Finding the Pearl

sri lanka

When Sri Lanka’s protracted civil war finally ended in 2009, the island state found itself with upwards of 200,000 casualties, lingering resentments and a bill that totalled roughly five times the country’s GDP at the time. But it also had a breathtakingly rich, if bruised, natural environment, crystalline Indian Ocean, Bay of Bengal and Gulf of Mannar waters all around, pristine beaches, an equally rich history — and no one to enjoy it. Recent changes to purchasing regulations and an outwards looking president could crack the door to increased foreign ownership and create a new investment hotspot in Southeast Asia.

Increasing Opportunities

First things first: whatever your instincts say about parallels with neighbouring India should be ignored. The so-called Pearl of the Indian Ocean has a birth future in tourism to be sure, but its services economy is also trending upward. Positive sentiment following Maithripala Sirisena’s 2015 election, an expatriate population in the south large enough to support an international school, burgeoning tourism averaging 14% growth over the past five years (with a 26% spike from Chinese tourists in 2016), five-star hotel brands (Shangri-La, Starwood, Hyatt, Movenpick) opening rapidly, and new e-visas have made the choice to travel easier. On GDP and social fronts, Sri Lanka’s average annual growth of 5% is better than Singapore’s and on par with Malaysia. The country is young (median age 32), educated, and is aggressively tackling corruption, human development and real estate transparency—all improving in leaps and bounds.

Though more foreign direct investment is needed, infrastructure improvements, welcoming economic policies and easing ownership rules could attract precisely that FDI. While JLL’s 2017 Sri Lanka: Land of Real Estate Opportunities argued the commercial capital, Colombo (government happens in Sri Jayawardenepura Kotte), was in need of more international standard Grade A office space, the controversial PRC joint venture, 270-hectare Port City (Colombo International Financial City) will go a long way to solving that problem. Taken with the infrastructure investment in the city, “Colombo is emerging onto the world stage as the next likely investment hotspot for commerce, as India, Japan [and] Russia jockey for position and opportunity,” theorises JLL Sri Lanka Managing Director Steven Mayes. Government incentives are exploiting the country’s geo-political importance, and reminding major occupiers a low-cost/high-skill workforce is at their fingertips.

sri lanka cabs

A robust middle-class and aspiring young population underpins the urban apartment sector. However, demand for affordable housing and increasing urbanisation is the Urban Development Authority’s biggest challenge in its quest to rid the city of its shanties (currently housing 50% of the population) by 2020. The goal is to build social housing with funds from land sales to the private sector, but JLL’s report argued that low margins would make private sector involvement questionable, and rising land costs could lead to lowered affordability. Premium condominiums in prime Colombo districts (01, 02, diplomatic 07) are averaging approximately US$450-600 (HK$3,500 to $4,700) per square foot, pricier than comparable markets because of speculation by cash rich Sri Lankan investors and rising construction costs.

Vacation Futures 

Investment in Sri Lanka is what Mayes calls “polarised” right now, with business attracted to the potential game changer at Port City and a slow trickle of trade agreements spurring potential investment from partners. Not surprisingly, hospitality provides the greatest opportunities for institutional and individual investors. In its 2018 budget, Sri Lanka repealed restrictions on foreign ownership by relaxing its odd prohibition on overseas investors purchasing anything between the ground and fourth storeys—effectively eliminating villa purchases, freehold or leasehold. Inconsistent policy that can change at the drop of a hat has been the biggest hurdle in fostering positive sentiment among foreign buyers. Nonetheless, the fourth floor rule has “Done little to improve the situation. The budget for 2018 provided for implementation of a 15% VAT levy on new condominium sales, effective 1st April, causing something of a rush for investors to sign condominium purchase agreements before the deadline,” notes Mayes. The levy was postponed because the government couldn’t lock down the legislation.

Now served by a new highway, soon extending to Matara and Hambantota, the southern Galle district is going a long way to cultivating Sri Lanka’s position as a less crowded alternative to traditional Southeast Asia destinations. As a result, the south has seen a hotel and residential development renaissance. Mayes believes that should continue on the heels of critical airport infrastructure development, and careful resources management. Like Thailand, Vietnam and Myanmar, tourism in Sri Lanka accounts for a significant chunk of its GDP (nearly 10% in 2017), and it’s only going to grow once the country fully capitalises on its geographic, environmental and cultural strengths, and brings Kandy, Jaffna and the east into the mix. 

sri lanka colombo

Speaking of Kandy, for many of us, Sri Lanka will be best known for recent sectarian violence in tea country and subsequent travel advisories. As is the case too often in our hot button world, a case of road rage turned into an incident that suggested Sri Lanka was on the brink of war once again. Was it? Without marginalising religious tension anywhere, no it wasn’t, according to Mayes. 

“The recent events in Kandy were exaggerated by the media, way out of all proportion, and it is widely accepted that the state of emergency and suspension of social media platforms throughout the country had quasi-political motivations,” he finishes. Tourists and resident business associates indicated no threats, and Mayes reminds that extremists are a minority. He advocates taking the long view. “Any tensions in the provincial cities may represent commercial pressures, rather than denominational issues, and it could be argued that government policy would be better directed at the economic situation, rather than blaming interfaith strife… A responsible media has an important role to play in the development of any nation and Sri Lanka is no different, with plenty of positives, worthy of reporting, to support investor sentiment.”