Foreign investment in Sri Lankan real estate to be supported by new legislation

In a bid to inject more foreign capital into the real estate sector and capital markets, amendments have been made to Land (Restrictions on Alienation) Act. Until this change was made, the transfer of title of any land to foreigners, overseas firms or Sri Lanka-incorporated companies with foreign shareholding of over 49% was prohibited by law.

However, amendments passed in 2018 have enabled foreign entities listed on the Colombo Stock Exchange (CSE) to purchase freehold land in Sri Lanka. By extension, this mean the lifting of the limit of 49% foreign shareholding on listed companies, provided they own freehold land.

The act came into effect on April 1, 2018, and has been broadly welcomed as a much-needed boost to investor confidence. “Removing unwarranted restrictions signals the intent of policymakers to help the industry expand,” Pradeep Moraes, chairman of the Condominium Developers Association of Sri Lanka, told OBG. “The government could also introduce resident visa programmes such as those employed in Malaysia to encourage greater foreign investment in the property sector,” he added.

Driving Investment

Initially proposed in the 2017 budget, the amended law has been lauded by not only the real estate sector but also the capital markets industry. By most accounts, the previous law had the effect of discouraging inflows of foreign direct investment not only in real estate but across the wider economy as foreign investors looking for investment opportunities in Sri Lanka bought passive stakes in local companies.

The removal of the 49% restriction has thus been widely cited as an important enabler of foreign investment in listed companies, providing them with a new window of opportunity. “Pro-business policy should help spur foreign investment,” Shiluka Goonewardene, principal of deal advisory at professional services provider KPMG, told OBG.

Residential Boost

Elsewhere, the amended law is expected to provide a boost to the residential segment after easing restrictions on foreigners’ ability to purchase apartments. Previously, foreign entities were permitted to purchase apartments or condominiums only above the fourth floor of any given development. This restriction has been removed following the amendments, allowing foreigners to purchase apartments or condominiums irrespective of floor level. However, as set out under the original act, the full payment for the property must be made in advance, prior to the execution of the relevant deed of transfer, via an inward foreign remittance. This effectively prevents domestic borrowing for the purchase of properties by foreign entities.

Restricted by the previous law, foreign institutional investment in the luxury property segment accounted for only 4% in 2018, compared to the 61% covered by local investors, according to data from the KPMG report “Real Estate in Sri Lanka”, published in August 2018.

The remainder was acquired by local end users, at 17%, and Sri Lankan expatriates, at 18%. The new law, therefore, is a step in the right direction when it comes to driving an increase in foreign participation within the Sri Lankan property market.

“There is huge growth potential across different property tiers,” Roshan Madawela, founding director and CEO at Research Intelligence Group, told OBG. “Given the immense scope to expand, Sri Lanka is a worthwhile property investment destination that can compete with the likes of Malaysia and Thailand.”

The new law is a step in the right direction when it comes to enticing more foreign participation in the Sri Lankan property market