Sothebys International Realty hosts webinar on COVID-19 impact on Sri Lankan real estate

As a result of COVID-19, we have witnessed a wave of disruption and change, not only in our individual lives but also in the business world. Private equity sponsors, senior management teams, real estate managers should be aware of and address the concerns impacting the real estate industry.

Sri Lanka Sotheby’s International Realty held an insightful webinar recently on the impact of COVID-19 on Sri Lankan real estate. The panel consisted of KPMG in Sri Lanka Real Estate Advisory Manager Gihani Hewavitarana, Graham Associates Managing Director Chris Graham and Sothebys International Realty Director International India Akash Puri, with Sothebys International Realty Sri Lanka Director Petar Petrovic moderating the discussion.

Hewavitarana initiated the proceedings for the evening by reiterating the key findings of a recent publication done by KPMG Real Estate Advisory regarding COVID-19’S impact on Sri Lankan real estate. She mentioned that the impact of the COVID-19 outbreak will be felt across all real estate classes, with the most severe impact on the hospitality and retail real estate classes.

Though the immediate implications were straight forward to analyse, the medium-term impacts could only be assessed with time. The impact on the main economic sectors, new business strategies by key sectors to weather the crisis and the related implications on labour, would impact the medium-term outlook of the real estate sector.

The greater use of remote working and use of collaborative technology to connect people remotely and the wider use and acceptance of e-commerce by Sri Lankan corporates and the public, will have an impact on the real estate sector’s demand and supply.

Hewavitarana touched on the demand on the luxury residential market in Sri Lanka, which had been significantly quiet since 2018, mostly due to political instability, a relative slowdown in the economy and inconsistencies in policy decisions relating to property.

The Easter attacks in late April 2019 and the current pandemic have reduced the pace of a much-expected recovery. This has led to less demand from expatriates, foreigners and high-net-worth individuals on luxury residential properties. She went on to say that buyers and sellers were taking a waitand-see approach during March and April of 2020. Due to the lockdown, coupled with social distancing, the number of luxury residential listings in the market also witnessed a drop.

However, we see a gradual increase in interest in the market as life returns to normalcy. Although the interest is mainly from sellers, we are yet to see the same enthusiasm from the buyers’ side in the present market. This is mainly due to the income levels of many taking a hit, due to the prevailing economic conditions. Fewer buyers will have higher bargaining power, which would have downward pressures on selling prices.

There may be luxury residential properties at the right price point in the market, which will have the potential to appreciate in the longer run. Real estate is a relatively stable class of asset and in the past, luxury residential real estate has generated an ROI over 19 percent and rental yields between 5 percent - 7 percent though with growing supply this remains a challenge, since no other class of investment has generated such stable high returns in Sri Lanka.

Graham shifted focus towards the international real estate market and emphasised that unlike other disruptions, the severity of the effects of the pandemic are difficult to predict, as we are unaware of how long the pandemic will last. However, much like the SARS epidemic in 2003, there was a dramatic collapse in transactions and a slight fall in prices but evidence suggests that this will be short term.

He further stated that experts believe that investors will turn to real estate as a stable asset, particularly luxury end, as it is considered a more secure type of investment. He shed light on the change in people’s attitudes toward physical exercise, food and mental well-being, which translates into demand for property with more space and privacy and a shift in focus from smaller units in large developments to larger family-friendly units in smaller developments and preferences to non-public facilities like gyms and saunas.

Home offices can add as much as 10 percent to the value of properties and can be a determining factor in the buyers purchase decision. Based on Graham’s observations, live interactive walk arounds using zoom or an electronic platform and the electronic signing of contracts and pitching through online platforms such as Zoom, are the latest trend to support social distancing.

Presenting a property at what it is worth and having a good price point are the key pointers Puri had to give real estate agents, with regard to clients interested in investing in top destinations.

He further went on to elaborate on the motivating factors in investing in property abroad:

Personal reasons:

Businessmen travelling regularly would prefer investing in their own place over living out of a hotel.

Those migrating for new jobs would look for places to stay.

Rather than renting an apartment for their children studying abroad, it is more practical to acquire property and service it through mortgages or rent payments.

Financial reasons:

Diversifying the current real estate portfolio.

Currency diversification and its benefits, as the dollar or pound is worth much more now than it was 10 years ago and the appreciation in value of property abroad.

Desire for a change in lifestyle.

Better conditions for retirement.

Investing in property abroad to gain citizenship and reap benefits such as better healthcare facilities, free education for children and visa-free access to other countries.

Touching on the topic of interest in investing in new developments, Puri said that the secondary market is more popular among people investing for self-use and prefer making a good bargain. However, people in countries like Sri Lanka, where there is a limit on remittances that can be made in a year, would prefer to take new developments and make payments over time. The appeal of new developments are the facilities that it provides such as a concierge, gym, pool, media room and being in close proximity to tube stations and supermarkets, which also makes it easier to rent out.

The overall economy has taken a severe hit from the outbreak of COVID-19 and inevitably the effects have rippled onto the real estate market. This will test the resilience of the economy as well as the industry and hence, adapting to rapidly changing environments will be key for survival. The real estate markets have continued to be a growing trend throughout the years and the trend will continue, once the pandemic is under control.