Sri Lanka’s luxury condo market
heading for tears?
by Amal Jayasinghe
20 May 2017
Sri Lanka’s Central Bank has placed the seemingly thriving real estate
sector under close watch after fears that excessive credit may have
financed a property bubble that could burst and undermine financial
Central Bank Governor Indrajith Coomaraswamay said a study was underway
on bank lending to property development ventures and check if credit
meant for small and medium-sized enterprises (SME) ended up in
Condominium prices in and Colombo have been rising rapidly with many
becoming more expensive than comparable apartments in Europe,
Australia, East Asia and neighbouring countries.
A recent HSBC bank study noted that the luxury condominium boom in Sri
Lanka was fuelled by "businessmen and deal makers with unexplained
wealth "and the supply of apartments would double in Colombo by 2018
raising serious questions of sustainability.
Governor Coomaraswamay told the Foreign Correspondents’ Association on
Thursday that a low interest regime about three to four years ago
encouraged money into real estate which at the time appeared to
give the highest rate of return on investment.
"What has been happening is that this sector has given a much higher
rate of return than anything else," he said. "When that happens. In
whatever sector, usually too much money gets in and then you end
up in tears."
"So the job of the Central Bank would be to try to take macro
prudential measures, not to essentially stifle the sector, but to kind
of slow it down to a more sustainable growth path. That is what the
(monetary) board is trying to figure out."
Coomaraswamy noted a sharp increase in lending to the property sector
and suspected that even loans taken by SMEs also ended up in real
"it is also possible that people with businesses are taking money out
of their business and putting it into real estate and then borrowing
from the banks to make up for the capital.
"So it gets recorded as a loan to the SME sector, but in fact there may
be leakage into the real estate sector."
He said there were safeguards such as loan-to-value,
income-to-debt-service and capital requirements in lending. A central
bank study would show if those safeguards had been observed.
"There are macro prudential instruments," he said. "But we have to be
very, very careful because this is an important source of growth and
employment in the economy right now. So we need to be careful of
essentially stabilising the situation without undermining it totally."
The governor said the Monetary Board of the Central Bank was yet to
decide on a course of action.
"At the moment, the board hasn’t decided that it needs to do anything
as yet. But an analysis is continuing and we are having a close watch
and we are very vigilant in terms of trying to pre-empt a bubble
Several banks have already stopped financing luxury apartments while
others have limited their exposure to mid and lower priced condominiums.
a property bubble burst in 2009
The HSBC study had also cautioned investors about a property bubble
that burst in 2009 leaving many developers without any cash to complete
Only 15% bought apartments to live in them.
About 60 per cent of buyers of apartments were speculators trying to
make a quick profit while 25 per cent were Sri Lankans living abroad.
Only 15 per cent bought apartments to live in them.
worries of building standards too
There are other worries of building standards too. Thursday’s collapse
of a seven-storey wedding hall raised questions about building
standards with Megapolis minister Champika Ranakawaka saying many
condominiums did not conform to approved building plans.
The minister said there were 1,800 illegal constructions along the
coastal stretch from Bambalapitiya to Wellawatte alone and the total
number of such unauthorised buildings in the city of Colombo exceeded
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