With interest rates in Sri Lanka lower than they have been at any point in recent memory, fixed income options have drastically reduced, while the ever dependable and safe fixed deposit has become considerably less attractive after rates plummeted. So if you want your money to continue growing - or at the very least to preserve its value - real estate may be your best bet.
Investing in real estate, however, is not without risk; and in a crowded marketplace, potential investors should carefully consider their options. An understanding of the dynamics of city evolution may help.
The Future of Colombo
Colombo is a city of approximately 560,000 (within the Colombo Municipal zone), with about half a million more people commuting into the city every day. The traffic is mind-numbing. But why do people choose to spend literally years of their lives sitting through traffic?
Colombo is the epicentre of the country; most high-paying jobs, leading schools, hospitals, and malls among other social infrastructure are concentrated in Colombo. And this will likely remain the case for the next several decades.
Unfortunately, through a combination of limited affordability, lack of innovation in mortgage lending, sky high construction costs, and inadequate policy direction, the dream of home ownership in Colombo has eluded many. And thus, many learn to live with the drudgery of the daily commute.
While revamped public transport and infrastructure could change this picture drastically, that is still quite a way away from becoming a reality. What is almost certain in any eventuality is that Colombo prices will continue to rise - and if you have a bit of money to invest and get started, you can profit from it.
Even in the midst of a pandemic, the fundamental socioeconomic forces driving people to hover around Colombo will not change that fast. Cities provide economies of scale that make it easier to access (or distribute) resources and services.
The Mortgage Solution
Mortgages give people access, choice, and the ability to afford convenience. It is, therefore, vital that the housing finance industry begins to innovate.
At John Keells Properties, we have been focused on mortgages for a while now as a means to complement our offering at TRI-ZEN—the cutting-edge apartment community we are developing on Union Place. Our most recent innovation—the Freedom Mortgage—aims to give homebuyers and investors some breathing space and flexibility.
The Freedom Mortgage plan essentially ensures customers a two-year interest free period on their mortgage, with the customer paying 20% up front and the bank taking up the remaining 80%. Once that initial payment is made customers don’t need to make another payment for a further 2 years. After 2 years, interest payments begin, and capital repayments start 3 years after that. Interest rates are locked in at 8.75% for 5 years, or 9% for 10 years with Commercial Bank. Of course, selling the apartment and capturing gains on the full value still remains an option during this entire period.
When investing, location and timing are key
Humanity will survive the pandemic; and so will Colombo. While we may see a temporary slump in rental demand due to the pandemic and an exodus of expats, we will undoubtedly see that bounce back as well.
It’s important to keep an eye out for opportunities. Yes, interest rates are muted and FDs and other fixed income instruments available today will barely keep you above inflation, but at the same time mortgage costs are also low and banks have pressure to lend, so you can get good deals on housing mortgages.
When property hunting in Colombo, proximity to the core (Colombo 1 and 2), combined with the neighbourhood context, would be important in ensuring convenience and rentability. Picking a developer that has the track record and strength to survive a downturn is also crucial, particularly if you consider something that is under construction. Finding the right product match for your wallet and lifestyle is critical too.
Ultimately, if you pick the right real estate product in the right location, and have the discipline to look medium term and ride out the current turmoil, you will likely do very well.