Proposed laws to increase foreign investor interest in local Sri Lankan real estate

Foreign interest in Sri Lanka’s property market has been steadily building momentum. The country’s rising global tourism profile is increasingly attracting international interest in the sector, while expatriate Sri Lankans are already an important part of the investment picture. For Sri Lankan expatriates abroad, owning property in their country of origin is a useful financial investment that can also provide a home for them to return to or a residence for family still living in the country.

Large-scale projects like Port City Colombo are helping put Sri Lankan real estate more firmly on the radar for foreign investors. Furthermore, if this 269-ha development is executed, it could act as a model for other investor-friendly projects down the track.

Barriers 

Although institutional investors and developers from China, Japan and India have shown interest in pursuing opportunities in Sri Lanka, some believe retail investment could be stronger. For years, this was put down to security concerns, but now Sri Lanka is one of the safest nations in the region. One reason may be that Sri Lanka is in an early stage of economic development, with many wealthy Asian investors preferring Singapore, Australia and Malaysia as retail destinations.

Currency risk is a notable deterrent, due to the rupee’s history of volatility and its depreciation in recent years. Political uncertainty is another concern, as governments of different stripes have taken diverse approaches to investment and reform. Indeed, the current ruling coalition is under strain from significant losses in the February 2018 local elections. The lack of transparency in the land registry and a post-conflict environment raise the perception of risk as well.

There are also multiple barriers to foreigners seeking to own property in the country. For one, it is not yet permissible for foreigners to obtain property loans from domestic banks. Second, there are no residence visa incentives associated with buying property in the country. Sri Lankan property would arguably be more attractive to foreign investors if there was a scheme similar to Malaysia My Second Home. This successful initiative, launched in 2002 following the Asian financial crisis, sought to bring new capital into Malaysia’s real estate market and absorb the surplus of units. Under the scheme, foreigners obtain long-term resident visas when they acquire property over a certain value.

Upswing 

Following the end of the civil conflict in 2009 foreign investment in the sector has gradually been recovering. This upwards momentum has picked up since the 2015 election of President Maithripala Sirisena, who is seen as a pro-business leader. Additionally, a $1.5bn, three-year deal signed with the IMF in June 2016 has underpinned vital reform and fiscal consolidation, strengthening investor confidence in the economy. Given Sri Lanka’s thriving tourism sector, a large portion of this investment has been channelled towards hotels, resorts and other tourist properties.

Prices for beachfront properties in the south-west of the island have been appreciating by around one-third a year. Ivan Robinson, the director of Lanka Real Estate, told local media that the average price per 25 sq metre for beachfront units rose to $15,000 in 2017 from $10,000 the previous year. However, this is still only one-fifth of the cost of equivalent properties in Bali.

Liberalisation 

If passed, proposed legislation outlined in the 2018 budget would further open the sector to foreign investors. The new provisions would allow foreigners to own condominiums without restrictions, easing the existing limitation that foreigners can only own apartments above the third floor. Currently, majority-foreign-owned firms can obtain a maximum 99-year freehold lease on land, but under the proposed reform they would be allowed freehold ownership on the condition a stake is listed on the Colombo Stock Exchange. Even though lawyers have become adept at drawing up deals that enable foreigners to invest in property with a Sri Lankan partner owning a nominal 51% stake via a corporate structure, liberalisation would establish a greater deal of certainty for investors in the market.