Nov 11, 2017

Sri Lanka averts a condominium housing bubble

Sri Lanka’s apartment prices are to go up with the government’s decision to remove tax exemptions on condominium housing units, industry sources said.

But the aim of the Finance Ministry to prevent the mushrooming of high rise buildings in Colombo and suburbs will lead to a property bubble soon, officials predict.

Central Bank Governor Indrajith Coomaraswamy announced that they were closely monitoring the real estate sector after fears that excessive credit may have fuelled a property bubble that could cause distress to everyone.

Sri Lanka’s high-end luxury apartment developments are to fall in to trouble, as at least two projects that failed to take off resulting in cautious lending to the sector.

He said a low interest regime about three to four years ago encouraged money into real estate which at the time appeared to give the highest rate of return on investment.

Under this set up, Finance Minister Mangala Samaraweera, in his maiden budget has made a proposal to make the condominium housing unit sale liable for tax.

The sale of condominium housing units which were made exempt from taxes from November 1, 2016, have been made liable again after a very short span of 1 year.

However, this will pose several challenges to apartment developers who just went through a significant change from a liable regime to an exempt regime (in November 2016) and would now have to change back to a liable regime from April 1, 2018.

This would have a significant impact on the pricing of units as the VAT inputs that are now absorbed as a cost, would be compounded by output VAT on sales from April 1, 2018.