On how the real estate market is adapting to market changes In what ways do you see the capital gains tax impacting the local real estate market?
Moraes: Seeing as 10% is a modest tax, the impact would be minimal. A number of other markets have much higher levels of taxation and still experience vibrant real estate growth. The tax has been implemented in a clear and open way, the figure has been made public, and now the market can factor it in and go about its business.
Is there enough purchasing power in Sri Lanka to support further developments in the luxury residential segment?
Moraes: According to global real estate consultancy Knight Frank, Sri Lanka recorded the second-highest growth rate internationally in the ultra-rich community in 2016. In our experience, luxury condominiums continue to be purchased with over 90% equity and without borrowing. Over 90% of such developments are in the relatively affluent Western Province, predominantly in Colombo. Additionally, 99% of luxury and ultra-luxury apartments in completed projects and around 51% of those under construction have been sold, according to investment management company JLL, with over 60% of both sold to resident Sri Lankans. Most of the larger projects have been undertaken by reputable international developers who do not borrow locally and have certainly done their due diligence.
Like many countries, Sri Lanka has a hugely inequitable distribution of wealth. This, combined with the previously relaxed tax regime, has led to a gross underassessment of wealth, some of which is sent overseas. Luxury real estate offers a desirable and commercially sound option for attracting these funds into the local economy. There is certainly enough purchasing power to justify further luxury developments.
How the profile of luxury residential property owners changing?
Moraes: The current profile is 60-65% resident Sri Lankan, 25-30% expatriate Sri Lankan and less than 10% foreign. The low foreigner count is because the purchase of residential property in Sri Lanka is not linked to residency privileges, unlike several countries in the Caribbean, South-east Asia, and the Middle East, as well as certain Mediterranean countries in the EU. However, this is now being remedied with a proposal to grant residency visas connected to investment.
The recently inked comprehensive free trade agreement with Singapore, together with the enhancement of the existing agreement with India and those being negotiated with China and Pakistan are expected to encourage business relocation to Sri Lanka, which should have positive effects on rental markets.
How has the market reacted to calls to restrict lending to the real estate sector?
Moraes: The Central Bank of Sri Lanka has engaged with all stakeholders and is satisfied that the real estate industry is not a cause for concern. It has broadcast this view, going on, in fact, to say that the luxury segment was the least vulnerable.
As with markets everywhere, mindset and speculative concern can and will affect performance, as was seen in Colombo with the six-month slowdown in sales in 2017. Thankfully, this has now corrected, and sales are proceeding satisfactorily once again.
What impact would the introduction of real estate investment trusts (REITs) have on the Sri Lankan market?
Moraes: The benefits of REITs would be phenomenal for both the industry and the economy as a whole. Investments could increase exponentially, as REITs facilitate the entry of small local investors who otherwise lack the means to purchase as an individual. They also reassure foreign investors that their purchase benefits from professional guidance and market knowledge.
The stumbling block to the implementation of REITs is the issue of the 4% stamp duty payable to the provincial councils. REITs by their very nature propagate multiple transactions and it was feared that the business model could not sustain repetitive taxation. However, evaluation undertaken by industry players, the Colombo Stock Exchange and the Securities and Exchange Commission points to the aggregate of capital gains and rentals providing a cumulative return that remains attractive.
Therefore, steps are now being taken to revive the formulation and implementation of REITs, based on this belief in their viability and the scope for their productive participation in the Sri Lankan capital market.
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