May 28, 2017 08:38 AM GMT+0530
ECONOMYNEXT - Sri Lanka’s high-end luxury apartment developments may already be in trouble, according to at least two developers responding to the Central Bank’s concern over a property bubble that could potentially undermine the entire economy.
The private Iconic Developments, an apartment builder, said it was aware of at least two projects that failed to take off resulting in cautious lending to the sector while another condo developer, Fairway Holdings, said acknowledged a “bubble” in the high-end segment.
Central Bank of Sri Lanka Governor Indrajith Coomaraswamy announced earlier this month that they were closely monitoring the real estate sector after fears that excessive credit may have fuelled a property bubble that could cause distress to all.
He said a low interest regime about three to four years ago encouraged money into real estate which at the time appeared to give the highest rate of return on investment.
“What has been happening is that this sector has given a much higher rate of return than anything else,” he said. “When that happens. In whatever sector, usually too much money gets in and then you end up in tears.”
Responding the Central bank chief’s comments, Fairway Holdings, which is putting up condominiums just outside Colombo, agreed that a bubble may be forming, but said it was in the ”luxury” segment.
“While agreeing that there is a possible bubble in the segment identified as ‘luxury’… the mid-range market is driven by solid fundamentals, underlying a gradual move towards modern city life,” Fairway chief Hemaka de Alwis said in a statement.
“Surely when the highest segment sells at double the price per square foot of the mid-range, there is every possibility of an unrealistic element in the pricing because the cost/quality base is the same – but the point is the whole industry can’t all be tarred with the same brush,” he said.
It is not clear what is meant by “luxury”, but the Hatton National Bank at a recent investor forum noted that they had not financed apartments generally costing over 40 million rupees, but felt there would be demand for more modestly priced units.
"We monitor the area quite closely," HNB’s Chief Operating Officer Dishan Rodrigo said. "In case there is going to be a bubble, we know we are going to be relatively well insulated from it."
HNB Chief Jonathan Alles said there was scope for apartments in the range of 10-20 million rupees targeting executives if developers were willing to get into that business.
Disputing reports of excessive bank credit into the sector, Fairway said only 10 percent of their customers used bank loans to finance their purchases while 75 percent of the customers bought the units to live in.
"Both indicators suggest that people are converting existing assets into apartments to support an urban lifestyle change," Fairway said.
Iconic argued that there was real demand despite at least two projects getting into trouble, but did not identify those in difficulty.
“Acknowledging the fact two notable high-end developers had failed to get their projects off the ground, resulting in limited negative ramifications for lending to the sector, Iconic noted that the significant majority of real estate development was in fact being driven by real demand.”
A recent Hong Kong Bank study also showed that about 60 per cent of buyers of apartments were speculators trying to make a quick profit while 25 per cent were Sri Lankans living abroad. Only 15 per cent bought apartments to live in them. The report also suggested that a majority of apartment buyers were those unable to explain their wealth. (COLOMBO, May 27, 2017)