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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Sri Lanka’s real estate bubble likely to explode in five years

Sri Lanka’s real estate bubble likely to explode in five years

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Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Sri Lanka’s real estate bubble likely to explode in five years File-picture-of-proposed-Cinnamon-Life-project_23032017_B05_CMY
File picture of proposed Cinnamon Life Project.

A bubble is emerging in Sri Lanka’s over-crowded real estate industry and likely to explode in another five years, a top government official says.

Urban Development Authority (UDA) Chairman, Jagath Nandana Munasinghe told the Business Times that Sri Lanka’s residential real estate market is likely to face a serious bubble in another five years.
“As per UDA estimation, somewhere around 2020 or 2022 the country will come to a peak for the bubble to burst. Sri Lanka at the moment is experiencing an upward movement in development which shows that the market is healthy. The demand for apartments and condominium is high and the supply is increasing to cater the demand.”
This is happening everywhere in the world and many countries are facing difficulties in selling apartments due to inflation which is the root cause for the bubble, he added.
Mr. Munasinghe further elaborated that by 2020 the supply of apartments will rise while demand will ease. “Real estate won’t be a good business at that time. The industry can topple and burst the bubble leading to a scenario where not a single apartment or property could be sold,” he noted.
As of now there is no government control in restricting (based on demand) the number of new apartments and condominiums, he stated but added that there will be a housing policy implemented soon.
Meanwhile Calamander Group Chairman Roman Scott, a real estate economist from Singapore, said that residential real estate in Sri Lanka is not following pure economics.
In general residential real estate becomes a problem because amateur investors get involved. This hits the banking system after real estate bubbles pop up. In Sri Lanka it will soon hit the banking system. Bankers will have to pay for it because banks provide loans to the developers, he said. “When speculators treat real estate like the stock market, they buy purely for capital appreciation as an investment; they use borrowed money that is leveraged from banks. That often creates a bubble for the banks,” he added.
He also mentioned that in the real estate should be in negative territory because the economy is not doing well.
It’s been badly managed, consumers are not spending, taxation rates are high while value added taxes have also increased. The residential real estate market is going in the opposite direction. Speculators are assuming that there is enough external demand. The problem is compounded by the source that feeds the addict — banks who will pay at the end for the bubble.
The feature of residential real estate is that people think it goes on forever. Countries like Bangladesh, Singapore, Thailand, Malaysia and Indonesia are going through massive bubbles in the residential real estate market, stated Mr. Scott while stressing that the Sri Lankan market could clear over time if it doesn’t keep supplying more condominium and banks stop lending. “It’s very difficult to predict when the bubble will pop. As economists, we know it will pop very soon,” he noted.
The only way to rescue the situation is relying on sufficient foreigners picking up the market. Foreigners don’t judge real estate like the locals do, they look at the underlying economy, he added.
When market prices of apartments go down, property developers refuse to sell at lower prices because they have got used to sell apartments at high prices. The bubble bursts when a property cannot be sold because liquidity goes out to the market.
“The best market for real estate in Sri Lanka is commercial real estate (office space and retail). There is very intense need for factories, warehouses, logistics and production space in Sri Lanka. The factory market which is highly developed in foreign countries doesn’t exist here,” he pointed out.

Quibit


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Already exploded

jayathu


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
i dont think so. If its exploded country economy will be at a worsen situation. I agree that land price appreciation is not there like 2010-2014 tym where land prices increased by more than 20% p/a, but still it's appreciating at a 5-10% level in certain areas.

Bubble will burst if the economy runs like this for 3-5 yrs.

samaritan


Moderator
Moderator
There are two views expressed in this article. 

Calamander Group Chairman Roman Scott, a real estate expert says that it's very difficult to predict when the bubble will pop and goes onto say that as economists, we know it will pop very soon.

UDA Chairman Nandana Munasinghe says that "as per UDA estimation, somewhere around 2020 or 2022 the country will come to a peak for the bubble to burst".
Unquote:
It must be noted that UDA has vested interests in the luxury apartment sector and they are struggling to  sell the apartments at 'Destiny towers' Colombo 03 which are under construction. 
Furthermore, UDA is responsible for the over heating of property market as they released a parcel opposite Galle Face green to an Indian Company at an exorbitant price which resulted in properties appreciating three fold for no known reasons, and are now not releasing about 268 acres of state owned prime land in Colombo fearing a bubble burst. 
I share the view of Roman Scott and of the opinion the bubble burst is around the corner.
Caveat:
The real estate brokers/agents mafia is misleading the public by advertising saying "Apartments Wanted" at various luxury apt complexes to give the innocent investor the feeling that aptartments are in demand. If one browse thro' the lanka property web site there are properties advertised with fancy prices which are remaining for more than a year with "urgent" tags. The absence of transactions taking place makes me feel that Quibit may be right.


_________________




The biggest risk in life is not taking any risk at all.

worthiness


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Some are in view of only super luxury apartments would be exposed to possible demand burst in the near future caused by lack of foreign investors' flow in.

Developers are struggling to market the projects launched in the last three months pricing around Rs.30-40m that be a signal of diminishing buying power.

nirowat


Manager - Equity Analytics
Manager - Equity Analytics
Land price in Colombo will never come down

Condos, may be

One thing I have learnt is never believe the self proclaimed
experts. No one can predict the future, only a guess, which is good as yours and mine. 50:50 chance

samaritan


Moderator
Moderator
@nirowat wrote:Land price in Colombo will never come down

Condos, may be

One thing I have learnt is never believe the self proclaimed
experts. No one can predict the future, only a guess, which is good as yours and mine. 50:50 chance

Property boom was artificially created based on higher expectations when this Govt came into power. Sri Lanka is no exception to the boom & bust cycle that is witnessed world over in the real estate markets especially at a time when the Central Bank is taking drastic measures to curtail the ever rising private sector credit growth.

Its only a time bomb ticking.


_________________




The biggest risk in life is not taking any risk at all.

nirowat


Manager - Equity Analytics
Manager - Equity Analytics
Colombo is different and is an exception
Colombo is similar to many other big cities
which does not go through boom bust cycles
Even at the height of the sub prime crisis real estate
prices went up in major cities around the world

kalu_mahaththaya


Equity Analytic
Equity Analytic
ACCORDING TO MY KNOWLEDGE, BURSTING BUBLLE THING MAT NOT HAPPEN. 

PRICES MAY GO UP BUT THE CRASH OF THE SECTOR WILL NOT HAPPEN.

PEOPLE INVEST MONEY IN REAL ESTATE FIELD TO HEDGE THE INFLATIONARY PRICE APPRECIATION..BUT LIQUIDITY IS VERY LOW.

SRI LANKANS NEVER EXCEED THEIR BUDGET ALLOCATED FOR WHAT INTERESTED. THIS BUDGET IS DESIGNED TO MEET THEIR INCOME AND PEOPLE NEVER TRY TO FOLLOW THEIR DREAM FOR ANY COST LIKE WESTERN PEOPLE...( SRI LANKAN PEOPLE ALWAYS CONSIDER THEIR OPPOTUNITY COST)..THEY DRAW THEIR OPTIMUM SATISFACTORY LINE ACCORDING TO THEIR INCOME...( PEOPLE GO TO A/C SUPER MARKET WHEN THEY HAVE HIGH INCOME AND IF THE INCOME DROPS THEY SATISFY WITH COCONUT SAMBOL AND RICE)

IF THE REAL ESTATE PRICES GO BEYOND THE RED LINE PEOPLE WILL TRY TO FIND OTHER OPTIONS TO COPE WITH THE SITUATION...

THIS IS THE EQUILIBRIUM OF THIS SCENARIO IN THE SRI LANKAN POINT OF VIEW...

samaritan


Moderator
Moderator
According to leading real estate agents a bubble is nearing. Transactions in Colombo property market has slowed down drastically. The result may be a significant price correction which is the burst of bubble. Bubble burst may be called a significant price correction!


_________________




The biggest risk in life is not taking any risk at all.

nirowat


Manager - Equity Analytics
Manager - Equity Analytics
As I said don't believe so called LEADING experts

Their guess is good as yours

Economy is probably the only field where an expert can bluff and talk all rubbish and still find an excuse when things go wrong
If you really find what their previous predictions were you will see the accuracy is around 50%, which is by chance

worthiness


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Marketing teams in very popular developers make huge efforts to sell off the units of ongoing projects. Considering the practical aspects it seems even ongoing projects are not selling fast comparing to previous years. 
Meeting competition, charts shown as sold are not true. Most of units are not even reserved. Also, prices indicated are far reachable to many. It seems that demand driven market is almost over due to unpredictable future.

samaritan


Moderator
Moderator
Sri Lanka’s real estate bubble likely to explode in five years Bubble
In a desperate bid the property developers sponsored the CSE Road Show in Australia to gain access to potential investors over there.

Presently some developers have shifted locations to places like Galle, wattala, Trincomalee (beach front apartments)etc.

The luxury apartments & Houses in prime areas in Colombo listed for nearly a year remains unsold. Party time is over!Sri Lanka’s real estate bubble likely to explode in five years Icon_sad


_________________




The biggest risk in life is not taking any risk at all.

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
Last week one sales person re-reached my friend working in MidEast and lowered the previously offered selling price by 2 million !.
"machan March 31 ta kalin gaththoth laksha wissak adu karala dennamlu . Anthima unit deka nisaa. Gamuda ? "

My advice was- don't go for it. last unit talking is rubbish.
Just wait calmly. Keep your Dollars with you -without converting to LKR-. You can get two way bargain in next couple of years.

samaritan


Moderator
Moderator
@Chinwi wrote:Last week one sales person re-reached my friend working in MidEast  and lowered the previously offered selling price by 2 million !.
"machan March 31 ta kalin gaththoth laksha wissak adu karala dennamlu . Anthima unit deka nisaa.  Gamuda ? "

 My advice was- don't go for it.  last unit talking is rubbish.
Just wait calmly. Keep your Dollars with you -without converting to LKR-. You can get two way bargain in next couple of years.  
Frequent full page advertisements can be seen in the news papers by developers stating last few apartments are for sale in the complexes under construction. If the demand was so high then it would be wise for the developer to hold back sale and sell them at a higher price once the project is completed. This was what the developers did when there was genuine demand but now the situation is pathetic. It is certainly a Buyers market.


_________________




The biggest risk in life is not taking any risk at all.

worthiness


Senior Vice President - Equity Analytics
Senior Vice President - Equity Analytics
Even developers payments plans could be negotiated in favor of buyers now. After the payment for reservation, negotiation would change to quarterly or semi annual payments instead of original monthly payment plan. In previous years there was no such flexibility.
Most of developers are in one group that carries close family links. 
@Chinwi
Do u mind to produce a clue of the developer who dropped the price by Rs.2m?

Chinwi

Chinwi
Associate Director - Equity Analytics
Associate Director - Equity Analytics
A known developer . They are the builders cum sellers.

(Others such as Prime lands are managers and sellers . Usually they give the construction to builders like maga, access. )

When we inspected the place we realised that it will drag for at least another 1 1/2 years. + interior another 6 months.

They first sold the units at 19.5 . Offered 17.5 .
The buyer has to wait at least 2 years to occupy
and I told him keep your $s and grab opportunities at a better location.

econ

econ
Global Moderator
@Chinwi wrote:Last week one sales person re-reached my friend working in MidEast  and lowered the previously offered selling price by 2 million !.
"machan March 31 ta kalin gaththoth laksha wissak adu karala dennamlu . Anthima unit deka nisaa.  Gamuda ? "

 My advice was- don't go for it.  last unit talking is rubbish.
Just wait calmly. Keep your Dollars with you -without converting to LKR-. You can get two way bargain in next couple of years.  

Most apartment builders (prime land, home land, CT, Blue mountain etc) are building apartments with money from future holders. I think there should be some regulatory mechanism to this. Otherwise this will be a another scam.

econ

econ
Global Moderator
@samaritan wrote:
@Chinwi wrote:Last week one sales person re-reached my friend working in MidEast  and lowered the previously offered selling price by 2 million !.
"machan March 31 ta kalin gaththoth laksha wissak adu karala dennamlu . Anthima unit deka nisaa.  Gamuda ? "

 My advice was- don't go for it.  last unit talking is rubbish.
Just wait calmly. Keep your Dollars with you -without converting to LKR-. You can get two way bargain in next couple of years.  
Frequent full page advertisements can be seen in the news papers by developers stating last few apartments are for sale in the complexes under construction. If the demand was so high then it would be wise for the developer to hold back sale and sell them at a higher price once the project is completed. This was what the developers did when there was genuine demand but now the situation is pathetic. It is certainly a Buyers market.

of course there is no demand for such high priced apartments. Only a very limited proportion of people can afford apartments for 30-50 million rupees. They try to artificially show that there is grater demand.

samaritan


Moderator
Moderator
FALSE HOPES GIVEN TO LANDOWNERS BY BROKERS:

Sandamini Perera (Deputy Chairperson of Prime Group) in an interview with LMD's Yamini Sequeira had this to say:

"The real estate prices remain inflationary and would settle at lower rates if not for brokers. According to her, they tend to push prices up artificially, often convincing landowners that the going rate for a property is much higher than the market can sustain."

"This becomes unsustainable; but as a result, landowners tend to quote astronomical prices for which there are no buyers."
(source:LMD March 2017)

unquote:
There are properties listed for nearly a year without buyers as owners are relying on false hopes given by brokers. Very soon the bubble will burst and the real estate market will tumble.


_________________




The biggest risk in life is not taking any risk at all.

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