- Port City strategy akin to how Britain governed Hong Kong under a 99-year lease
- Sri Lanka’s natural resources remain largely untapped
- Proximity to India and China presents opportunities for synergistic growth
In Sri Lanka’s real estate industry, few names resonate as powerfully as Minoli Wickramasinghe’s. With a remarkable journey from a modest beginning to becoming the Managing Director of Capital Trust Properties, Wickramasinghe has navigated the complexities of the real estate sector with visionary zeal. She has been duly recognised with the prestigious ‘Top50 Professional & Career Women Global Award’ in the real estate and construction sector, cementing her status as a trailblazer in the field.
As the Executive Director of the Capital Trust Holdings Group, Minoli Wickramasinghe shoulders a pivotal role overseeing diverse companies. One of her key responsibilities lies as the Managing Director at Capital Trust Residencies, an international award-winning developer celebrated for its innovation and exceptional achievements.
Notably, projects under her leadership such as Capital Trust Residencies Vajira Road, Capital Trust Thimbirigasyaya, and Capital Trust Residencies – Fortress have not only garnered accolades but have also become benchmarks of excellence.
In this exclusive interview, The Sunday Morning Business delves into the world of real estate in Sri Lanka, guided by Wickramasinghe’s profound insights. From addressing the pressing property shortage to clarifying misconceptions about foreign investments, from understanding the resilience of the market in turbulent times to exploring the diverse investment opportunities it presents, she offers a wealth of knowledge and expertise.
Following are excerpts of the interview:
What inspired you to pursue a career in the real estate industry and eventually become the MD of Capital Trust Properties?
Capital Trust Properties is actually a company I founded and it had very humble beginnings – just one room and two employees. Real estate, for me, is more than just a career. It’s a passion that runs deep in my veins. What inspired me most was the need for more ethical and professional agents in Sri Lanka’s real estate sector. I envisioned a company that would not only operate with the utmost professionalism but also uphold strong ethical and moral values, so that is the ethos we have embraced and continue to work towards at Capital Trust Properties.
Could you discuss the property shortage and the concerns surrounding it?
Certainly. Property shortage is a pressing issue. Given the expected increase in Sri Lanka’s population from approximately 22 million to 24 million by 2030, the demand for residential real estate is becoming the focal point of the industry. According to data from the Central Bank, we require about 100,000 units of housing, which can include apartments and houses.
However, the private sector has managed to produce only a cumulative total of approximately 19,600 apartments, with just about 4,000 units completed last year. This year, it is projected to be even lower, possibly less than 800 units and the following year could be even worse, with estimates falling to around 400 units. Additionally, population density in the Colombo District is anticipated to rise significantly from 3,495 people per square kilometre to 5,722 per square kilometre by 2030. These factors underscore the growing need for housing.
Construction costs have skyrocketed, primarily due to inflation and the financial crisis. Inflation alone has led to an increase of about 150% in construction costs. Moreover, the Government, faced with the need to generate revenue, has imposed taxes on the property sector, including apartments. For example, there is a 15% VAT, a 2.5% Special Commodity Levy (SSL), a 4% stamp duty, and a 10% capital gains tax.
This accumulative tax burden has become unsustainable. A study we conducted with Tier 1 and Tier 2 apartment complex developers revealed that 98% of their sales declined after these taxes were implemented, indicating that the economy isn’t benefiting from this tax structure.
The high property prices have raised concerns for many first-time buyers, especially among the younger generation. The aspiration to own a house or an apartment independently is now fraught with challenges, given the current economic crisis, inflation, and instability. This has left potential buyers in a tough spot, questioning whether it is wise to invest in property or whether they should consider taking out loans. My advice to first-time property buyers would be to carefully assess their financial situation and consider the long-term implications before making any decisions.
Despite facing adversity, including the Easter attacks, the pandemic, and an unprecedented economic crisis that led to a surge in interest rates from 9% to 29%, the property market has shown remarkable resilience. Square footage prices have appreciated significantly. For instance, in prime areas, they have risen from approximately 50,000 to 120,000 per square foot. Even Tier 2 apartments have appreciated from around 40,000 per square foot to 70,000, and suburban areas have seen an increase from 26,000 to about 40,000 per square foot. This indicates an appreciation of around 50-60%.
The primary reason behind this price surge is the depreciation of the Sri Lankan Rupee, which has fallen by approximately 53% against the US Dollar. Since 90% of our construction materials are imported, this depreciation naturally leads to higher construction costs. Despite the crisis, we could have seen a year-on-year increase of about 17% if economic conditions had been stable. In essence, the current pricing is relatively low, and during times of crisis, it is often an opportune moment to buy and hold.
How can potential buyers ensure they’re making wise investment decisions, given the volatility in property prices and the current market conditions?
Indeed, real estate stands as a secure and profitable investment. Historically, it has yielded consistently high returns, often reaching around 17% in Year-on-Year (YoY) gains and approximately 40-50% over a three-year period, especially when invested from the conceptual phase to completion. This applies particularly to unfinished apartments, where investments made within three years post-completion have shown around a 40% appreciation.
While pre-Covid rental yields were approximately 9%, the present landscape has seen them settle at around 4%. The presence of Airbnb and increasing foreign tenants have contributed to this improvement. Investment decisions should align with individual risk appetites and investment horizons.
What specific property types or locations currently offer stability and profitability?
Diversification is key. Depending on factors like investment horizon and risk tolerance, individuals can consider land with property or apartments, both of which hold potential. At present, land prices remain relatively low due to a combination of elevated construction costs – increased by over 150% – and import restrictions that have depressed land values. This suggests that land could appreciate significantly in the future.
However, for those seeking higher rental yields, especially foreign investors or the diaspora with shorter stays, apartments could be an attractive option. The increasing popularity of Airbnbs and the potential for professional management, such as offered by companies like ours, contribute to the appeal of apartment investments.
Why has Sri Lanka emerged as a destination for real estate investment, in your view?
Sri Lanka’s emergence as a real estate destination can be attributed to its abundant natural resources. This potential, similar to regions in Africa, has remained largely untapped. The country’s temperate climate, natural beauty, and suitability as a second home make it an appealing destination for investors seeking a retreat.
Additionally, its strategic location along vital maritime routes has drawn attention from global superpowers, including China, India, Russia, and the US. Sri Lanka’s property sector shows great promise due to a shortage of properties and ongoing infrastructure projects, providing limited land for development. Its proximity to India and China, both experiencing substantial growth, presents opportunities for synergistic growth.
How do you address concerns raised by those who accuse Sri Lanka of selling land to foreigners?
It is important to clarify the misconception that Sri Lanka is simply selling off its land to foreign entities. Let’s look at the example of the Port City project, which has garnered its fair share of attention. It is crucial to understand that this project doesn’t equate to selling land, but rather facilitating foreign investments in a strategic manner.
In the case of the Port City, it is essentially a 99-year lease granted by the Government. The lease agreement allows for the creation of a planned, smart city covering 269 hectares, with an associated investment of around $ 15 billion. This is a colossal endeavour that Sri Lanka, operating on its own, could not undertake. The goal is to build a thriving, modern city that will attract further foreign investments, generate employment opportunities, and bolster the nation’s prosperity.
Here is where the important distinction lies: the ownership of those 269 hectares remains vested with the Government of Sri Lanka. This means that Sri Lanka, as a nation, retains control over the land. Citizens are the ultimate beneficiaries of this initiative. During the 99-year lease, jobs will be created, wealth will be generated, and the economy will benefit from these developments.
After the lease term expires, the land and the accompanying infrastructure will revert to Sri Lanka. This is not a sale. It is a long-term development strategy aimed at harnessing foreign investment to uplift the nation. It is akin to how Britain governed Hong Kong under a 99-year lease.
Furthermore, the Port City is established as a special economic zone. It offers incentives such as tax advantages and regulatory stability, ensuring that the laws governing the area won’t change arbitrarily. This provides security for investors and encourages them to participate in this ambitious project.
In practice, this development creates a ripple effect that can positively impact the Sri Lankan mainland. It sets an example of modernity and progress that can inspire further growth and development. The idea that we’re merely selling land to foreigners oversimplifies a complex strategy designed to drive sustainable economic development and benefit the nation and its citizens in the long term.
What are your thoughts on interest rates in the property sector?
Historically, our interest rates have been quite high. However, I believe there is a positive shift happening now. The Government is working to reduce interest rates to stimulate economic activity. By the end of the year, I anticipate that we will see interest rates for housing loans drop to around 12%. This is a significant development, because even though rates have decreased, borrowing rates have remained stubbornly high at around 30%.
The Central Bank of Sri Lanka (CBSL) issued directives to address this issue, but it might take some time for these changes to fully take effect. Until then, obtaining financing for real estate investments may remain challenging.
Can we expect an uptick in apartment sales once the interest rates come down?
Yes, there is growing interest in apartment sales. Inquiries have increased over the past month. However, there is a pricing mismatch in the market. Buyers are seeking prices similar to those before the currency depreciated, but developers are hesitant to lower prices. It is crucial for the general public to understand that construction costs, particularly labour costs, have risen significantly. The construction industry relies heavily on imported materials, and the currency depreciation has affected these costs. Therefore, prices are likely to gradually increase.
In the ever-evolving real estate industry, what strategies has Capital Trust Properties adopted to stay competitive and align with changing market conditions?
Capital Trust Properties has strategically partnered with four global giants in the real estate industry: Knight Frank, CBRE, Colliers, and Sotheby’s. This partnership positions us as a professional player in the global market. We have developed a reputation for performing due diligence for foreign Multi-National Corporations (MNCs) when they wish to enter the Sri Lankan market.
We have cultivated strong relationships with commercial landlords across all building grades and are deeply interconnected with stakeholders. Our innovative spirit shines through, thanks in part to our IT company, which has helped us develop a robust property app. We’re dedicated to staying informed about global real estate trends and advisory practices to remain at the forefront of the industry.
What recent developments or projects has Capital Trust Properties been involved in and what impact have they had on the local business community?
Despite the challenges posed by the past year, we adopted a different approach, which led to substantial achievements. We managed to sell more than 200 apartments, along with numerous commercial properties and rental arrangements. We recognised that crises often bring opportunities. When the exchange rate shifted dramatically from 150 to 330, we acted swiftly to assist our clients in acquiring apartments. This strategic approach allowed our clients to benefit significantly.
At Capital Trust Properties, we excel in both strategic investments and exiting at the right time, thanks to our experience in the financial sector.
How do you see the real estate market evolving in the coming years? What opportunities or challenges do you anticipate for your company?
Presently, we face several challenges, particularly due to the heavy taxation in the form of VAT. While there is still demand, there is a mismatch in the market. Our industry operates as a regulated entity, but the sector as a whole remains unregulated. This leads to a lack of knowledge and understanding among buyers, creating a disconnect between what is available, at what price, and what the demand truly is.
I foresee a slower demand until conditions improve. Efforts are also being made to reform certain land ownership laws to encourage foreign ownership. However, the challenge remains that our banking system is cautious about lending to the real estate sector, which can stifle growth.
What advice would you give to aspiring professionals looking to excel in the real estate industry, especially in leadership roles?
Perseverance is key. If you’re passionate about something, pursue it relentlessly. That has been my guiding motto throughout my career. Additionally, always prioritise doing things ethically and correctly. At Capital Trust Properties, we’re not just about business; we’re deeply committed to giving back to our community. We’re passionate about supporting the health sector, promoting women’s empowerment, and advancing education. Engaging in corporate social responsibility projects in these areas has been one of the most rewarding aspects of our journey.