Sri Lanka’s HNB cautious on condos; sees prospects in middle range

ECONOMYNEXT – Sri Lanka’s Hatton National Bank is closely monitoring property lending to minimize risks in the case of a bubble, but sees value in growing the middle-to-lower cost segments, officials said.

"We have been selective with property development," Chief Executive Jonathan Alles said. "We have not got into the very expensive end of the market. So what we are mainly involved in is the middle range of apartments, which we see as selling quite nicely at the moment. But to highlight, it is an area that we need to watch."

Alles said HNB has been working with a few property developers who have "proven their ability to sell apartments and repay" at an early date.

The bank had stayed out of financing Rs100-150 million apartments, but had financed to condominiums in the Rs20-40 million range.

"Those apartments are selling quite well, and the repayments are also quite good," Alles said.

Officials say the bank had a land and property portfolio of around 6-7 percent of its loan book (about Rs35 billion) and perhaps 10 percent was in condominiums.

Bubble Risk

"We monitor the area quite closely," Chief Operating Officer Dishan Rodrigo said. "In case there is going to be a bubble, we know we are going to be relatively well insulated from it."

"Currently, we are quite comfortable with the portfolio we manage," Alles said. The bank’s risk managed department is watching the sector closely, he said.

Alles believed there was scope for apartments in the range of Rs10-20 million targeting executives if developers were willing to get into the business.





Last year, HNB had grown is property loan portfolio 15 percent and was looking for similar growth this year.

"So, 15-20 percent growth is what we can aspire to, given that it is one of the four key areas of focus," Alles said.

Unlike the mid-and-lower range sector, some high-end apartments were not bought to live but as investments to sell later, industry analysts say. Some buy them as investments to keep and rent, using international booking engines in some cases. But there are also others who pay only down payments and book apartments early, and try to re-sell them later as prices move up.

Over the last two years, apartment and land prices moved up sharply as the Central Bank printed money and kept interest rates and excess liquidity in the banking system especially in 2015.

Low interest rates and printed money sharply increases the present value of long-term fixed assets, creating a bubble.

The Central Bank has since hiked rates, but bubbles tend to move under their own momentum once fired, analysts say. Meanwhile, money was also printed to repay maturing bonds in January, introducting a new risk to the economy.

Some of the money printed in 2015 moved out of the country as vehicle imports, reducing pressure on a domestic asset-price bubble. But vehicle imports have now been restricted.

Sri Lanka’s last property bubble broke in 2008/2009, taking down several finance companies involved in the sector, following several years of loose monetary policy, coupled with steady currency depreciaton that sent inflation soaring to 29 percent. (Colombo/Mar15/2017)

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