The first quarter of 2012 witnessed a number of developments in the real-estate sector in Sri Lanka, coming on-stream. Leisure projects were among the major contributors to activity in the market, with the commencement of construction of several hotel projects and the opening of some recently-completed boutique hotel properties. The steep rise in the number of tourist arrivals signified a potentially increasing demand for hotel rooms in varied categories, with existing capacity still falling short of the anticipated requirement. Selective properties in scenic locations with good amenities continued to attract investor interest.
Ongoing construction activities continued in the city of Hambantota, primarily in the completion of the Ruhunu Magampura Sea Port and in the International Airport in Mattala which is due for completion later this year. While there is still wide disparity in the price of property in the region, it is likely that properties in areas allocated for housing projects as well as properties in proximity to commercial developments, will appreciate in value.
The recent increases in interest rates and the likely consequences of inflation as a result of price increases of a number of essentials, are likely to have both demand-side and supply-side implications for the real estate sector. It is envisaged that the momentum of real estate transactions will slow-down in the year ahead, a result of the rising cost of funds, along with margins also being affected consequent to the increased cost of construction. Hence “cautious optimism” is likely to be the sentiment.
Expanding – Hambantota
With so many new initiatives currently underway backed by strong government support, the story of real estate in Hambantota is one of fast-tracked and dramatic development. Moreover, this process of emergence from penuriousness to prosperity is still at a very early stage of development and given the long-term nature of current developments, the future appears to hold great promise.
Background
Hambantota has been identified by many as the fastest developing region in Sri Lanka today. Undoubtedly, over the last four years, billions of dollars have been invested into the district which, until recently, lacked basic necessities of drinking water, access to proper roads and electricity.
Hambantota is home to approximately 526, 414 people across 252,500 hectares of land. The current population density is recorded at 228.02 per square km. The forecasted population is set to be about 613,000 people, by the year 2030 (UDA, 2011). Although thousands of visitors pass through Hambantota each year on their way to Kataragama, Hambantota has only recently been highlighted for its geographical, cultural and economic importance. Historically, Hambantota is one of the lowest per capita income regions in Sri Lanka with high unemployment rates plaguing the region.
The costal district was severely affected by the 2004 Indian Ocean tsunami and the recent reconstruction taking place has helped to restore some of the buildings that were ravaged in 2004.
Hambantota’s location in the Southern Province enables the region to be linked with Sri Lanka’s growing tourism sector where beach areas are a favourite haunt for visitors. It is also located in close proximity to the Bundala National park, the Yala National Park and the sacred temples at Kataragama. The city of Hambantota is also scheduled to host the Commonwealth Heads of Government Meeting in 2013. Consequently, Hambantota’s relentless development shows no sign of wavering and progress is being facilitated towards ultimately transforming into Sri Lanka’s first planned city.
Current happenings
Power port
The Ruhunu Magampura Sea Port is the largest and most prominently featured project of the city of Hambantota. A Chinese loan funded the majority of phase one of the project where costs have been reported to be US$ 361 million (Sri Lanka Ports Authority slpa.lk) The construction of the port began in the year 2008 with the first phase of operations starting in November 2012 and the final phase of business operations expected to begin shortly. According to news reports, Sri Lanka invested US$ 360 million and a further investment of over US$ 760 million has been secured via other sources. The services and industrial port will aim to serve one of the world’s busiest shipping routes, the east-west shipping route which passes 19 kilometres south of Hambantota and links Asia and Europe. It is widely acknowledged that the port allows international shipping times to be reduced by up to three days, saving both time and fuel costs for business. The Hambantota Sea Port is probably one of the most suitable ports for the Indian subcontinent, competing directly with Dubai, Salalah and Singapore.
The expected revenues are estimated at over US$ one billion and the creation of over 2000 employment opportunities within 24 months, according to the Chairman Sri Lanka Ports Authority (SLPA) Dr. Priyath Wickrama.
The investments that have been attracted to the Hambantota Port are notable. The private investment of US$ 7 million by Dragon Asia Fertilizer, whose local partner is Hayleys PLC, represented the first investment by a domestic company for a fertilizer bagging, storage and processing plant. The plant is over 200,000 square feet in extent within an area of 2.5 hectares. Other international investors in the port include Peak Energy of Singapore, setting up a petro-chemical plant for US$ 434 million; Thatta Cement of Pakistan, set to invest in a cement processing and bagging plant valued at US$ 15.6 million and Shree Renuka Sugar of India who will bring raw sugar from Brazil for refining and export.
An oil tank farm with 14 tanks is also being constructed at the Hambantota Port with an investment of US$ 76 million. Eight tanks will be used for the fuel bunkering of vessels, three of the tanks for strong LP Gas and three tanks for storing aero fuel.
The Sri Lankan Ports Authority recently ordered for all ships carrying motor-vehicles to be unloaded at the Hambantota port. Whilst many companies reported increases in costs of transport because of this policy move, the direction of the Sri Lankan government boosts the local economy within Hambantota as planned.
Airport
In addition to the sea port, the international airport in Mattala, within the Hambantota district is currently under construction. By the end of construction, this would cover over 2000 hectares of land and would generate over 1,500 direct employment opportunities and over 3,000 indirect employment opportunities. A leading German Airline is currently also exploring possibilities of investing in the Airport.
Phase one of the airport development consists of a single runway and phase two would provide a larger runway and a greater number of taxiways to cater to international traffic and larger runway and a greater number of taxiways to cater to international traffic and larger planes such as the A380’s. A flying school, airport hotel and other recreational facilities are also planned within the development project for phase two. Phase one is expected to be complete by the end of the year 2012, with an aim to cater to Sri Lanka’s growing tourism industry. Recent media reports quote the Chairman Airport and Aviation Services (AASL), Prasanna Wickramasuriya stating that 80 percent of the runway has been completed and 60 percent of the airport traffic, control tower, fire station, cargo and passenger terminal have also been completed.
Hambantota’s strategic location in the South, a short distance from Sri Lanka’s well known, pristine coastline, will make the airport an ideal hub for tourists aiming to reduce travel time on Sri Lanka’s roads. The Mattala International Airport will be able to capture the regional traffic in the South East Asian area and play a role in development efforts. The airport is expected to serve as an air-sea transhipment hub, in conjunction with the Hambantota Port as well as to serve as a cargo hub for the entire region, including the Eastern province of Sri Lanka, reducing transport and fuel costs of many businesses.
Wide roads
The proposed road network of greater Hambantota is an important factor to note with regards to the development of the region. Plans to extend the Southern Highway through the Hambantota region are in place, connecting the region with Colombo. Within the city, road development has been a concentrating factor. The Government of Sri Lanka hopes to widen all roads, creating multiple four lane and six lane roads across the city.
Once completed the Southern Highway will run through the Hambantota town giving road connectivity to Matara as well as providing a vital link to the Matara-Kataragama rail road.
Landmark developments
Other high profile development projects are the International Cricket Stadium, the Botanical Gardens and the Heritage Museum. The cricket stadium holds a capacity of 35,000 and has already held some World Cup matches in 2011. The upcoming Twenty 20 World Cup that is to be held in September/October of this year will also boost the stadium as an international venue with many of the 27 games to be hosted in Hambantota. The Botanical gardens of Hambantota is being established with the aim of conserving rare plants that are native to the dry zone of Sri Lanka. The Dry Zone Botanical gardens is being set up in Mirijjavila, a key location along the Colombo-Kataragama main road thus attracting a large number of local visitors. The Botanical gardens will provide an opportunity for Sri Lanka to move towards ecotourism industries and development in environmentally friendly concept. The gardens will feature over 300 rare plant varieties over 120 hectares of land.
In addition to the Botanical gardens, the Heritage Museum is to be established as well. The old Kachcheri building complex is the chosen site for this project which falls under the Ministry of National Heritage. The heritage of the former Kingdom of Ruhuna, when established in ancient times was visited by travellers from the Far East, Siam and China. The former kingdom is the site of the region of Hambantota today. The Heritage Museum would be an attraction for both local and foreign travellers in the area, attracting visitors with exhibits featuring the history of the area. In addition to being a tourist destination, the Heritage Museum is aimed at providing a high degree of educational value to local school children in the Southern Province. The museum will be the first of its kind, to exhibit the history and culture of the province.
The proposed Central Business District of the Hambantota region encompasses a diplomatic enclave, high income housing and chalets, middle income housing, city hotels, commercial and mixed development blocks, banking square, golf course and urban, nature and linear parks. In addition to this, hospitals, police stations, markets, theatres and beach parks have also been proposed. The impact of such precise urban planning and zoning is that Hambantota will be Sri Lanka’s first ever accurately planned region, in contrast to the commercial capital of Colombo which developed without a vision or a long term city plan. Hambantota could grow into a city for industrial activities and business in general because of its proximity to the sea port and international airport.
High-end housing
A special highlight of the central Business District of Hambantota is the proposed Lotus Tower that is to be constructed in the midst of the High income housing and chalets development. International hotel chain Shangri-La has also purchased land to build 162 rooms and 20 beach villas that are to be ready by 2013.
According to media sources, land prices in Hambantota that once were extremely low having increased considerably. What we can note is a great potential for this part of the island to develop in to a hub that will be driven by new free trade zones (FTZ) and increasing demand for warehouse space. The growth in tourism will also continue along the Eastern and Southern cot line with the commissioning of several large resorts. This too will contribute to the local economy. Consequently the real estate market in Hambantota is expected to remain on a positive incline for many years ahead.
At A Glance: Suburban Property
Whilst gaining access to registered property prices in Sri Lanka is a difficult task, RIU has nevertheless gathered primary data from a variety of sources covering the past fifteen years for both development properties as well as bare lands. Here in, we have an illustrated account of price trends over the period under review.
Average price per-perch during the period under review in Dehiwala is Rs. 629.074. It can be observed that there is significant variation in prices between different areas of the municipality and the prices are quite scattered. However there is a clear and positive trend and we can note that a price of three million per-perch was recorded in 2012. According to the data the average price per-perch over the past 12 months is Rs. 1.392 million. (Average plot size in sample: 8.2 perches)
In Mount Lavinia the average price per-perch during the past 14 years was recorded at Rs. 538,165. Again a clear positive incline can be noted whilst price variations are less scattered than in most municip0alities. According to the data the average price per-perch over the past 12 months is Rs. 733,333.00. (Average plot size in sample: 6.8 perches).
The story in Battaramulla/Pelawatte shows a large level of variation since 2004 given that both affluent and lesser developed neighbourhoods are to be found in this suburb. We can note that parts of this area has held a high and steady property market, probably due to fact that the parliament building is located in close proximity and the road and other infrastructure has been comparatively advanced for several years. The 12 month average is Rs. 707,500. (Average plot size in sample: 9.1 perches).
Rajagiriya also shows a large degree of variations in prices over the past eight years due again to the fact at both affluent and less developed neighbourhoods are to be found in the area. A top price Rs. 3.5 million was recorded in 2011 and the average over the past year is calculated at Rs. 1,720,000.00. (Average plot size in sample: N/A).
In Kohuwala, which is comparatively a smaller geographic area, the data confirms the overall positive trend that can be observed in most other areas. A top price of over Rs. 2.5 million per-perch was achieved last year. However, scarcity of data for Kohuwala prevents us from making any conclusive comments for this suburb. The moving 12 months avarege is recorded at Rs. 1.146 million. (Average plot size in sample: 6.9 perches).
Valuation Dynamics
Property valuation is a key area of interest and an important consideration in almost every real estate transaction. The following interview with Mr. W. Seniviratne, Former Chief Valuation Department, shares insights on the subject.
1. What are your takes on the movement of property prices over the past ten years in Sri Lanka?
Overall, the past ten years have witnessed an upward movement in prices except for the years 2007 to 2008. During this time there was the global recession that led to a financial crunch and this in turn caused stagnation in the local property market, both in terms of prices and volumes of deal closures. However, we cannot also say that it was a time to ‘pick up cheap properties’ as this too was not the case. People were not willing to part with their property at low rtes. Perhaps they knew that the market would pick up again. What transpired for certain was that what happens in the global economy has a direct bearing on the local real estate market.
2. How has the return of peace to the island in 2009 revived the market?
With the return of peace in 2009, the market took on a noteworthy upward trend by 2010. However, it was not only a matter of regaining peace. What also had a significant impact were the policies adapted by the government that served to woo investors back to the island. In particular, we can note that the tourism sector has done very well because of positive government policies. What we see now is a transformation in the leisure property sector.
One land-mark deal worth noting is the sale of the Galle-Face land to Shangri-La for a high end hotel facility. This was an important signal to the international investor community because Sri Lanka had only completed smaller deals in the past whereas Shangri-La was over 800 perches of land in a prime location. This trigger renewed international and local interest and led to a boom in demand for leisure property in all parts of the island including for the East coast, Puttalam and Kalpitiya areas. Now, we have a much higher level of confidence amongst the investors.
3. What do you think about the development efforts in the Capital?
The work of the UDA is having a strong impact on land prices within the Capital. Currently, a per-perch price of between Rs. 8 to 10 million is normal in Colombo city. This would have been unimaginable in the past. We can also note that as a result of the restoration work that is being conducted by the UDA, residential land prices are also rising.
However, it is important to note that private land plot sizes in Colombo are much smaller than land plots owned by the state. The latter are largely owned and managed bythe UDA who are also active in mobilizing investors.
4. What do you consider to be the key drivers of demand in the market?
One thing that we have noticed is the growing number of collaborations between locals and foreigners, including expats, for property development projects. It is true that the expats typically have more money for investment than the locals do. This fact combined with the global recession, especially in the west, has resulted in many looking at Sri Lanka as a better alternative for their investment. Where domestic investors are concerned, we find that despite interest rates that are high even by international standards, the local policy environment and a stable economy has sufficed to encourage the market.
5. What do you consider are the limitations on the supply side?
Public sector authorities like the UDA have a large stock of land and this account for some of the large plots in Colombo City and elsewhere. Therefore, we have to note that supply is essentially limited. The most preferred way to circumvent this problem is so build-up, vertically.
Another option is land-merging as they have done in Beijing where they have relocated lesser developed settlements to outer-city areas and developed high-rise apartments. We have already seen that the government has been willing to relocate a number of public sector agencies out of Colombo.
It can also be noted that building restrictions for tall buildings should ease with time. For example, until 2008, it was not permissible to build high-rise developments along the coastal side of Galle Road without special permission. However, we are now operating under the New Zoning System that was introduced in 2008 which allows for tall constructions.
So with rising demand and with restriction in supply, prices will continue to accelerate. That is why real estate is considered to be one of the best investments.
6. Tell us more about your career?
I was in the Valuations Department since 1977, staring out as an Assistant valuer and moving up to the highest position in this respected field in Sri Lanka.
Enjoying the City Life
Colombo city is currently experiencing a high overall demand for city hotel rooms in most pricing categories. From budget hotels to the five star categories, the majority of rooms are sold out weeks in advance and last minute bookings come at a much higher cost.
Upward trend
Since the end of Sri Lanka’s civil war in 2009, the tourism sector has been on an upward trend, with increasing numbers of tourist arrivals to the country creating a positive impact on the sector. In 2010, the number of arrivals rose 40 percent and in 2011 the number of tourists exceeded the 800,000 mark, a milestone for Sri Lankan tourism. March 2012 marked a 21.3 percent year on year increase in tourist arrivals, compared to a year earlier with 91,000 tourists visiting the country in March alone. By the end of March, 260,000 tourists had visited the island. Sri Lanka’s Tourist Board expects 950,000 tourists in 2012. Such increases point to a healthy growth within the sector. The steady increase in demand has led to a shortage of hotel rooms within the city, especially during peak seasons. Colombo acts as a transit point for many visitors having to pass through the commercial capital to break journey or to enjoy some city life before or after their travels to the rest of the island.
Overall, the Sri Lankan Government targets that by 2016 tourism will provide annual revenue of US$ 2.75 billion from 2.5 million tourist arrivals (Sri Lanka Tourism). The government along with the private sector is currently working towards doubling the hotel room capacity island-wide to accommodate the large number of expected arrivals. The current number of rooms stands at 22,745 and this number is expected to grow to 45,000 by 2016. Colombo city is estimated by the RIU to have approximately 3000 hotel rooms over the three, four and five star categories. To achieve the 2016 targets there is an increasing need for investment, both domestic and foreign alike, in order to narrow the gap in capacity.
Price regulations
Pricing of hotel rooms within Colombo City are governed by the ‘minimum selling rate’ policy, imposed by the Ministry of Tourism. Based on a respective star category, each hotel is required to charge a minimum rate in order to avoid severe price competition within the industry. The rationale was also based on the reality that during the time of conflict, tourism was the most affected and all categories of hotels had to slash their room rates in order to survive. Within the sector, there was a cascading affect when a five-star hotel dropped their prices, the four star hotels also had to follow. The net impact on the entire industry was therefore negative.
Traditions and seasons
Factors that affect variation in occupancy levels have traditionally been closely connected to seasonality in Europe and other source markets in the west. However, with the emerging change in tourist arrivals where more and more visitors are coming from South Asia, the Middle East and China, these patterns are now giving way to more constant year round trend. Likewise, internal seasonality based on the monsoon seasons that used to dictate choice of leisure activity between beach and up-country resorts is no longer applicable given the current unpredictability in weather patterns. A third significant factor that determines tourist inflows to the Capital can be sighted with reference to sporting and other major public events. For example, Colombo hotels are nearly 100 percent booked out in the month of October 2012 owing to the Twenty 20 cricket World Cup that will be on during this period.
Outlook
For the first time in Sri Lanka, the leisure sector has outpaced housing as the driving force of the construction industry. This is a strong indication of a short-term boom whilst in the long term, the market is expected to settle on a more steady incline that reflects the overall international travel environment.
