The recently released Q2 data of the House Price Index of LankaPropertyWeb showed that the overall selling prices of apartments increased by 45.17% when compared to Q2 of 2021. According to developers and real estate agents that LankaPropertyWeb has been in contact with, these price increases are largely a cause of the demand created for real estate as a hedging against inflation, shortage in raw material, and skyrocketing construction costs.
Driven by the devaluation of the Rupee against the US Dollar and the shortage and high priced raw materials have shifted people’s behavior since March 2022, with them preferring to buy houses or apartments rather than build a home. The uncertainties of obtaining raw materials and rising interest rates for home loans have also contributed to this behavior.
A study on the overall asking prices of houses in Sri Lanka showed prices had increased by 21.85% when compared to Q2 of 2021. Houses for sale in the North-West Province recorded the highest increase of 31.2% from Q1 of 2022, followed by Colombo house prices that had risen by 13.9% during the same period.
Meanwhile, the prices of apartments for sale in Colombo had increased by 32.9% in Q2 of 2022 when compared to Q2 of 2021. This phenomenon takes place simultaneously at the same time as the country has battled the pandemic since Dec 2020 and foreign exchange (FOREX) issues that worsened towards the end of 2021.
According to LankaPropertyWeb’s Development Consultancy and Research team data, the top 5 searches for apartments for sale were from Colombo 6, Colombo 5, Rajagiriya, Colombo 3, and Colombo 2, respectively.
Increasing prices of raw materials for construction from 2018 to 2020
Meanwhile, data from the Construction Industry Development Authority showed that the average price of a 50Kg cement bag sold by public and private dealers has increased by 187% from June 2021 to June 2022. The same increased by 98% from January 2022 to June 2022.
Home loan interest rates that recorded lowest at 7% p.a after decades during Q3 2021, have also been increasing with its current highest being at 22% and negatively influencing property buying decisions of first-time homebuyers.
In addition to this, LankaPropertyWeb’s recent studies on the Land Price Index (based on asking prices) also show that the rate of land prices increasing on a quarter-to-quarter basis in Colombo city has slowed down over the past quarters. Lands for sale in Colombo 3, 4, 5, 6, and 7 recorded the slowest percentage increase in prices in the last five years. While the rate of prices increasing in lands for sale in Colombo 9, 13, and 15 were at a peak of 113%, 87%, and 47% respectively from Q1 2018 to Q1 2022. This is mainly due to the construction of many mixed development projects that are expected to drive prices further in the future.
Elsewhere in the Western Province (except Colombo 1-15), per perch prices of lands for sale in Ingiriya and Horana, which once had the lowest rate of price increases, have seen the highest increases, and lands which had the highest prices, such as prime Colombo areas, have seen the prices stagnate or drop between Q2 2021 and Q2 2022.
“With the Central Bank’s (CBSL) decision to float LKR in March 2022 and due to the inflation surge to a record high, we saw a rapid increase in demand for completed condos in primary and secondary markets as well as for the houses as a hedge against economic calamity. Especially expats’ interest in Sri Lankan real estate increased to gain in the Rupee devaluation. This behavior was further recorded on LankaPropertyWeb portal that in fact saw a surge in search traffic from countries such as the UK, Australia, USA, Canada, and UAE,” added Tharindu Jayarathne, Head of Research at LankaPropertyWeb.
In addition to this, according to the press release of the Prime Minister’s office on 31/05/2022 proposed tax reforms, the exemption granted on Value Added Tax (VAT) on residential condominiums shall be removed from 01/10/2022. This is expected to drive prices in the future when buying apartments directly from the developers and considering the probability of VAT being imposed in the near future. Thus, now is a good time for buyers willing to invest in apartments to plan ahead before VAT comes in.