Sri Lanka's Property prices are soaring with imminent burst in sight

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.