Sri Lanka Real Estate Sector: Investment Analysis and Expected Return

This report analyzes the investment potential of Sri Lanka's real estate sector, specifically the hotel industry, and assesses the risk and return of investing in the sector. The report highlights the growth potential of the industry, with a focus on the increasing number of tourists and improvements in infrastructure. The report also provides a risk analysis and recommendations for hedging against potential risks. Expected return rates are estimated to be between 7-8% for capital appreciation and 11-14% for annual returns.

SRI LANKA – LAND OF REAL ESTATE
OPPORTUNITIES
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EXECUTIVE SUMMARY
Present report emphasizes on Sri Lanka Real Estate sector in order to ascertain whether the
same can provide an adequate return in next five years or not. The variant which effects an
investment decision comprising risk, return, and other prospective have been assessed in
detail in order to conclude an appropriate decision. Through assessment of major
beneficiaries which has moved real estate sector towards the attainment of higher growth, it is
appropriate to invest in the specified sector.
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Table of Contents
Introduction................................................................................................................................5
Investment Analysis...................................................................................................................5
Expected Return.........................................................................................................................8
Risk Analysis comprising the manner in which same can be hedged......................................10
Conclusion / Recommendation................................................................................................11
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Table of Figures
Figure 1: Assessment of occupancy and turnover of Hotel Industry.........................................7
Figure 2: Graph representing stability in GDP of Sri Lanka over years....................................8
Figure 3: Table presenting rankings relating to ease of doing business....................................8
Figure 4: Graph representing Real estate transparency Index...................................................9
Figure 5: Growth of Hotel Industry in correspondence with no. of arrivals............................10
Figure 6: Assessment of business environment of Real Estate Sector of Sri Lanka................11
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INTRODUCTION
The investment decision is taken only after detail assessment of risk and return
relating to investment option availed. Present study revolves around detail analysis of
investment option, i.e. Sri Lanka Estate which is chosen for New Zealand investment
company International Growth Funds Ltd.
INVESTMENT ANALYSIS
Sri Lanka is believed as ‘Pearl of Indian Ocean’. Presently the annual growth rate of
the country is 5.0% which is the highest rate during the year 2010 to 2010 (Sri Lanka Real
Estate Report, 2017). It implies that currently, the country is enjoying its growth period.
Moreover, 8% of the GDP is contributed by construction sector which is a second largest
contribution. Thus, Real Estate (Hotel sector) option has been chosen for investment as it has
been assessed by Sri Lanka Tourism Authority (SLTDA) that Sri Lanka has about 28500
keys of which 67% is of the unofficial sector. It comprises of small luxury boutiques hotels,
unspecified hotels and supplementary institution. Further, application of the new law which
specifies that from now onwards the tax which gets due on the purchase of assets by
foreigners is no longer valid. Moreover, the new law also declares that a foreigner now can
hold 49% shareholding of an organization that purchases land, which has increased to 25%.
The balance 51% will be held by Sri Lankan nominee. In 2015, the growth of hotel sector of
Sri Lanka increased by 5%.
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Figure 1: Assessment of occupancy and turnover of Hotel Industry
(Source: Sri Lanka Real Estate Report, 2017)
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Figure 2: Graph representing stability in GDP of Sri Lanka over years
(Source: Sri Lanka Real Estate Report, 2017)
Along with the increase in growth of hotel sector, the average occupancy level across
main Sri Lankan hotel companies record an augment contrast to the previous year as the same
has enhanced significantly. In addition to this, with the current growth trajectory, numerous
opportunities are continuously occurring in the Sri Lankan Real Estate environment.
Infrastructure is also improving at leisure time destinations, and imminent travellers’ circuits
will increase Sri Lanka’s overall pleasant appearance. Since leisure destinations, while
precise measures to endorse Sri Lanka as a MICE and entertainment destination are about to
see advantages in the long-term. Thus, the above specification assert that appropriate return
with minimum risk can be attained in next five years through investing in the stated option of
investment.
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Figure 3: Table presenting rankings relating to ease of doing business
(Source: Sri Lanka Real Estate Report, 2017)
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Figure 4: Graph representing Real estate transparency Index
(Source: Sri Lanka Real Estate Report, 2017)
EXPECTED RETURN
Presently, various international companies such as Shangri –La Group (Hong Kong/
Singapore), India’s update ITC group, Spain RIU have made an investment in Sri Lanka. As
the increasing no. of tourist facilitated by the ease of transport links the prime city which
comprises Colombo, Kenya, Galle and Gampaha. Above specified facts will have significant
positive effect of the Real Estate sector thus higher return in comparison to previous years
can be expected. It is expected that capital appreciation rates in short to medium term are
expected within a range of 7 -8% year on year and annual returns in 11-14% range.
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Figure 5: Growth of Hotel Industry in correspondence with no. of arrivals
(Source: Wahab, 2013)
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RISK ANALYSIS COMPRISING THE MANNER IN WHICH
SAME CAN BE HEDGED
Figure 6: Assessment of business environment of Real Estate Sector of Sri Lanka
(Source: Business Environment, 2014)
Risks related to investment in infrastructure projects in Sri Lanka hotel industry are as
follows:
 Political and regulatory risks: Umasuthan and Park (2018) asserted that these are the
risk which arises from the actions of government comprising changes in policies
which have brunt negatively on infrastructure investment. Sri Lankan real estate has
been choosing due to changes made by government and application of new policies
relating to taxes. In case again some changes are done then, this type of risks can be
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highly subjective, hard to quantify and also complex to price into infrastructure
finance.
 Macroeconomic and business risk: Macroeconomic and business risks comprise
macroeconomic variables for example inflation, real interests’ rates and variations in
exchange rates. An asset exposure at the trade cycle that is a shift in demand is a
major business risk of interest. Furthermore, finance risks for instance debt maturity
are also the most important part of business risk relating to the Real Estate sector. The
loss due to the above risk can be toned down through making an appropriate analysis
of external environment variants which affect Real Estate Sector (Kaluthanthri and
Osmadi 2016).
 Technical Risks: This type of risk is determined through the skill of functions,
executives and related to characteristics of the project, project difficulty, construction
and equipment. It is a significant part of Real Estate sector as technical issues are core
part of same. Above specified risk could be hedged through the know-how of expert
operators and should be a shift to the private sector to cause a motivation for
successful project delivery.
CONCLUSION / RECOMMENDATION
Investment in real sector estate of Sri Lanka can be concluded as the appropriate
option of investment from which return with average risk could be attained in the next five
years. Further, it is suggested that government can manipulate political and regulatory risks
through the creation of a more favourable institutional environment. It must comprise a
believable commitment to honour the terms of the contract and to develop trustworthy
guidance on growth and construction costs.
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References
Business Environment. (2014). [Online]. Available through <
http://www.atkearney.com.au/paper/-/asset_publisher/dVxv4Hz2h8bS/content/
competitive-benchmarking-sri-lanka-knowledge-services/10192>. [Accessed on 12th
August 2018].
Kaluthanthri, P.C. & Osmadi, A., (2016). An Expert Review on Corporate Real Estate
Strategies for Hotel Industry in Sri Lanka.
Sri Lanka Real Estate Report. (2017). [PDF]. Available through < http://www.jll.com.lk/sri-
lanka/en-gb/Research/SriLankaRealEstateReport_final.pdf> [Accessed on 12th August
2018].
Umasuthan, H. & Park, O.J., (2018). The challenges faced by hotel service industry in Sri
Lanka. International Journal of Tourism Sciences, pp.1-12.
Wahab S. (2013). Sri Lanka Tourism Development Strategy for 2011-2016. [Online].
Available through < http://www.in2ition.biz/2013/05/01/sri-lanka-tourism-
development-strategy-for-2011-2016-part-1/> [Accessed on 12th August 2018].
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