Real estate market overview: High-end office space shortage
We believe there is currently a notable shortage of high-end office space in the Colombo central areas. The lack of availability of Grade A space is prompting organisations to refurbish lower grade developments in order to meet the requirement of being centrally located.What we also note is that the developments owned by large corporations have also started letting out entire floors to outside companies whilst relocating some of their own subsidiaries in order to cash in on the high rental rates.
The market for commercial property island-wide seems is also active in most districts, given the strong economic growth that has been experienced in the past few years. We can note that after Colombo, Kandy is the next most expensive city to rent followed by Gampaha, Trincomalee and Galle. A similar price pattern exists with regard to the commercial rental market with Negombo also showing a good demand for commercial space.
Demand forecast
The overall economic wellness of the country will have a large impact on demand and in this regard the Sri Lankan economy is looking at sustained growth rates of between 6.5 and eight per cent in the short to medium term. This will ensure that demand for office space in Colombo will continue on a steady and positive incline. The ADB in a recent study points at several growth corridors that will drive demand for commercial space in terms of regional competiveness.
Several additional considerations can also be noted in order to support this position such as the expansion and development of the Colombo port which is already a top 20 global harbour in terms of volumes. In addition, we can note that pipelined leisure sector projects in Colombo will double the number of hotel rooms available within three years and this will lead to a proliferation of peripheral service sector growth within the vicinity. Other bullish sectors that will require office space in the city centre will include the financial services sector which is at the frontline of economic growth and the IT sector.
The real estate market as a whole will also benefit from the ongoing ‘beatification’ programme in Colombo where the ‘garden city’ concept is being pursued.
Resolving the issues of traffic congestion and a mass public transport system in the capital will help to further improve Colombo’s positioning as an ideal place to locate business in the region. The demand for commercial property in Colombo between individual developments will be driven more by internal factors like the facilities on offer and ease of access/parking facilities and the ‘smartness’ of the building measured in terms of technology and ‘greenness’.
Supply forecast
The Research Intelligence Unit (RIU) expects a continuation in the rise of office space prices of around 15 per cent due to strong demand amidst supply that is lagging behind. While there are several new developments in the pipeline, demand, we believe, will continue to out-pace supply in the next few years. Other notable additions to the office space stock include Platinum One at Bagatelle Road in Colombo 3 and the AEC Towers at the Kettarama Temple Road, adding 60,000 square feet to commercial space in Colombo.
Havelock City is also set to develop commercial office towers in phase two of its mixed development project but no date has been set for this although 400,000 square feet has been allocated for this, according to our sources. A local IT company is also expected to add 200,000 square feet of additional office space, followed by an additional 2.1 million square feet by 2015.
Additionally, future projects have been planned for the Colombo 1, Fort Area of the city. Krrish Towers that will include the Transworks building on lower Chatham Street in the heart of the Fort Area is set to become the centre of the Transworks Square designed by the UDA and built by the Indian-owned Krrish Group. According to RIU sources, the Krrish Towers will also allocate a significant amount of commercial office space that will be available for lease or rent. In this context the next few years will witness Fort consolidating its position as the commercial hub of Colombo city.
In addition, a development at Southwest Beira Lake and a mixed development at D.R. Wijewardene Mawatha near Lake House are also reported to have been initiated and underway. Chalmers Granary is another high profile, mixed development project being undertaken in Fort according to RIU sources
Additionally, there is speculation that several large conglomerates are planning to enter the market. For example, it is likely that JKH will enter the market with their property in Glennie Street whilst new leisure sector developments like Shangri-La will also allocate some space for commercial rentals.
According to some sources, office stock in Colombo is expected to multiply by 2.4 over the next five years to 12 million square feet. Much of this will consist of Grade A developments as the demand to locate head offices of existing and new organizations will continue to gather momentum.
Opportunities
File picture of the Chalmers Granary.
Given the current supply gap for commercial office space that meets high international standards, there are immediate opportunities for any new entrant who can supply the market. According to available information, property developers are currently enjoying good financial returns. In short, the opportunities can be listed as follows;
- As more and more prestigious international firms enter the Sri Lankan market, the demand for locations that benefit the profile of this organisation will increase. Colombo 1, 2, 3 will be at the frontline in this regard.
- Initiatives to move towards a ‘garden city’ that is geared to meeting an anticipated hike in tourist arrivals will increase demand from businesses that provide ancillary services to the leisure sector.
- Colombo port expansion which is supported and funded by the government, the ADB and large private sector players will lead to an expansion in demand for ancillary services related to importers and exports, thereby creating new demand for commercial office space.
- New initiatives to develop under-developed areas, especially in Colombo 1, will provide excellent opportunities for ‘early-movers’ to benefit from an expected incline in real estate prices
- Bullish sectors like leisure and tourism, finance, IT and KPO’s will continue to drive demand for many years.
- Kandy, Kurunegala and Hambantota will increase their office stock of smaller Grade A office space as industry and commerce picks up.
- The development of the Outer Circular and the 3K’s (Kaduwella, Kadawatte, Kottawa) townships will extend green-field opportunities for commercial and industrial developments.
Outlook
Our data on the commercial property sector shows a strong post-peace demand growth that has been experienced in Colombo since the second quarter of 2009. Based on land registration prices (sales), the growth in commercial land and property prices shows consistent growth in the city as well as the suburban areas of as much as 30 percent per annum.
We expect the rate of increase in grade A commercial property rentals will move up as much as 20 per cent for the next few years before slowing down to around 10-15 per cent as more commercial space stock is added to the market.
Overall, the following factors will affect the supply and demand outlook over the next five years;
- Strong demand in the luxury property and leisure sectors has resulted in the fact that revenue generation from commercial property is lagging behind. The return on investment for office space is not as fast as from apartments and leisure as the former is typically given only on rent and not sold outright as with the latter.
- The government is yet to extend incentives that are geared towards facilitating rapid development of commercial property. The UDA regulations also will need amendments in order to facilitate and encourage more investment in this segment. For example, the stipulated amount of parking plots in relation to office space needs to be updated given that vehicle ownership has dramatically increased over recent years.
- The success of the authorities in managing emerging issues in the capital relating to traffic congestion and the lack of a proper public transportation system will also have a direct impact on demand over the long-term.
- The exodus of public sector offices from the city will free-up more land in the city. These might be given on a 99 year lease to private investors.
We expect that the next real estate market segment to take-off in Sri Lanka will be the commercial property developments.
(The writer is CEO, Research Intelligence Unit. He could be reached at roshan@riunit.com)