BY T.V. PERERA
The real estate sector is one of the most internationally renowned sectors. In India, the real estate sector is rated the second major sector following agriculture. Until around mid last year the real estate sector in Sri Lanka had been a prospective business investment with good returns. Uncertainity, however, which set in the property market resulted in the residential sector taking a declining trend with many construction projects being on hold, property developers facing difficulties in re-paying their loans, and some even ending bankrupt.
While property developers are weighed down, being unable to earn expected profits, those who buy apartments to sell them at gains are saddled with cost excursion. In Sri Lanka, land prices keep rising year after year. The Colombo District Land Price Index compiled by the Central Bank reached 132.2 during the first half of 2019 recording an increase of 13.6% compared to the first half of 2018. The sub-indices of land price, namely Residential, Commercial and Industrial have contributed to this increase. The averge price of a residential lot was up 15.3% in 2018 and in Colombo, by 15.5%.
There is evidently a bubble in the market when buying a property with intention to sell it at a higher price although not on a very high scale in Sri Lanka, due to land prices constantly rising. At some point of time this bubble will surely burst where none of the apartments could be sold.
The subdued economic performance which resulted in the drop in the real estate sector is attributed to weak domestic demand, continued tightening in monetary conditions, government consumption spending, stagnant fixed investment, and lower net exports.
The tightening monetary policy enforced on the recommendation of the IMF was one cause that led to drag down domestic demand and investments, and further, inconsistent economic policies driven by instability adversely affected public and private sector investments, the key drivers of economic growth.
The real estate sector, which is described as property consisting land and the buildings on it as well as the natural resources including crops, water, and mineral deposits, is linked with the overall performance of the economy. Hence fluctuations within the sector magnify ups and downs of the overall economy. As a result of this link, large movements in the real estate market tend to amplify fluctuations in the overall economy in addition to potentially destabilising the financial system. An example of this is the financial crisis where the real estate market had vast and disasterous effects on the overall economy on a global scale.