Impact of the crisis on the condominium sector
Sri Lanka is going through what appears to be a “once in a generation” crisis, economically and politically. What impact would this have on the country’s real estate market, particularly the residential condominium market?
First, it’s important to understand that unlike, say, manufacturing or services, the impact on condominiums will be complex and mixed. Indeed, the situation has positive and negative implications and will have an impact on demand and supply.
First, exploring the positives, real estate and residential condominiums provide investors with a buffer to protect their wealth against unpredictable and rampant inflation – which has been one of the most significant outcomes of the crisis in Sri Lanka. Inflation is already at record highs and by all indications will remain high for the foreseeable future.
Since real estate is a long-term asset class, nominal property values generally increase to match inflation, thereby guaranteeing the investor gains in real terms. Therefore, real estate assets like residential condominiums represent a secure, long-term store of value that can offset the impact of inflation and can be sold profitably once normality returns.
This is in stark contrast to financial asset classes such as stocks and bonds which carry high levels of risk and can be very volatile during a macroeconomic crisis like the one we are going through. Therefore, real estate can protect your wealth much better, compared to typical alternatives like cash or savings accounts, which could lose value significantly and quickly due to inflation.
Overall, real estate represents a tangible and solid asset that can provide security and stability to investors at a time when property values and the stability of businesses and industries are changing.
However, the current crisis may also have a negative impact on the real estate market.
There is a high probability of a shortage of apartments in the medium term as new projects are canceled or postponed due to uncertainty regarding the cost of inputs and the availability of necessary imports. Buyers could rush to buy existing condominiums available on the market, reducing availability for other buyers.
Such shortages can also cause condominium prices to rise rapidly, which, however, is likely to benefit buyers who move in early. However, financing these new investments could prove difficult, particularly given the rapid rise in interest rates.
Real estate developers and businesses will also face significant constraints and challenges due to the inability to start new projects as they would be uncertain about input prices. Therefore, it will be difficult for developers to price apartments accurately. As projects are put on hold, employees in the sector could either face job losses or businesses will face high overhead costs.
Need for extra caution
Given the situation above, low-quality developers who have invested in low-feasibility projects and have high borrowing levels are likely to be much more affected than cautious, high-quality developers. Therefore, buyers of residential condominiums should take extra care in assessing the feasibility of their developer, ensuring that they only select reputable developers with a strong track record.
The quality of future construction projects could also be compromised as imports will remain limited in the medium term, which will complicate the supply of key components such as kitchens and appliances.
There could also be a dampening effect on land prices (taking into account inflationary pressures) due to the slowdown in land purchases by developers. It can also be seen as positive, especially for buyers, but will negatively impact sellers.
Weighing the positives and negatives, overall real estate and residential condominiums are likely to remain an attractive investment class in Sri Lanka.
The long-term fundamentals remain relevant, especially as Sri Lanka has low levels of urbanization and vertical living clearly provides the only viable solution. Projects with strong business fundamentals, formulated by high-quality developers and closely aligned with market needs, will continue to be attractive investments.
The author is the president of Iconic Developments