Sri Lanka mid tier apartment property seeing buyer interest after tax cuts

ECONOMYNEXT – Apartments in the mid-tier segment is drawing customer interest after recent tax cuts, but the luxury segment could follow later in 2020, with buyers still held back by relatively high nominal interest rates, an industry official said.

“We have actually started seeing a considerable pick up already, especially in the Mid Tier segment,” Suresh Rajendra Chairman of Sri Lanka’s Condominium Developer’s Association and head of property at John Keells Holdings said.

“The reduction in the VAT, NBT has worked well. But probably one of the biggest challenges to the buyer is the high borrowing cost.

“The luxury sector would probably follow thereafter.”

Rajendra says the luxury apartment sector may pick up in the second half of 2020.

Sri Lanka has monetary instability coming from a highly unstable soft-pegged exchange rate regime, where rate cuts are enforced with liquidity injections while also targeting the exchange rate.

As a result whenever domestic credit picks up, the currency peg collapses, triggering elevated domestic currency interest or a nominal inflation in dollar loans and prices.

Sri Lanka’s rupee last collapsed from 153 to 182 to the US dollar in 2018, and the crisis ended in January 2019.

Analysts say in general the credit system tends to pick up after about 18 months, though it has taken longer after some collapses.

There are basic fundamentals such as shift to urban areas, which is driving long-term apartment demand, Rajendra said.

High land costs, transport bottlenecks from urban sprawl made an economic case for apartments closer to the centre.

He was speaking at a business forum on the construction sector organized by Asia Securities, a Colombo-based, brokerage.

Asia Securities construction sector analyst Naveed Majeed said a stock of unsold apartments were making developers take a wait and see attitude before starting new ones.

Majeed said in 2019, the Easter Sunday attacks, elections as well taxes dampened apartment demand.

However in 2020 there were over 10,000 apartments in the pipeline including in the low end, though fundamentals were driving demand.

“We do not see developers committing to large scale investments until this supply is absorbed by the market,” he said.

Rajendra said prices of apartments had not come down though some ‘distressed’ developers had offered discounts.

Majeed said in the leisure sector, there was a reduction in the new hotel rooms coming into use.

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