Tuesday, December 16, 2008

Economic consequences of the halt to most apartment construction

One just has to look at the halted construction projects on the Colombo skyline to wonder if a major crisis in the housing and hence in the banking sector is about to erupt. The Dawson Grand has ceased any further building work, and it looks like the Emperor has done the same. Ceylinco Celestial seems to be going that way, and Premier Pacific has declared insolvency. Just as there was a meteoric rise in the value of apartments, there is now a meteoric fall in the same.

In the past the builders took stage payments from the apartment buyers in order to finance the construction. That helped them construct with little bank borrowing by preselling the whole project. Premier being unable to sell all its apartments found itself unable to continue as they were unable to obtain bank borrowings at an acceptable rate of interest to make the project viable. So those who put in stage payments are faced with a dilemma and a part completed building. Of course an investor who can see a good profit may wish to buy the shell and promise existing purchases completion if they are willing to pay more than originally committed but that is another story.

What all this means is that the apartment and condo building boom in Colombo is over for the foreseeable future. Those buildings that have been completed all have issues that have dissatisfied the buyers. Therefore this is not a harbinger for the health of apartment living in Sri Lanka. Banks are either unwilling to lend or extend already stretched credit lines as this does not seem to be a good investment after all.

Many of those who bought apartments for speculative purposes have lost their money and are trying to cash in their investment at any cost as some have borrowed heavily to purchase them. The world economic crisis has resulted in rich Sri Lankan expats overseas not wanting to invest in an apartment in Colombo and some who have want to cash out as they need the funds. Many high net worth individuals who purchased apartments as part of their diversified portfolio have seen their wealth drop in many of their investment vehicles, that include stocks here and overseas, property and businesses, Only those who hold cash have weathered the storm but are unwilling to buy property now as it no longer seems a good investment as rental returns do not seem a possibility either with no demand. Banks who have lent on the valuation of property have seen their security drop in value by 50% but worse have realized that they are all illiquid at this time.

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