Challenges in the condominium sector
View(s):“There are several challenges facing the condominium sector, high interest rates, construction cost escalations due to high duty, high depreciation of the Sri Lanka Rupee last year, labour shortages, lack of proper regulatory framework, and envisaged introduction of 15 percent VAT,” said Ravi Abeysuriya, Group Director – Candor Holdings, at the Lanka Property Show 2019 held recently at the Kingsbury Hotel in Colombo.
In a panel discussion at the Lanka Property Show, Mr. Abeysuriya said the real estate sector in Sri Lanka that used to give very high returns is gradually decreasing. In today’s context, people who buy apartments should be cautious. They should also check on where the sale agreement has penalties for construction delays, who will be providing the facilities management post construction as some construction companies may not look after the condominium property once apartments are sold out. “In the current market conditions, the apartment buyers may not be able to sell their apartments in a hurry as potential for capital appreciation and rental yields are low,” he added.
He said, “fire risk could be high in tall buildings in Sri Lanka, unless the buildings have built-in firefighting systems such as properly reinforced fire escapes with high pressure fans to keep the fire escapes secure for evacuation. Many developers may be using cheap combustible cladding, etc due to archaic legislation.
However, he mentioned that there is no bubble in the property market in Sri Lanka. A real estate bubble can occur when people buy property purely with the intention of selling at a higher price, particularly during times of low interest rates and financial institutions irresponsibly lend over 100 per cent of the true value due to escalating property prices, where at some point the bubble bursts.
Mr. Abeysuriya speaking on attracting foreign direct investment (FDI) to Sri Lanka’s real estate sector stated that the 15 per cent VAT on residential accommodation should not apply with effect from April 1, 2019. “If the government is smart enough and wants more FDI to flow into the country, VAT on physical asset should not be applied. It’s a very poor decision where no other country has done on the residential property,” he noted. He questioned the fairness of charging VAT when buying an apartment vs not charging VAT when buying a house as a first residence of a family.
Mr. Abeysuriya said, if the Government is smart it should create a conducive environment for the real estate sector which attracts the largest amount of FDI to thrive. “There is tremendous scope for the property market to attract foreign investors by creating an enabling environment such as Real Estate Investment Trusts (REITS) which have formal, transparent and well-governed mechanism and asset-backed and hence have strong foreign investor appetite. REIT needs to be a tax pass through, under the Collective Investment schemes proposed by SEC similar to Unit Trusts and Exchange Traded Funds so that all investors can invest in the Sri Lanka real estate market.
In order to attract more foreign buyers to the sector, he said “similar to many other countries’ Sri Lanka could introduce a resident visa programme where the period of the resident visa is tied to the amount of foreign currency brought into the country by the applicant, for example a 5-year visa for those who invest US$500,000. Sri Lanka can easily become a major international retirement destination if the Government follows correct policies such as destination marketing and adopt right policies to promote the country on par with other well-known retirement destinations with similar quality of life such as Peru, Costa Rica and Thailand. Further, support service providers such as facility management companies, property lawyers, a standardising brokerage, loan facilities, etc need to be encouraged. “Unfortunately, we do not have the political will, commitment and the speed at which policies need to be implemented to progress in this space. Most importantly, for Sri Lanka to achieve this, changing the mindset of the public is also imperative because there is a lot of socio-economic benefits to the people.”