Sri Lanka bond probe exposes condo bubble
ECONOMYNEXT – The ongoing Presidential commission of inquiry into controversial bond sales may have unwittingly exposed an even more deadly property market bubble that could explode and undermine Sri Lanka’s financial markets.
The investigation uncovered how the then finance minister Ravi Karunanayake rented a fifth floor flat at the Monarch building in Colombo 3 and how his company eventually ended up buying it.
Evidence before the commission suggested that the seller, Anika Wijesuriya, a director of East – West Properties, wanted 185 million rupees for the 3,800 square foot flat misleadingly called a Penthouse apartment.
According to her, the price was beaten down to 165 million rupees, or about 43,421 for a square foot.
However, the Seylan Bank which was approached to finance the purchase by Global Logistics, a company of the Karunanayakas, had valued the super luxury flat at Monarch at 75 million rupees, which is still above market, according to the trade.
The evidence before the Presidential Commission suggest the disconnect between the realistic market value and the dizzy asking price of flats in a market which the industry itself warned in May could be heading for a tumble.
Several luxury developers who promised super star luxury are known to be in looking for bank financing for construction in the absence of advance bookings of flats.
A cursory look at Sunday classified advertisments underscore the desperation of property developers. One developer offers a 40 percent discount for a condominium being built in Colombo 5.
"Acquire an asset below its market value," says the advertisement. Another is offering a 26 million rupee apartment also at Colombo 5 on an interest free 30-month payment plan. Many offer hefty discounts for advance purchases.
Central Bank of Sri Lanka Governor Indrajith Coomaraswamy announced in May 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."
Several builders have already agreed with the governor that the luxury segment of the market is already in trouble.
However, on the flip side, most who bought high-end flats are those who are unable to explain their wealth, according an HSBC study and hopefully the implications for the banking sector could be minimal.
On the other hand, as the central bank suspects if a lot of loans taken by the SME sector ended up real estate, there could be serious implications for banks which failed to supervise their loans. (COLOMBO, Aug 1, 2017)