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| Sunday, 19 January 2003 |
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| News Business Features Editorial
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Trends in the real estate market by J. Baratha Dodankotuwa
Since land and buildings are scarce resources, they should be used as effectively and efficiently as possible. This is the starting point for the economist, whose task is to apply economic analysis to formulate principles necessary for the efficient use of land resources and thereby suggest ways in which the existing allocation might be improved. This is because conventional economic analysis cannot easily be applied to urban and specific real estate activities. Further, the activities of the real estate market cannot be forecast correctly due to the dynamic and cyclical nature of the socio-economic environment. After 1977, Sri Lanka paved the way for liberalised economic principles with respect to many activities in the economy. Real estate development activities, at the inception, had shown a tremendous leap towards the national development process, combining spiralling land values with the boom of construction activities. Many investors, both individual and institutional, played a very competitive role in the field of real estate activities in the level playing field, as introduced by the open economy. Many succeeded, but some did not. Fully authoritative government institutes were also formed under various statutes to cope with the national development process (ex. Urban Development Authority, National Housing Development Authority, Board of Investment and Sri Lanka Land Reclamation and Development Board). They played the change agents' role with regard to real estate development activities in a fast developing economy during the initial years of the new government. However, this momentum could not be sustained for long due to various political-administrative failures coupled with the civil disturbances that took place in the country, especially after 1983. Sri Lanka has still not witnessed the rapid momentum of real estate development activities, which it had experienced more than two decades ago. Nevertheless, the country has reached some commendable landmarks with respect to real estate development activities. Landmark buildings like the World Trade Centre, Bank of Ceylon head office and the Hilton at Echelon Square, Colombo 1, the JAIC Hilton Tower in Colombo 2, Crescat Condominium at Colombo 3, Royal Park Condominium at Rajagiriya and the new Hatton National Bank building at Jaya Road, Colombo show the development potential of our country irrespective of the economic crisis the country has been seeing for a few years. Further, the 'Millennium City' at Athurugiriya, based on Malaysian and Thailand experiences, shows the dynamism and possible direction of residential development by private sector organisations. Though Sri Lanka has missed many opportunities regarding real estate development due to social disturbances, it has potential which needs proper and well-informed attention from authorities. The following trends have been identified especially in Colombo City and its environs. A large number of registered companies for real estate activities Over 200 private sector registered companies engaged in real estate activities have been identified. These companies can be categorised into four segments as shown in the table. The majority of these are engaged in real estate business activities. They provide basic infrastructure such as access roads, water, electricity, telephones and surface drainage. They can also be categorised as real estate subdividers. Real estate investors usually build or construct their own property to engage in the sector. Sri Lanka lacks genuine institutional real estate investors as seen in the Western, East Asian and South East Asian countries. For this, it is essential to introduce new financial market instruments such as property bonds and property unit trusts to the capital market structure. Real estate developers are primarily engaged in activities such as housing, office, commercial and factory construction. Development and building contractors serve them. Real estate agency services are engaged in identification and introduction of different real estate, ranging from individual houses to large warehouses and factories between willing sellers and prospective buyers. Emergence of real estate agency services for high-income clientele Real estate agency services and brokers in Sri Lanka do not have to obtain any professional qualifications unlike in other countries. They hold only the licences issued by the respective local authorities. Due to the high demand for luxury houses and other categories, this field of real estate activities needs skilled and reliable professionals. Most real estate companies have their own agency and brokering services for its clientele. Development of luxurious apartments and condominiums The Apartment Ownership Law No. 11 of 1973 and the Apartment Ownership (Amendment) Act No. 45 of 1982 provide the legal framework for condominium properties in Sri Lanka. This law provides for the registration of multi-storeyed properties, the division thereof into independent units with common elements, enabling separate ownership and disposition of title to such units. This law applies to property comprising land with a building or building of more than one storey and having more than one unit of residential or non-residential accommodation. Emergence of high-rise apartments or condominiums in Sri Lanka dates back to the 1970s with introduction of the Apartment Ownership Law No. 11 of 1973. Luxury apartments have become a recent phenomenon due to the large number of expatriates coming to Sri Lanka on international assignments. Sri Lankans who have a high income and foreign exposure also demand condominiums. Over a thousand condominium plans have been registered at the Colombo Land Registry within its area of jurisdiction. However, the establishment of a management corporation has not taken place with six months of the registration of these plans as required by the law. The first management corporation was formed in 1994 under the registered condominium plan of the Liberty Plaza, Kollupitiya. Registered condominium properties can be categorised into different types based on the ownership and use. Under the ownership criteria, the following three types could be identified: (a) Condominium with all units sold and owned by different owners (b) Condominium with certain units sold and owned by different unit owners and the balance retained by the developer or owned by an investor and given on rent or rent purchase basis (c) All the units owned by the developer and given to individuals on rent or rent purchase basis. At present there are three types of condominiums on the basis of the use of individual units namely single use, twin use and multi-use. Most of the condominiums, which consist of only housing units, fall into single use category. There can be single use condominiums with any of the other uses. Unity Plaza and People's Park are condominiums with shops and offices. Liberty Plaza and Lucky Plaza fall in to the multi-use category where there are housing, office and shop units. Even the shops are of different types with banks, restaurants and supermarkets. Colombo and surrounding areas now have a number of super luxury condominiums offering quality and facilities available in other developed countries. Residential condominiums like Royal Park, King's Court, Queen's Court, JAIC Hilton Tower and Flower Court have reached a high occupancy ratio. However, the demand for high-rise apartments had fluctuated due to communal unrest. Low performance of listed companies under the land and property sector at the Colombo Stock Exchange Though the Colombo Stock Exchange (CSE) has shown a stable upward trend recently, it was on a downward trend in the past due to many factors which lowered investor confidence both local and foreign. The CSE market capitalisation had fallen below Rs. 100 billion. The land and property sector comprises 20 listed companies while the CSE has 245 listed companies. Most companies listed in the land and property sector do not actively sell their shares in the market while the active companies also show very low prices in trade, some as low as Rs. 5 per share. CT Land Development Ltd, the owner of Majestic City, is fairly active in the CSE compared to other companies in the sector. This shows that the sector requires a strong feedback from investment fora to be properly vitalised. Indiscriminate land subdivision along major arterial roads from major cities Land subdivision along major arterial roads has become a meticulous planning and social dilemma. It is, some people argue, an environmental hazard if not an environmental crisis. Both private sector developers as well as government development institutions pay high attention to sites located along highways due to the accessibility they provide. The damage to plantations (mainly rubber and coconut) and cultivation such as paddy fields due to land subdivision and authorised or unauthorised filling presently has stimulated a topical issue, which is highly sensitive. However, it is very difficult to find a worthwhile solution for this phenomenon as it has many facets. For instance, land subdivision is basically for home building which is very essential or based on basic needs while most land subdivided are freehold land belonging to many individuals who have the sole authority to use or occupy and sell or destroy the land within the purview of legal rights. However, the prevailing trend requires very high attention from the respective government authorities in order to avoid the possible disaster of unnoticed urban sprawl. Some primary issues such as traffic congestion, environmental pollution, lack of services and accidents are already encountered by road users and others. The Colombo-Galle Road, Colombo-Ratnapura Road (High Level Road), Colombo-Kandy Road, Colombo-Negombo Road, Colombo-Horana Road, Colombo-Avissawella Road (Old Road) and Colombo-New Kandy Road (via Kaduwela) have been identified as the major roads where indiscriminate land subdivision is predominantly visible in the Colombo Metropolitan Region. To be continued next week |
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