis can also negatively impact the real estate market.
There is a strong likelihood of a shortage of apartments in the medium term as new projects are cancelled or postponed due to the uncertainty regarding the cost of inputs and availability of necessary imports. Buyers could rush to purchase the existing condominiums available in the market, reducing the availability for other buyers.
Such shortages may also result in prices of condominiums increasing rapidly – which is however likely to benefit buyers who get in early. Funding such new investments could however be challenging, given especially the rapid increase in interest rates.
Real estate developers and companies will also face significant constraints and challenges due to the inability to start new projects, as they would be uncertain of the prices of inputs. Hence, it will be difficult for developers to price apartments accurately. As projects are put on hold, employees in the sector could either face job losses or companies will have to contend with high overheads.
Need for additional caution
Low-quality developers who have invested in projects with low feasibility and who have heavy levels of borrowings are likely to be impacted far more than prudent, high-quality developers, given the above situation. Hence, buyers of residential condominiums need to take extra care to assess the feasibility of their developer, ensuring that they select only reputed developers with a strong track record.
The quality of future construction projects could also be compromised as imports will remain restricted in the medium term, leading to difficulty in procuring key components like kitchens, appliances, etc.
There could also be a dampening impact on land prices (discounting inflationary pressure) as land purchases by developers slowdown. This can be also perceived as a positive, especially for buyers but will negatively impact sellers.
Weighing the positives and negatives, overall, real estate and residential condominiums are likely to remain an attractive investment class in Sri Lanka. Long-term fundamentals remain relevant, especially considering that Sri Lanka has low levels of urbanisation and that vertical living clearly provides the only viable solution. Projects with sound business fundamentals, formulated by high-quality developers and which are aligned closely with market needs, will continue to be attractive investments.
(The writer is the Chairperson of Iconic Developments and an alumnus of the Wharton School of Business and INSEAD.)