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The lockdown will worsen housing shortage

 

“It’s only when the tide goes out that you learn who has been swimming naked” – Warren Buffet

 

By Rohan Parikh 

 

Colombo has seen a building boom over the last few years primarily in the luxury sector. However, there is still a shortfall in the semi-luxury or affordable luxury sector. Compared to all major South Asian cities, Colombo has a lower rate of urbanisation and urban density. As a result, the city has one of the largest proportions of daily commuters and a public transport system that is struggling to support them efficiently. As the economy continues to grow, this shortage will be more and more acute, and the need for housing will continue to increase. Hence, the long term view for apartment values in Colombo is extremely positive.

 The construction industry has been through multiple shock waves in the last two years. Starting with a slowing economic growth, followed by political uncertainty and policy changes, the terrorist attacks of last year and finally the current global pandemic. In the past, the demand has bounced back before unfortunately being interrupted again for an unforeseeable event. This proves that given the right price point, there is tremendous demand.

 The current global pandemic has had a significant effect on the construction industry and the challenges faced are manifold. The most obvious being the delay caused to construction companies. Idling of workers and escalating interest result in increased costs to the companies. Restarting sites, while ensuring social distancing and other safety measures prescribed by the government, will be time-consuming and costly, leading to an increase in costs and prices.

 Initial caution from investors will result in slower sales for a few months, putting further stress on the cash flow of developers. Weaker developers will be put under tremendous pressure to sustain themselves through this period. These are developers who are dependent on pre-sales which fund their projects (i.e. a sign of weak capitalisation), or who have large loans and interest costs, or projects that are targeted to the wrong market segment. Those projects that are highly dependent on a small pool of ultra-wealthy or overseas clients, and those catering to the luxury and super-luxury end of the market, especially found in Colombo 1 and 2 will struggle. So, as Warren Buffet so memorably put it, we will soon see who is “swimming naked” as some developers collapse under the weight of the pressure on the balance sheets caused by the receding tide of Covid-19.

 There is an opportunity in every crisis. Prudent developers who have chosen the right segment and are conservatively capitalised will be able to see themselves through to project completion. There will be reduced competition as weaker developers and inviable projects will be forced out, and a lack of new projects starting, owing to capital scarcity caused by the global economic slowdown. This would make apartments an excellent investment at this time. 

 Overall this could prove to be an optimal time for smart buyers as developers offer discounted prices to buyers. Those choosing the right project to invest in could see a strong return on their investment in the long run. However, picking the correct developer and project is key. 

(The writer is the Managing Director of Iconic Developments and an alumni of the Wharton School of Business and INSEAD) 

 

 

Summary

 

The lockdown is expected to worsen the housing shortage as when restarting sites, while ensuring social distancing and other safety measures prescribed by the government, will be time-consuming and costly, leading to an increase in costs and prices.

These are developers who are dependent on pre-sales which fund their projects (i.e. a sign of weak capitalisation), or who have large loans and interest costs, or projects that are targeted to the wrong market segment.

Those projects that are highly dependent on a small pool of ultra-wealthy or overseas clients, and those catering to the luxury and super-luxury end of the market, especially found in Colombo 1 and 2 will struggle.

Competition is expected to reduce as weaker developers and inviable projects will be forced out, and a lack of new projects starting, owing to capital scarcity caused by the global economic slowdown.

Overall this could prove to be an optimal time for smart buyers as developers offer discounted prices to buyers.

 

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