Real Estate in Sri Lanka Prospects and Potential

Translating Economic Growth into Real Developments in Colombo

 On Point Real Estate in Sri Lanka - Prospects and Potential

Beira Lake in Colombo

On Point Real Estate in Sri Lanka - Prospects and Potential 

Laden by the hope of a virtuous future, Sri Lanka teems with infinite possibilities and is preparing itself to become a destination of choice. Since the end of the civil war in mid-009, the countrys economy has been on a strong growth trajectory led by determined rebuilding measures, surging tourism and increased investor confidence. After a sharp decline in growth during 008-009, it expanded rapidly by 8% in 010 and 011, and a further 7-8% is expected in 01. This makes it the second fastest growing economy in emerging Asia, after China. Low interest rates and moderate levels of inflation will boost trade and industry in the medium term, and the government is also placing increased emphasis on carrying out large infrastructure projects, which will not only improve communications in established areas, but also unlock the hidden potential of other locations. With several local and domestic investors looking to capitalise on a promising economic growth environment and improving infrastructure, real estate has witnessed an upward trend in demand and pricing. The recent upswing in the service sector from finance, tourism, and the IT/ITES industry in Colombo, has triggered a healthy demand for residential space in the Greater Colombo real estate market. The development of premium condominium projects is most prominent in the Central Business District; and sub-divided developments, row houses and villas in the peripheral suburbs have emerged as the preferred choice for middle-income buyers. However, with rising land and construction costs, it is important to be aware of the affordability of upcoming supply. Also, whether it is happening in the right locations and will it be adequate to meet the growing demand? Retailing in the country has largely been confined to established high streets, with domestic retailers catering to an urban population. Lately, Colombo has witnessed the development of some organised retail establishments in up-market locations. Given the current trend in organised

retail and brand presence, will there be significant scope for enhancing targeted retail capacity in upcoming residential locations, and will there be an opportunity to expand retail services for food and beverages, healthcare, personal care and tourism? The demand for commercial office space is driven by growth in the banking, IT/ITES and tourism sectors. While Banking, Financial Services and Insurance have an established presence with captive properties across Colombo, IT/ITES is emerging as an attractive sector. According to SLASSCOM, over 40,000 people are employed in the IT and BPO industry in Colombo and the workforce is growing at over 0% annually with low attrition rates of 10-15%. Colombo is comparatively cost competitive and has lower upward wage pressure than many established global sourcing destinations. With limited operational Grade A office space in the city, the demand is trickling down to inferior grade properties. Will this dearth of quality office space continue or will developers and investors perceive this as an opportunity to build more and attract global occupiers? What cost advantage does office real estate in Colombo provide for outsourcing? The Sri Lanka Tourism Development Authority figures show that tourism forms 0.6% of the countrys total GDP, and is one of the fastest growing sectors in the economy, growing by 9.8% in 010. With the Government setting the target for 2.5 million tourist arrivals by 2016, hotels and resorts are set to mushroom in tourist destinations. Are there enough hotels to meet the burgeoning demand from tourism? Will Sri Lanka remain a budget destination or transform itself into an exotic destination for affluent global vacationers? We shall attempt to address some of these issues and many more in the following sections of this whitepaper: Real Estate in Sri Lanka Prospects and Potential.

4 On Point Real Estate in Sri Lanka - Prospects and Potential

ECONOMY 94.2% Middle Income Country in 010 3.5 times during the last decade Top 9 7 million sq ft of office space required for
IT/ITES Sector by 2015 IMF upgraded Sri Lanka to

8% growth
in GDP (010-011)

 successive years of

Highest literacy rate in South Asia at

USD 4,000
by 2016

Per Capita Income targeted to cross

Workers remittances multiplied over

OFFICE
Ranked in the AT Kearney Global Services Location Index 2011

21st

Ranked in financial attractiveness, ahead of India, China, Central Europe and Eastern Europe

5th

Included among the in Asia Pacific Gartners 30 Leading Locations for Offshore Services (010-011)

IT/ITES sector achieved export revenues of

USD 392 million and had over 40,000 employees in 011 USD 1 billion and 100,000 employees by 015 RESIDENTIAL 8,129 condominium units have been supplied in
Colombo during 005-011 Rental yields of

Targeting to achieve export revenues of

R E TA I L
Total stock of operational malls in Colombo -

647,000 sq ft

1.05 million sq ft
of shopping mall supply

3-7%

34%theofpremium category (LKR 25-45 million) in the supply of condominium units in Colombo

HOTELS
Tourist arrivals expected to grow by

24% annually during 2011-2016

2.5 arrivals by 2016 million tourist

Target of

75-85 hotels or nearly 3.5-4.0 million built annuallyoftillhotel space sq ft 2016 needs to be

Sri Lanka named amongst the

Top Five Destinations in Kuonis 2012 annual poll of where UK customers want to spend their holidays. Sri Lanka also retained its status as Top Destination for Weddings

On Point Real Estate in Sri Lanka - Prospects and Potential 5

Zoning the City: The Growth Corridors

Colombo has traditionally been the hub of economic and political activities in Sri Lanka and is divided into 15 zones for administrative purposes (Figure 1). During the last few years, due to the increased service sector activities in the city, the citys real estate market has witnessed heightened activity and has drawn interest from both national and international investors. The city, including the suburban areas, has been classified into various micro-markets based on similarity of real estate development and characteristics. Figure 1: Zones in Colombo Zones
CBD

Localities
Colombo 01: Fort Area Colombo 02: Slave Island Colombo 11: Pettah Colombo 03: Kolupittiya Colombo 04: Bambalapitiya Colombo 05: Narahenpitiya Colombo 06: Wellawatte Colombo 07: Cinnamon Garden Colombo 08: Borella Colombo 09: Dematagoda Colombo 10: Maradana Colombo 12: Kochchikade Colombo 13: Kotahena Colombo 14: Maligawatte Colombo 15: Mutwal Hendala, Wattala, Peliyagoda, Kelaniya, Welisara, Ja-Ela, Katunayake Raja Giriya, Golf Links, Sri Jayawardenepura Kotte, Battarmulla, Talangama, Malambe, Ambatale, Dehiwala, Mt. Lavinia, Ratmalana, Moratuwa, Panadura, Piliyandala
PD - Northern

Extent
Fort Area and localities in 3 km radius

Markets

Characteristics and Land Availability

CBD of Colombo is the financial, business and transportation hub of Sri Lanka. Part of the CBD is upscale and modern, especially those parts close to the Galle Face beach where the Galadari, Intercontinental and Hilton Hotels, as well as the World Trade Centre are located. Other parts closer to the Pettah market cater to the mid-income segment and form the traditional CBD core of Colombo Preferred by HNIs, businessmen, senior executives of corporate houses; upper and upper middle-income earners, except for the Pettah area High-end premium residential projects in the price range of INR 20-30 million Capital values appreciated by more than 40% in the last three years Limited Land Availability SBD is primarily residential with strip retail activity along major transport corridors such as Galle Road and Duplication Road Colombo 07: Cinnamon Garden Up-scale residential pocket. Highest concentration of HNIs Colombo 09: Dematagoda Considered more a part of suburban than central Colombo. It has comparatively cheaper housing options Colombo 15: Mutwal Caters to port related activities warehouses, container yards, non-polluting industries, power supply establishments and other allied activities Colombo 04: Bambalapitiya and Colombo 06: Wellawatte Primarily residential areas, though the main roads are lined with established retail and commercial activity. Majestic City and Unity Plaza are the major shopping complexes in this area located along Galle Road Limited Land Availability Fast developing as a middle-income residential locality with several retail outlets (mini-majors) along the A3 Highway connecting the City to the Airport. Area around airport has seen small scale industrial development in addition to already established industrial areas of Welisara and Ja-Ela High Land Availability Sri Jayewardene Kotte, being the new administrative capital of Sri Lanka, has witnessed relocation of major administrative offices and residences which has further led to a spurt in real estate activity in the region The region is fast becoming a retail and residential (high and middle-income) destination Has the most diversified socio-economic mix in Colombo High Land Availability Dense residential area with retail development along Galle Road and hospitality development along sea shore Primarily middle-income residents High Land Availability

SBD area stretches to the Colombo City Municipal limits; a distance of  km from CBD limits towards North, East & South

SBD

Along A3 Highway towards airport; stretches to a distance of 0 km from SBD towards North Zone extends to Kaduwela, a distance of 10 km from the SBD Along Galle Road; stretches to a distance of 0 km from SBD towards South SBD PDSouthern PD- Eastern PD- Northern

PDSouthern

PDEastern

PDNorthern

GAMPAHA

Kolonnawa Fort

Slave Island Kollupitiya

COLOMBO CBD SBD

Narahenpita

Baseline

KOLONNAWA
Angoda Talengama

Kaduw

PD EASTERN

Bambalapitia

THIMBIRIGASYAYA

Cotta Road Manning Town

KADUWELA
Arangala

SRI JAYAWARDANAPURA KOTTE

Sri Jayawardanepura Wellawanta Nugegoda Kotte

DEHIWALA
Dehiwala

MAHARAGAMA
Maharagama Kottawa

PD - SouthernBoralesgamuwa
Mt Lavinia Colombo Municipal Area

RATHMALANA
Ratmalana Piliyandala Angulana

Source: Jones Lang LaSalle CBD - Central Business District, SBD - Suburban District, PD - Peripheral District

Kesbewa

Map not to scale

CBD

6 On Point Real Estate in Sri Lanka - Prospects and Potential

Offices in Colombo: Putting Function before Form

Housing the headquarters of several national and international banking and financial institutions, the capital city of Colombo is the most prominent commercial office destination in the country. In 2008, the Colombo Metropolitan Region (Colombo, Gampaha and Kalutara) accounted for over 48% of the countrys GDP. Demand for office space is primarily driven by growth in the banking, financial services, IT/ITES and tourism sectors. Due to a dearth of supply of quality space, strong demand in the past - years has trickled down to absorption of Grade B and C space. The city lacks multi-tenanted Grade A leasable office buildings, with most of the demand for prime space absorbed by eight major office buildings. The Fort area has traditionally been considered the Central Business District as it is home to the World Trade Centre, the Ceylinco high-rise and the Bank of Ceylon buildings. The capital has limited alternative office space, with the Access Towers and Hatton National Bank (HNB) Towers, both located in the Colombo 0 district, providing the only other high-end purpose-built space. Alternatively, the Wellawatte and Cinnamon Gardens (SBD) offer office space, which is refurbished residential space and used by a number of domestic firms, or mixed-use developments such as the Liberty Plaza, Unity Plaza and Majestic City shopping malls that have office space above the retail floors. Apart from the Grade A office space detailed above, the CBD and SBD micro-markets have stand-alone Grade B office buildings, especially along the arterial roads of the core city in the SBD micromarket. Galle Road, RA De Mel Mawatha and Union Place have the major share of this unorganised Grade B office space. The office buildings in these localities are typically low rise with the total built up areas ranging from 8,000-30,000 sq ft. Galle Road and Union Place are the major locations for stand-alone self-owned Grade A office buildings used primarily by the Banking, Financial Services and Insurance sector.

captive towers that are self-owned by banks, financial institutions, government bodies, manufacturing firms and conglomerates. The nearly 765,000 sq ft of office space under construction is scheduled for completion during 2012-2015. Over 6 million sq ft of office space has been planned but no ground has been broken yet. Platinum One at Bagatelle Road is expected to become operational in 2012, while AEC Towers at Khettarama Temple Road is expected to offer 60,000 sq ft of office space by 3Q12. Among the landmark office projects that are planned, Havelock City Commercial Towers and Suchir NEB are the most prominent. Orion City is expected to deliver 200,000 sq ft of additional office space, followed by 2.1 million sq ft more by 2015. Orion City is the only IT-centric development in Colombo city, with the others focused on non-IT commercial occupiers. Occupancy in the Grade A space segment is extremely high, with HNB Towers, Merchant Towers and Access Towers turning away potential customers (Figure ). The average occupancy in Grade A office buildings for the past year has been around 95% which is a dramatic increase from the occupancy levels of 2006-2008 which were around 60%. The IT Park at Orion City is over 90% occupied.

Rental Affordability
Apart from the iconic World Trade Centre (WTC), which offers office space at LKR 260 per sq ft per month, the majority of office space in the CBD and SBD is available in a rental range of LKR 100 - 150 per sq ft per month . Office space in WTC was being leased at LKR 15 - 150 per sq ft per month during 009, which indicates the rapid appreciation in rents witnessed by Colombo CBD during the last three years. Office space at Galle Road and Union Place is available for lease in a rental range of LKR 75 - 140 per sq ft per month. Orion City, which is the IT/ITES campus of Colombo, offers large IT space areas at LKR 110 per sq ft per month. In terms of real estate affordability, Colombo real estate costs are comparable to other outsourcing destinations (Figure 2) and with office space within the city, travel costs are lower than in other outsourcing destinations.

Supply of Office Space in Colombo

In total, the central and secondary business districts of Colombo (CBD and SBD) have nearly 2.5 million sq ft of Grade A multitenanted leasable office space. The total stock, including the stand-alone self-owned office space and Grade B office space, is estimated to be around 5 million sq ft. The majority of the stock is contributed by Galle Road (Galle Face - Bambalapitiya - Kollupitiya - Wellawatte) and the Union Place micro-market. There are several

From the perspective of Grade A speculative commercial development for lease, Colombo offers limited options for prospective investors with just eight operational office buildings.  Rents quoted are inclusive of maintenance charges.
1

On Point Real Estate in Sri Lanka - Prospects and Potential 7

Figure 2: Availability and Affordability of Office Space in Outsourcing Locations

Beijing

Average Rents (USD p sq ft pm)

Ho Chi Minh City

4

Hanoi Chengdu Kuala Lumpur Colombo Manila

Guangzhou

Gurgaon Chennai
0 0 40 50

Bangalore

0 0 10 60

Office Stock (million sq ft)

Source: Jones Lang LaSalle, 4Q11 | Note: The size of the bubble indicates the office stock (Net Lettable Area) in these cities. 1 USD = 130.24 LKR (As of March 23, 2012)

Figure 3: Major Office Projects in Colombo Subject Property

World Trade Centre Ceylinco House HNB Towers Access Tower Aitken Spence Orion City Phase 1 Summit Orion City Phase 

Location
Bank of Ceylon Mawatha, Fort Janadhipathi Mawatha, Fort T.B. Jaya Mawatha Dr. Colvin R. De Silva Mawatha, Union Place 05, Vauxhall Street, Colombo 0 Dr. Danister De Silva Mawatha, Colombo 09 Galle Road Dr. Danister De Silva Mawatha, Colombo 09

Developer
Overseas Realty Ceylon Ceylinco Limited Sithma Development Access Realties Aitken Spence St. Anthonys Industries Group CSEM Lanka St. Anthonys Industries Group

Leasable Area (sq ft)

750,000 175,000 50,000 180,000 180,000 700,000 180,000 00,000

Construction Completion Availability Status Date

Operational Operational Operational Operational Operational Operational Under Construction Under Construction 1997 001* 00 2004 2004 010 2014 2014 1% 6% 0% 0% 5% 10% 100% 100%

Rents3
260 15 150 10 10 110 140 110

Source: Jones Lang LaSalle, 4Q11. Notes: 1 USD = 109.76 LKR (Average during 2011) *Refurbished in 2001. Originally completed in 1960. Rents are LKR per sq ft per month, and inclusive of maintenance charges.


Rents are LKR per sq ft per month, and inclusive of maintenance charges

8 On Point Real Estate in Sri Lanka - Prospects and Potential

Demand Drivers for Office Space in Colombo

According to the Asian Development Bank, Colombo ranked first in the City Competitiveness Rankings among the top cities of Sri Lanka, India and Bangladesh, and above the Indian cities of Mumbai, Bangalore and New Delhi4 (Figure 4). For Colombo, the most favourable sectors in the competitiveness rankings of sector industries were Textiles and Apparel; Finance, Insurance and Real Estate; Information and Communication Technology and Hotels and Restaurants (Figure 5). The future demand for commercial office space in Colombo will be closely correlated with the industries that have the prospects of maximum growth. While growth in the textiles and apparel industry would result in demand for retail and industrial space; growth in finance, insurance and information and communication technology sectors would lead directly to demand generation for quality office space. The growth of the hotels and restaurants sector would result in the development of hospitality real estate. Transport, storage and communications, rubber and plastic products, furniture, the wholesale and retail trade and others would lead to demand for retail as well as industrial space. In this section, we will discuss the prospects for growth in the Finance, Insurance, Information and Communication Technology sectors, and its impact on the demand for office space in Colombo. Figure 5: Competitiveness Scores by Industry Sector, CMR
0.00 Textiles and Apparel Finance, Insurance and Real Estate Information and Communication Technology Hotels and Restaurants Transport, Storage and Communication Rubber and Plastic Products Furniture Wholesale and Retail Trade Electrical Machinery and Apparatus Construction Fabricated Metal Products Food and Beverage Paper and Paper Products Publishing and Printing Chemicals and Chemical Products Basic Metals Fabrication Source: Competitive Cities in the 21st Century, Asian Development Bank (2011) 0.10

Figure 4: Top 15 Competitive Cities in South Asia City

Colombo Mumbai Bangalore New Delhi Chennai Dhaka Hyderabad Kolkata Gampaha Ahmedabad Pune Surat Kalutara Chittagong Kanpur

Country
Sri Lanka India India India India Bangladesh India India Sri Lanka India India India Sri Lanka Bangladesh India

Rank
1   4 5 6 7 8 9 10 11 1 1 14 15

Level of Competitiveness
International International International International International International International National National National National National National National National

Source: City Competitiveness Ranking (39 South Asian Cities), Competitive Cities in the 21st Century, Asian Development Bank (2011) City Competitiveness Ranking (39 South Asian Cities), Competitive Cities in the 21st Century, Asian Development Bank (2011)
4

0.0

0.0

0.40

0.50

0.60

0.70 0.70 0.68 0.66 0.66 0.63 0.62

0.80

0.60 0.59 0.57 0.5 0.50 0.50 0.49 0.49 0.46 0.44

On Point Real Estate in Sri Lanka - Prospects and Potential 9

Banking, Financial Services and Insurance

Contributing about 8-9%5 to the countrys GDP, banking and financial services firms have an established presence in the island nation. As of 2Q11, there were 22 banks (including 11 foreign) operating in the Colombo Metropolitan Region (CMR), with over 632 branches and 897 banking outlets6. A majority of office space occupied by this sector is in self-owned or single tenanted office properties across all major locations in the city. While the Bank of Ceylon and the Peoples Bank are the two stateowned banks having a large network, several private banking firms such as Hatton National Bank, Seylan Bank, DFCC, Commercial

Bank of Ceylon and Sampath Bank also have an established presence in the banking and financial services sector. Among the foreign banks that are operational in Sri Lanka are HSBC, Standard Chartered, Citibank, Deutsche Bank, State Bank of India, ICICI Bank, Indian Bank, Indian Overseas Bank, MCB Bank, Public Bank Berhad and Habib Bank (Figure 7). The number of banking branches in Sri Lanka has been increasing at an average rate of 7% per annum since 007. Since it has outpaced the annual population growth of the country, which is 0.9%7, the population per bank branch is decreasing and branch density (banking branches per 100,000 persons) is increasing.

If we linearly extrapolate these trends, nearly 1,804 more banking branches would open by 2015, increasing the branch density from 23.5 in 2010 to 30.5 by 2015 (Figure 6). Assuming a conservative average area of bank branches to be 2,500 sq ft, these would directly lead to demand for at least 4.5 million sq ft of office space across cities in Sri Lanka during 2011-15.

Figure 6: Projected Growth of Banking Branches

7,000 6,000 Bank Branches / Population per Branch 5,000 4,000 ,000 ,000 1,000 0 Total Bank Branches Population per Bank Branch Banking Branches per 100,000 Persons

5 0 5 0 15 10 5 0 Banking Branches per 100,000 persons

005

2006

007

008 009a 010b 011f 01f 01f 2014f 015f

,716 3,749 4,007 4,19 4,533 4,858 5,180 5,504 5,872 6,256 6,66 5,9 5,304 4,994 4,681 4,511 4,51 4,029 ,8 3,630 ,444 3,269 18.9 18.9 0.0 1.4 2. .5 4.8 6.1 7.5 8.9 0.5

Source: 005-010b: Sri Lanka Socio-Economic Data 011, Central Bank of Sri Lanka 011f-015f: Forecast projected by Jones Lang LaSalle based on  year moving average model Notes: 1. Total Banking Branches includes main branches and other banking offices of Commercial Domestic and Foreign banks, Regional Rural and Development Banks, National Savings Bank and Co-Operative Rural Banks. . 009a: Revised and 010b: Provisional

Banking, Financial Services and Real Estate sub-sector contributed 8.6-9.3% to Sri Lankas GDP during 1Q10-4Q10 (Bloomberg) Colombo Metropolitan Region includes Colombo, Gampaha and Kalutara. Banking outlets include banking units such as Extension Offices, Pawning Centres, Student Savings Units and Pay Offices. Data sourced from the Central Bank of Sri Lanka. 7 Population growth recorded in 2010, as per World Bank figures.
5 6

10 On Point Real Estate in Sri Lanka - Prospects and Potential

Figure 7: Major Banking Institutions in Colombo (2010) Licensed Commercial Banks

Bank of Ceylon Peoples Bank HSBC, Standard Chartered, Citibank, Deutsche Bank, State Bank of India, ICICI Bank, Indian Bank, Indian Overseas Bank, MCB Bank, Public Bank Berhad and Habib Bank Commercial Bank of Ceylon Hatton National Bank DFCC Vardhana Bank Sampath Bank Seylan Bank Union Bank of Colombo Nations Trust Bank Pan Asia Banking Corporation PLC NDB Bank National Savings Bank Regional Development Banks

Type
State Owned State Owned

Number of Branches
In Western Provinces 142 0 In Sri Lanka 517 679

Foreign

147

216

Private Private Private Private Private Private Private Private Private Savings Bank Savings Bank

99 89 8 71 59 10 34 26 1 78 0

18 190 18 148 114 18 43 45 49 19 243

Source: Economic and Social Statistics of Sri Lanka 011, Central Bank of Sri Lanka

Information Technology and Information Technology Enabled Services

Sri Lanka has witnessed a steady upward trend in the IT/ITES sector during the past decade, with several global firms such as WNS, HSBC, Aviva, Microsoft, Motorola, Industrial & Financial Systems (IFS ), Amba Research, RR Donnelley, Quattro, Virtusa, eCollege, Valista and Innodata Isogen already having off-shore centres in the country. The Government is promoting the growth of the sector, with an aim to make it the top revenue earner for the country within the next ten years. In 2011, the IT/ITES sector achieved export revenues of USD 392 million8 and had over 40,000 employees. IT exports alone have more than doubled from USD 121 million in 2006 to USD 294 million in 2010.

Bank of Ceylon Headquarters

With an average floor space per employee of 127 sq ft for IT and 103 sq ft for ITES9, Sri Lanka had an estimated 4.7 million sq ft10 of operational office space occupied by IT-ITES in 2011. The medium term goal of the industry is to achieve export revenues of USD 1 billion and employment of 100,000 people by 2015. This would translate into a demand for nearly seven million sq ft of additional office space for the IT/ITES sector alone

SLASSCOM (2011) ICT Export Value 2010 IT/ITES Export Sector by Sri Lanka Export Development Board (2010) 10 27,000 employed in the IT and 13,000 employed in the ITES industry (SLASSCOM, 2011), would require 4.7 million sq ft of office space. This includes captive offices held for IT/ITES outsourcing.
8 9

On Point Real Estate in Sri Lanka - Prospects and Potential 11

Key factors that will facilitate the growth of IT/ITES industry in Sri Lanka in the coming years are:

A skilled workforce with low attrition rates Sri Lanka spends

nearly 5.4% of its GDP on education and boasts a 94.2 per cent literacy rate11, the highest in South Asia. English is the primary language of higher education and commerce. The country has  universities offering international degrees and agreements with other universities including Monash, Curtin, Staffordshire, Manchester and Metropolitan, producing 30,000 graduates annually. Sri Lanka produces 40,000 CIMA or ACCA qualified accountants and nearly 70 per cent of this pool is prepared for outsourcing. As such, Colombo has the largest pool of UK certified accountants outside the UK. This provides a talent pool prepared for outsourcing jobs at reasonable wages. The country enjoys a low attrition rate compared to other offshore destinations, at 10-15%1.

Figure 8: Mean Monthly Salary Compensation in the IT Sector (in LKR pm) Sri Lanka*
Application Support Associate Application Support Engineer Application Support Engineer Associate Business Analyst Business Analyst Associate Quality Assurance Engineer Software Quality Assurance Engineer Associate Software Engineer Software Engineer 9,11 5,18 41,559 94,273 44,063 8,9 78, 1,7,08 -% -36% -47% -1%

Financial attractiveness due to low compensation costs

According to the AT Kearney Global Services Location Index 011, Sri Lanka ranks in sixth position in terms of overall financial attractiveness among off-shoring destinations. Of the top 50 destinations, Sri Lanka is the most attractive in terms of compensation costs, salaries being 30-40% lower than in neighbouring India and also having a lower upward wage pressure. The Sri Lanka IT and ITES/BPO Sector Salary and Benefits Study 2011 carried out by SLASSCOM and PwC, entry level IT sector positions in the field of Application Support start at LKR 29,311 per month while those entering the Business Analysis/ Business Consulting, Software Quality Assurance and Software Engineering areas earn salaries of LKR 41,55950,345 per month (Figure 8).

India^

Difference %

Business Analysis / Consulting Business

Software Quality Assurance 46,990 70,406 68,542 1,07,708 -1% -5%

Policy incentives for the Knowledge Services1 sector To

motivate private investments, both domestic and foreign, in the IT/ITES sector, the Government of Sri Lanka has offered several tax incentives, including a full tax holiday of 4-12 years for the knowledge services sector, depending on the minimum size of the investment (categorised into small, medium or large scale enterprises)14. The tax holidays begin for investments as low as LKR 25 million, clearly indicating the intent of the authorities to support small and medium scale enterprises as well. Apart from the tax holiday, customs duty will be exempted on the import of project related capital goods and raw materials for export oriented projects. To reduce the initial cost incurred on account of import of project related plant, machinery and equipment, the applicable VAT, Customs Duty, and PAL will be deferred during the project implementation period.

Software Engineering 50,345 80,586 78, 1,17,500 -36% -1%

Source: *Sri Lanka IT and ITES/BPO Sector Salary and Benefits Study 2011, Price Waterhouse Coopers and SLASSCOM ^Jones Lang LaSalle, Estimates for a Junior Mid-Level employee in India Notes: Some difference between Sri Lankan and Indian salaries can also be attributed to the sharp decline in the Sri Lankan Rupee. 1 USD = 109.76 LKR (Average during 2011) 1 USD = 46.67 INR (Average during 2011) 1 INR = 2.35 LKR (Average during 2011)

United Nations Development Programme (UNDP) Report, 2011 SLASSCOM (2011) 1 According to the Board of Investment Sri Lanka, the Knowledge Services sector includes IT Software Development, KPO / BPO Industry, IT and IT Enabled Services and IT Training Sectors. 14 Board of Investment, Sri Lanka (2012)
11 1

Courtesy: Rakindo Senior Living | Coimbatore

1 On Point Real Estate in Sri Lanka - Prospects and Potential

Apart from tax incentives, the Board of Investment also offers advice in site selection and purchase of land, identification of local partners, and facilitation of residence or work visas for investors and expatriate staff.

With peak demand of 1955 MW, Sri Lanka has an installed capacity of 2806 MW, 43% of which is provided by hydroelectric plants15. There is no load shedding which ensures a reliable transmission of power.

Adequate telecom and power infrastructure Sri Lanka has

eight telecom operators and is connected with three international submarine cables providing ample redundancies. It is connected to the South East Asia-Middle-East-West Europe 4 (SEA-MEWE IV) project - the submarine cable system linking South East Asia to Europe via the Indian Sub-Continent and the Middle East. These fibre optic cables provide a bandwidth capacity of 1.8 tbps, with a 5 year guaranteed lifespan for the technology, offering Sri Lanka an immense bandwidth advantage. Sri Lanka was among the first South Asian countries to establish a 3G and Next Generation telecom network. Figure 9: Advantage Sri Lanka: IT/ITES Outsourcing

Strong protection of Intellectual Property Rights The country

is a signatory to international treaties on intellectual property rights such as the Berne Convention and WTO/TRIPS and has adopted a comprehensive IP regime. Sri Lanka has also enacted an Electronics Transactions Act, Computer Crimes Act and is a signatory to the latest UN e-contracting convention. A Data Protection Code of Practice is also under preparation and the country has a strong enforcement unit the National Intellectual Property Office, which ensures that all regulations are fully adhered to.

94.2% literacy rate and English as the primary language of higher education and commerce Produces 0,000 graduates annually Low attrition rates of 10-15%

HUMAN RESOURCE

Adequate power with 100% up-time Well established telecom and data network with ample redundancies

INFRASTRUCTURE

COST EFFECTIVENESS
Salaries lower than other outsourcing destinations, including India Low real estate and operational costs

ADVANTAGE SRI LANKA INFORMATION TECHNOLOGY

IT/ITES sector achieved export revenues of USD 392 million and employed over 40,000 employees IT exports have more than doubled from USD 121 mn in 2006 to USD 294 mn in 2010

GROWING INDUSTRY

Full tax holiday of 4 -12 years depending on minimum investment size Custom duty exempted on the import of project related capital goods and raw materials

POLICY SUPPORT

Signatory to international treaties such as the Berne Convention and WTO/TRIPS Enacted an Electronics Transactions Act, Computer Crimes Act and is a signatory to the latest UN e-contracting convention

IP PROTECTION

Source: Jones Lang LaSalle, 01

15

Ministry of Power and Energy, Sri Lanka

World Trade Centre

On Point Real Estate in Sri Lanka - Prospects and Potential 1

The Retail Experience Designing Space for the Consumer

Retail establishments in Colombo are largely located along the high streets, either in traditional retail areas like Pettah, Dematagoda (Northern Colombo) or in upmarket established retail areas like Kolupittiya, Bambalapittiya and Wellawatte (Southern Colombo) (Figure 10). Given Sri Lankas prominence in textiles, tea, spices, gems and jewellery, the traditional wholesale areas in Northern Colombo are busy throughout the year with continuous patronage from domestic as well as export oriented business units. Up-market and branded shopping destinations are found towards the south of the city centre along the Galle and Duplication Roads. Majestic City, Liberty Plaza, Crescat Malls and ODEL are popular with the locals as well as tourists. Figure 10: Retail Micro-Markets Traditional, Established and Upcoming Retail Areas Markets Characteristics
High Income catchment with highest propensity to spend. Especially attractive to tourists, though the catchment size is limited due to limited residential localities Primarily dominated by high street activity on Pettah, Galle and Duplication Road; five operational malls (459,000 sq ft) Primarily middle-income catchment with a few pockets of high-income catchment areas (Cinnamon Gardens) Major retail activity in two High Streets - Galle Road and Sri Jayawardene Mawatha No retail mall operational at present; with Havelock City mall planned PD- Northern Major retail activity found on A3 Highway (Airport Road) in form of several mini-major retail outlets Primarily catering to middle-income local residents Realty Plaza is the only mall operational at Ja-Ela; John Keells Mall planned at Ja-Ela Retail activity restricted to Rajagiriya and Sri Jayewardenepura Kotte in form of High Street and standalone outlets Fastest growing micro-market in Colombo for residential and retail asset classes No malls operational at present; Fairway City Mall planned The most developed suburb of Colombo with established high street retail along Galle Road The consumer profile ranges from low-income to middleincome One Mall - K Zone operational primarily servicing the residents of the micro-market only SBD

14

PD - North

04 05

01

03

02

CBD SBD
10 12 13 08 09 15

PD - East

06 07

CBD

11

PD - South

PD- Eastern

LEGEND Key Retail Districts Established Retail Area

04 05 06 07 08 09 Fort Kolupittiya Bambalapitiya Wellawatte Dehiwala Mt. Lavinia

Traditional Retail Area

01 0 0 10 11 1 1 14 15 Pettah Dematagoda Kotahena Rajagiriya Moratuwa Nawala Nugegoda Ja-Ela Battarmulla

Upcoming Retail Area

Source: Jones Lang LaSalle

PD- Southern

14 On Point Real Estate in Sri Lanka - Prospects and Potential

Shopping Malls
Colombo has eight operational shopping malls with leasable areas varying from 0,000-50,000 sq ft (Figure 11). The concept of anchors is still in its nascent stage, and in most cases it is a supermarket or a mini-major occupying about 3-20% of the mall area. At end-2011, the total stock of these operational malls stood at 647,000 sq ft with an average vacancy rate of 3-8%. In addition to the existing eight malls, three more are in their planning stage and will add another 1.05 million sq ft of retail space to the Colombo retail stock by 015. Figure 11: Shopping Malls in Colombo Shopping Mall
Liberty Plaza Unity Plaza Majestic City Crescat Boulevard Realty Plaza Dutch Hospital Courtyard

Location
Duplication Road, Kolupittiya Galle Road, Bambalapitiya Galle Road, Bambalapittiya Cinammon Grand, Galle Road ColomboNegombo Road, Ja-Ela Bank of Ceylon Mawatha, Fort

Leasable Area (sq ft)

110,000 36,000 5,000 5,000 75,000 NA

Developer
Colombo Land ON ALLY Holdings CT Properties John Keells Ceylinco International Realty Group UDA

Major Tenants
Keells Super, Abans, Sony, Premasiri, Labelswine, Bata, Perfumerie, Lakehouse Bookshop, DSI City Opticals, Network Communication, PC Electronics, Leader, Photo Micro ODEL, Hameedias, Triumph, DSI, KFC, Food City, Majestic Cinemas, Wonderworld Hameedias, Triumph, Levis, Reebok, Adidas, E-Mart, Keels Super, Perfumerie ODEL, Cinemax Cinemas LUV SL, Colombo Jewellery, SPA Ceylon, Crab Ministry, Heladiv Tea Club, WIP Bar, Barefoot

Occupancy
89% 100% 9% 100% 88% 100%

(LKR per sq ft per month) 50 175 450 00 NA NA

Rents

Source: Jones Lang LaSalle

K-Zone

On Point Real Estate in Sri Lanka - Prospects and Potential 15

High Street Retailing

Prime high street activity in Colombo is largely restricted to Galle Road, Duplication Road and Sri Jayewardene Mawatha along with mostly un-organised wholesale markets in North Colombo like Pettah (Figure 1). Figure 12: High Streets in Colombo Name and Location
Galle Road (Galle Face - Bambalapitiya - Kolupittiya - Wellawatte) Galle Road (Wellawatte - Dehiwala - Ratmalana - Moratuwa) Duplication Road Sri Jayewardene Mawatha Pettah
Source: Jones Lang LaSalle

Character
Prime High Street of Colombo with a mix of commercial and hospitality activity Caters to local market with highest density of organised retail in Colombo

Consumer Profile
High and middleincome group, tourists Middle and lowIncome group

Major Retailers
McDonalds, KFC, Barefoot, Shirt Works, ODEL, Abans Glitz, No Limit, DSI, Arpico, Food City, K Zone Fashion Bug, Liberty Plaza, Mercedes, Softlogic, Singer McDonalds, Coffee Bean, Pizza Hut, Barista, Arpico, Keells Super, Food City Food City, Arpico, Keells Super

High and middlePrime High Street of Colombo with a mix of Income group, commercial, entertainment and institutional space tourists Upcoming retail area (mini-majors) Traditional retail area of Colombo High and middleincome group, tourists Middle and lowincome group

Figure 13: Supermarkets and Hypermarkets in Colombo Retailer Name

Cargills Food City Keells Super City Co Op* Laughs Premasiri Arpico

Format Types
Food City, Food City Express, Food Big City, Cargills Warehouse Keells Super, Elephant House, Beema Best Buy City Co Op Laughs Sun Up Departmental Store Premasiri Supermarket, Premasiri Mini Market Arpico Super Center, Arpico Super Store

Source: Jones Lang LaSalle Notes: *Formerly known as Sathosa

Majestic City

Figure 14: Mini-Majors in Colombo Retailer Name

ODEL Abans Abstract Abans Elite Fashion Bug Hameedias Barefoot No Limit Glitz Paradise Road Laksala
Source: Jones Lang LaSalle

Category
Lifestyle Lifestyle/Electronics Electronics Lifestyle Lifestyle Lifestyle Lifestyle Lifestyle Lifestyle Lifestyle

16 On Point Real Estate in Sri Lanka - Prospects and Potential

The Residential Sector: Housing the Citizens

The recent upswings in the service sector including from the finance, tourism and the IT/ITES industry in Colombo have triggered a healthy demand for residential space in the Greater Colombo area. The development of premium condominium projects is most prominent in the CBD, whereas sub-divided developments, row houses and villas in the peripheral suburbs have emerged as preferred assets for investment amongst the middle-income group. Easy availability of housing loans, higher prevailing disposable incomes and investments by Non-resident Sri Lankans have all contributed to the demand for residential properties in the city.

the upcoming suburbs of Rajagiriya and Sri Jayawardenepura Kotte. These include such as Parliament 110, Fairway Sky Garden and Centrium amongst others. Units are available from LKR 10-25 million and the segment has a share of 26% in the supply of condominiums (Figure 15). Premium Segment: This is the most popular segment within the city limits of Colombo and is primarily in close vicinity to the CBD area, with pricing in the range of LKR 25-45 million per unit (Figure 15). Specifications are superior with large unit sizes ranging between 1,250-1,800 sq ft. Most projects in this category have been completed, apart from On Three20 at Union Place and Havelock City. Luxury Segment: The luxury segment consists primarily of already established projects with resale values of more than LKR 45 million per unit (Figure 15). The Emperor at Galle Road and a few units from premium segment projects qualify for this categorisation based primarily on their larger floor area (above 1,800 sq ft). Ultra Luxury Segment: Colombo doesnt have any projects with average unit value above LKR 60 million, although every project in the premium and luxury segments has a few units of the ultra-luxury segment with considerably higher specifications, furnishings and larger floor area. In most projects, these units are either penthouses or higher floor duplex units with private terraces etc.

Colombo Residential Market - Segments

Lower Mid-Level Segment: The lower mid-level segment has the largest supply as well as absorption share in the apartment market. Projects are predominantly concentrated in the peripheral and old city areas. Many of them fall into the unorganised real estate sector with an average of 5 - 0 units each. The average unit cost is approximately LKR 10 million with minimum specifications and unit sizes and a clear focus on affordable pricing. Mid-Level Segment: The mid-level segment has specifications and product mix similar to premium segment apartments, but is located in the suburbs. Most of the projects in this category are located in Figure 15: Major Residential Projects in Colombo Project Name
The Emperor Iceland Residencies Crescat Residences Empire Tower Havelock City On Three0 The Monarch Trillium Residences The Fairway The Fairmount 110 Parliament Fairway Sky Garden

Location
Galle Road, Colombo 0 Galle Road, Colombo  Galle Road, Colombo 0 Colombo 0

Developer
Asian Hotels ICC Housing Asian Hotels CT Properties

Current Current Current Sales (LKR per Unit) (LKR per sq ft) (USD per sq ft) (Launch Year)
48,000,000 ,100 26,400 26,200 ,900 0,800 ,700 32,400 17,800 15,800 14,900 15,600 16,300 16,400 50 00 00 180 165 170 50 150 10 10 10 140 140 100% (008) 100% (007) 100% (2006) 100% (007) 55% (010) 75% (011) 100% (007) 90% (008) 100% (007) 100% (007) 100% (008) 15% (011) 1% (011)

Luxury Segment Premium Segment ,000,000 34,000,000 43,000,000 26,000,000 5,000,000 34,000,000 Mid-Level Segment Borella, Colombo 08 Rajagiriya Kotuwegoda, Rajagiriya 110, Parliament Road Rajagiriya Trillium Residencies The 000 Plaza Fairway Residencies Fairway Residencies Atlantis (ANPG Group) Fairway Residencies 24,000,000 19,000,000 26,000,000 5,000,000 ,000,000 7,000,000 000 Plaza Residences Thalapathpitiya

Havelock Road, Colombo Mireka Capital Land Union Place, Colombo 02 John Keells Galle Road, Colombo 0 Asian Hotels

Source: Jones Lang LaSalle, 4Q11 Note: 1 USD = LKR 109.76 (Average during 2011)

On Point Real Estate in Sri Lanka - Prospects and Potential 17

Figure 16: Average Capital Values and Absorption Levels by Segments (2011)
60,000 50,000 40,000 Value 0,000 0,000 10,000 0 Luxury Segment Avg Unit Value ('000 LKR / Unit) Avg Capital Value (LKR / sq ft) Average Absorption (%) Source: Jones Lang LaSalle, 4Q11 48,000 ,100 96% Premium Segment 28,663 ,9 75% Mid-Level Segment 19,955 14,008 57% Lower MidLevel Segment 10,000 10,500 77% 10% 100% 80% 60% 40% 0% 0% Average Abosprption

2000 Plaza Residencies

Supply and Absorption of Residential Units

The average yearly supply of nearly 1,00 units, which gradually declined during the 007-011 period, is expected to resume an upward trend in 01 (Figure 17). Average cumulative absorption has decreased from 2007 levels to stabilise at 65%. Due to continuous supply of residential units, the absorption rate has declined from 33.7% in 2008 to 14.5% in 2011. The high absorption rates in 2006 and 2007 can be attributed to a low base of available stock, since the information has been tracked from 005. The absorption rate is expected to improve to 1.% in 01, with a forecasted increase in yearly absorption from 500 units in 011 to 900 units in 01 (Figure 17).
Supply and Absorption

1800 1600 1400 100 1000 800 600 400 00 0 005 2006 007 008 009 010 011 01F .7% 5.5% 7.5% 14.5% 62.6% 59.7%

7% 64% 56% 48% 40% % 1.% 24% 16% 8% 0% Absorption Rate

Yearly Supply (Units)

Yearly Absorption (Units)

Absorption Rate

Figure 17: Supply & Absorption Trends in Colombo Condominium Market Year
Yearly Supply (Units) Cumulative Supply (Units) Yearly Absorption (Units) Cumulative Absorption (Units) Cumulative Absorption (%) Unsold Stock Available Stock Absorption Rate

2005
184 184 85 85 46% 99

2006
1,498 1,682 1000 1,085 65% 597 1,597

2007
1,547 ,8 180 2,365 7% 864 2,144

2008
1,1 4,351 670 ,05 70% 1,17 1,987

2009
1,433 5,785 700 ,75 65% ,050 ,750

2010
1,402 7,187 950 4,685 65% ,50 3,452

2011
942 8,19 500 5,185 64% 2,944 3,444

2012F
1,00 9,429 900 6,085 65% 3,344 4,244 1.%
Source: Jones Lang LaSalle, Condominium Management Authority Colombo (2012) Note: Available Stock is the sum of Unsold Stock at the end of previous year and Yearly Supply in the current year. Absorption Rate for a particular year is the ratio of Yearly Absorption to Available Stock, implying the rate at which the unsold inventory is selling.

62.6% 59.7% .7% 5.5% 7.5% 14.5%

18 On Point Real Estate in Sri Lanka - Prospects and Potential

The supply share categorisation (20052011) reveals that the highest supply was in the lower mid-level segment (units below LKR 10 million) at 35%, followed by the premium segment (LKR 2545 million per unit) at 34%. The supply share categorisation for 2012-2015 based on historical absorption trends is envisaged to be the highest in the lower mid-level segment at 42% followed by the mid-level segment (LKR 1025 million per unit) at 28%. Colombo is witnessing a strong demand in the premium housing segment, driven by High Networth individuals (HNIs) and Non-resident Sri Lankans. Colombo city has seen a supply of more than 1,500 high-end condominiums in a price range of USD 180220 per sq ft, of which more than 70% has been sold. The demand for premium segment housing is expected to be sustained over the medium term. The projected shortage of housing units has encouraged developers to start developing or expanding their residential project portfolios in Colombo. Political and economic stability, coupled with an increased thrust towards the establishment of a service-based economy, are envisaged as the drivers of future demand.

Victoria Towers

On Point Real Estate in Sri Lanka - Prospects and Potential 19

Investing in Residential Properties in Colombo

Sri Lanka has witnessed tremendous growth in workers remittances, which multiplied over .5 times during the last decade from USD 1.17 billion in 2001 to USD 4.12 billion in 2010 (Figure 18). Residential real estate offers an ideal investment option. Over 70% of the 4,100 condominiums sold during 20072011 in Colombo were for the purpose of investment. This figure could be as high as 85% in some projects under the premium and luxury apartment segments. The investment brigade spearheaded by NonResidents Sri Lankans, which is estimated to be as high as one million in number, has a huge impact on the market. Even projects in the mid-income category, which are primarily marketed as an opportunity for people to move inside the city limits, have attracted more investors than end-users. The share of non-Sri Lankan investors is negligible as of now, but the interest among global investors is increasing. Rental Yields for Investors Typically, residential yields in Colombo range from -7%.

Established micro-markets offer nearly 4% yield, which may go up to 7% in premium locations. Apartments are rented to expatriates and corporate houses on short-term leases of one to three years as well as long-term leases of five years depending upon the profile of tenants. Completed projects such as The Emperor, Empire Residencies, Iceland Residencies, and Crescat Residencies quote rents in the range of LKR 250,000-350,000 per month for a threeBHK apartment. Restrictions on Foreign Investors Foreign investors are liable to pay a tax of 100% of the value of the property for buying apartments below the fourth floor (including landed properties) in Sri Lanka. While the restriction is not applicable on apartments above the fourth floor, certain property developers, with the approval of the Board of Investment of Sri Lanka (BOI), have obtained concessions for foreign investors to invest in apartments below the fourth level (including landed properties) without paying additional tax. A company incorporated in Sri Lanka with less than 5% foreign participation in equity is also exempt from the above.

Figure 18: Workers Remittances to Sri Lanka

5,000 4,500 4,000 Workers' Remittances (in USD million) ,500 ,000 ,500 ,000 1,500 1,87 1,414 1,000 500 001 00 00 2004 005 2006 007 008 009 1,165 1,564 15.8% ,0 16.6% 14.1% 22.6%

23.6%

5%

0% 4,116 15% ,918 ,50 10% 5% 0% 010a

10.5% 9.9%

10.6% 1,918

1.7% 2,161

Workers' Remittances Source: Central Bank of Sri Lanka Notes: 2010a Provisional figures

Annual Change

0 On Point Real Estate in Sri Lanka - Prospects and Potential

Assessing Housing Affordability The Three Dimensions

There are three dimensions to affordability in housing the price of the house, the income level of the buyer and the mortgage rate. Sri Lankas per capita income in 2010 was nearly USD 2,400 or LKR 271,259 and is forecast to cross the USD 4,000 level by 2016 (Figure 20). Although income levels are rising, home loan interest rates in Sri Lanka are very high at 15-17%, which effects affordability. Hence, affordability is assessed at only -.5 times the annual household income. From the Household Income and Expenditure Survey 2009-10, released by the Department of Census and Statistics, Colombo residents had a mean household income of LKR 51,070 per month (or LKR 612,840 per annum) in 2009-10. Assuming a growth rate equal to the Per Capita Income growth rate at the national level, the current mean household income for Colombo can be estimated as LKR 800,000900,000 per annum. Hence, an average Colombo citizen could afford a housing unit costing LKR 2.83.2 million. To afford a housing unit costing LKR 10 million or more, the annual household income should be above LKR 2.86 million. As a result, a major share of the buyers of Colombo condominiums are either Non-Resident Sri Lankans investing in Colombo or expatriates working in Colombo. There is another dimension to the demand and supply gap due to mismatch of affordability. According to the Ministry of Construction, Figure 19: Average Weighted Lending Rate
15.17

Engineering Services, Housing and Common Amenities (MCEHC), nearly 54% of the population of Colombo lives in huts or slums. Sri Lankas high-rise low income housing programme - Relocation of Underserved Settlements - which began in 2001 with the construction of the Sahaspura project, has already completed the construction of nearly 1,000 units in the last decade. The government has announced an ambitious plan to construct 5,000 houses during 2012-2014 for the re-housing of slum dwellers. Private players, both domestic and foreign, can participate in the low-income relocation housing programs. Figure 20: Growth in Per Capita Income (At Current Market Prices)

4,500 4,018 4,000 Per Capita Income (in USD) ,500 ,000 ,99 2,600 2,736 ,500 ,000 1,421 1,617 1,500 1,241 1,000 500 CAGR 14% (005-010) 2,014 ,057 CAGR 11% (010-015) ,119 3,556

005 2006 007 008 009a010b011e01F01F2014F015F

Source: Department of Census and Statistics, Central Bank of Sri Lanka and Jones Lang LaSalle 009a: Revised; 010b: Provisional; 011e: Estimated; 01F-015F: Forecast

15.5 14.98 14.80 14.21 14.25 14.11 1.71 1.71 1.7 13.74 1.70 14.0 13.62 13.60 13.47 13.44 1.5 1.0 1.5 1.0 15.0 14.5

15.5

0.09.010

1.10.010

0.11.010

1.1.010

1.01.011

8.0.011

1.0.011

9.04.2011

1.05.011

0.06.2011

9.07.011

0.08.011

0.09.011

1.10.011

0.11.011

0.1.011

Source: Central Bank of Sri Lanka

The Emperor

On Point Real Estate in Sri Lanka - Prospects and Potential 1

Hotels: Building a Tourists Home

Sri Lanka entered the international tourism arena in the 1960s and has witnessed a steady annual growth of 8% in tourist arrivals from just 18,969 in 1966 to 438,470 in 2009. The direct contribution of travel and tourism to GDP was LKR 219.7 billion (3.4% of total GDP) in 2011, and forecasted to rise by 5.6% in 2012, and by 5.7% from 2012-2022, to LKR 402.4 billion in 2022 (in constant 011 prices)16. The sector is also a major contributor to employment generation, and directly supplied 236,500 jobs (or 3% of total employment) in 2011. It is estimated that total employment, including jobs indirectly supported by the sector, was 7.5% of total employment (590,000 jobs).

The Surge in Tourist Arrivals

After the end of the Civil War in 2009, Sri Lanka witnessed an upsurge in tourism in 010 and 011, with the number of tourist arrivals increasing by 46% in 2010 and 31% in 2011. Tourist arrivals in January and February 01 have witnessed a y-o-y growth of 16% and 27% over the same period in 2011. Extrapolating the trends, we can expect the total tourist arrivals in Sri Lanka to reach one million in 2012; a significant 38% CAGR during 2009-2011 (Figure 1). The Government of Sri Lanka has projected a 2.5 million tourist arrivals by 2016, which implies a healthy 24% CAGR during the 2011-2016 period. Figure 21: Tourist Arrivals in Sri Lanka The Expected J Curve
GOVERNMENT ,500,000 ,000,000 CAGR 24% (2011-2016) CAGR 38% (009-011) 100%

Hilton JAIC Tower

,500,000

80%

,000,000 Tourist Arrivals

60% % Y-o-Y Change

1,078,719

1,500,000 855,905

40%

654,477

JLL ESTIMATE

500,640

549,310

559,600

1,000,000 400,410 336,800 9,170

0%

494,010

438,470

566,200

500,000

0%

447,890

-0%

01F

014F

015F

Tourist Arrivals

% Y-o-Y Change

Source: Sri Lanka Tourism Development Authority (2000-2011), 2012e estimated by Jones Lang LaSalle, 2013F-2016F based on the target set by Government of Sri Lanka
16

Economic Impact 2012: Sri Lanka by World Travel and Tourism Council

016F

01e

00

2006

000

001

00

2004

005

007

008

009

010

011

 On Point Real Estate in Sri Lanka - Prospects and Potential

Hospitality Infrastructure: Capacity Generation

The surge in tourism will require a near doubling of hospitality infrastructure in the coming years. As of 2010, the country had only 22,735 SLTDA approved hotel rooms (Figure 22). From an assessment done by SLTDA in 2009, there was a high concentration of hotels in the premium 5-star category and the budget 2-star category (Figure 23). A significant share of the current capacity is unclassified with no star rating, which offer a less expensive but non-standard product option to tourists. In the segment spectrum, there is a significant shortage in the 4-Star and 3-Star categories, which together account for only 18% of the rooms. Figure 22: Tourist Accommodation in Sri Lanka (2010) Accommodation Type
Tourist Hotels Boutique Hotels and Villas Home Stay Units Guest Houses Heritage Homes Total

Number
256 50 181 679 49

Number of Rooms
14,948 577 560 6,393 57 22,735

With a target of 2.5 million tourist arrivals by 2016, nearly 4,500 5,100 annual incremental supply of hotel rooms will be required in the next five years. With an average of 60 rooms per hotel17, the supply of hotels needed every year for the next five years to meet the demand is 75-85 hotels or nearly 3.5-4.0 million sq ft of hotel space (Figure 24). Figure 24: Estimated Number of Additional Hotel Rooms Required Hotel Rooms Required Annual Incremental Supply Required
Hotel Estimated Area Hotels Rooms (million sq ft) Government of Sri Lanka Target (2012-2016)^ ,500 0,500 5,000 4,500 5,08 5,000 75 85 8 3.6 4.1 4.0

Source: Tourism Development Strategy 2011-2016, Ministry of Economic Development, Government of Sri Lanka

Figure 23: Hotel Rooms by Star Category (2009)

5-Star Unclassified 36% 11% 7% 7% 1-Star -Star Source: Sri Lanka Tourism Development Authority 17% -Star 4-Star 1%

E&Y-FICCI Estimates (2011-2016)# JLL Estimates (2012-2016)*

Source: ^Tourism Development Strategy 2011-2016, Ministry of Economic Development, Government of Sri Lanka (011) # A New Realty: Dissolving Borders Through Cross-Border Integration, E&Y and FICCI (2011) *Jones Lang LaSalle

Cinnamon Lakeside
17

As per SLTDA, in 2010 there were 242 hotels with a total of 14,461 hotel rooms, implying an average of 60 hotel rooms per hotel.

On Point Real Estate in Sri Lanka - Prospects and Potential 

Hotel Rooms - Occupancy

Occupancy rates in hotels across Sri Lanka increased after the end of the civil war, rising from 48.4% in 2009 to 70.1% in 2010 (Figure 25) and it is estimated that occupancy rates in 2011 were above 80%. Hotels in the Greater Colombo Area enjoyed a high occupancy rate of over 75% during 010, which underlines the need for quality supply in this region. The tourist hotspots on the South Coast also witnessed high occupancy levels of over 71.9% during 010. However, occupancy of hotels along the South Coast before Galle was higher than those beyond Galle. Thus, from the occupancy data, it is clear that there are ample opportunities for hotel construction in the Greater Colombo Area and on the South Coast before reaching Galle. Figure 25: Hotel Occupancy Rates by Region 2001
Colombo City Greater Colombo South Coast East Coast High Country Ancient Cities All Regions 45.4 47.2 41.1 15.0 35.4 9.1 42.1

2002
56.4 42.8 8.0 44.8 36.3 42.4 43.1

2003
68.7 48.9 48.3 51.1 44.3 54.0 5.

2004
75.5 5.9 52.6 44.2 52.4 60.4 59.

2005
76.3 44.8 1.5 9.1 36.6 9.5 45.4

2006
64.3 48.0 41.2 16.9 9.9 43.3 47.8

2007
63.9 49.3 47.6 18.0 41.2 40.3 46.2

2008
57.1 52.6 46.1 21.6 34.2 5. 43.9

2009
57.8 5.7 49.6 7.8 42.2 44.4 48.4

2010
78. 75.1 71.9 70.0 63.5 62.6 70.1

Source: Annual Statistical Report of Sri Lanka Tourism 2010 (SLTDA) Notes: Major Cities in Each Region - Greater Colombo: Colombo, Gampaha and Kalutara | South Coast: Galle | East Coast: Trincomalee and Batticaloa | High Country: Badulla and Bandarawela | Ancient Cities: Kandy, Anuradhapura, Habarana and Polonnaruwa

Figure 26: Major Investments in the Hospitality Sector Project

661 room Shangri-La Luxury Hotel 650 room ITC Luxury Hotel Thona Bay Development 15 room Shangri-La Luxury Resort 20 Acre Beachfront Property Six Senses Before Galle and Six Senses Meeraladuaa Ippantivu Islands Vellai 1,2 and 3 Islands

Location
Colombo Colombo Kalkudah Hambantota Kuchchaveli Ahungalla, Meeraladuaa Kalpitiya Kalpitiya

Acres
10 6 NA 145 0 7.5 190 80

Investment (LKR)
USD 500 million (LKR 65 billion) for 99 year lease of land and construction USD 125 million (LKR 13.7 billion) for 99 year lease of land and USD 300 million (LKR 32.9 billion) for construction USD 360 million (LKR 39.5 billion) for acquiring land and construction USD 126 million (LKR 13.7 billion) for 99 year lease of land and construction USD 100 million (LKR 11.0 billion) for 99 year lease of land and construction USD 45 million (LKR 4.9 billion) for acquiring land and construction USD 127,500 (LKR 14 million) for 5 year lease of land and USD 15.5 million (LKR 1.7 billion) for construction USD 34,000 (LKR 3.7 million) for 5 year lease of land and USD 11 million (LKR 1.2 billion) for construction

Year
011 01 010 011 011 010 010 010

Investor
Shangri La ITC Karooda Group Shangri La

Investor Origin
Hong Kong India Switzerland Hong Kong

Mfar Hotels (Cochin) (Dr P Mohammed Oman Ali) Six Senses Resorts and Aitken Spence Qube Lanka Leisure Sun Resort Investment Thailand and Sri Lanka India Maldives, Sri Lanka and Switzerland

Source: Industry and Media Sources, Jones Lang LaSalle Notes: 1 USD = 109.76 LKR (Average During 2011)

24 On Point Real Estate in Sri Lanka - Prospects and Potential

The Next Decade: Top Trends to watch for in Colombos Real Estate
Leapfrogging: Integrated Developments at Suburban Locations
Land prices in Colombo have appreciated rapidly in the last four years. With prime land parcels in the CBD (Colombo 01 and 02) being offered at LKR 8-9 million per perch18 (USD 268-301 per sq ft), construction of offices in the core of the city will imply a high rental expectation. Land in SBD locations is also expensive, and is available at LKR 4-5 million per perch (USD 134167 per sq ft). Leapfrogging is the phenomenon of developing real estate at locations further away from the city, where land prices are still cheap despite the on-going improvements in infrastructural connectivity. To increase financial attractiveness for outsourcing, developers and government should explore the development of integrated IT parks with office, retail and residential developments in these suburban locations. These compact developments with walk-to-work concepts are also sustainable as they bring the workforce closer to their offices.

Consolidation: Portfolio Rationalisation of Major Banks and Conglomerates

A significant amount of banking institution and major conglomerate office spaces in Colombo consist of self-owned or single tenanted premises. As more Grade A office space is constructed across the city, there will be opportunities to achieve cost rationalisation and reduction of leverage through consolidation and decentralisation measures. The sale and leaseback of properties will offer investors the prospect of gaining exposure to investment grade stable income yielding assets. Since the supply of office space is limited, non-performing real assets held by the banks and conglomerates can be sub-leased to prospective occupiers.

Real Value: Refurbishment and Redevelopment of Prime Properties

Refurbishing existing Grade B and C properties with Grade A facilities and infrastructure can be a cost effective measure to provide prospective occupiers with quality office space in a short span of time. It will not only increase the efficiency of real estate space, but will also reduce the energy requirements, if sustainable solutions are incorporated in the new design. There are several plots of mill land near the CBD and in the northern part of Colombo which offer immense opportunities for redevelopment into prime residential, hospitality or office projects.

Up in the Sky: High Land Prices to lead to Slew of Condominium Developments

High land prices have already restricted villa and plotted developments to fringe areas of the city, and such developments will be pushed even further out as land becomes more expensive. With growing demand for condominiums, we should see the building of more residential towers in various city locations.

18

1 perch = 272.25 sq ft and 1 USD = 109.76 LKR (Average during 2011)

On Point Real Estate in Sri Lanka - Prospects and Potential 5

Affordability: Lower to Mid-Income Mass Housing to cater to Urbanisation

As income levels increase and more people begin to be able to afford the minimum housing prices (assessed through the rate of construction costs), even prominent developers will look at the massive opportunities of scale available at the bottom of the pyramid and construct housing units for lower midincome and low-income segments. This will not only address the issues of urbanisation but also reduce risks for developers, who will have a diversified development portfolio.

Experience Retailing: A Place to Shop, Dine and Hang out

Colombo is limited in experience retailing with its major shopping malls constructed nearly a decade ago. Successful modern malls in South Asia not only serve the purpose of retailing, but are important congregational places for shopping, dining and relaxation activities. We foresee at least  -  large shopping malls with an eclectic mix of leisure, entertainment and cultural experiences, housing anchor stores, multiplexes, food courts, gaming zones and atrium spaces, being constructed in Colombo in the next 4-5 years.

Globalisation: Foreign Players drive Quality

The opportunities in Sri Lanka will capture the attention of several global players in the real estate business developers, investors, property consultants, architects, contractors and manufacturers. During the next decade, the quality of construction will improve significantly, both due to the demand pressures from overseas investors and the availability of expertise.

Mixed-Use: High Rise Developments in City Core

As per a study carried out by the Department of Estate Management Valuation in the University of Sri Jayawardenapura, 78% of the office properties in Colombo are held as pure office properties, while 22% are held as mixed commercial and retail developments19. With high land prices, developers will diversify their risks in the core city and increasingly opt for mixed-use developments, with multiple asset classes including high-end residential, hospitality, office and retail space.

19

Office Market in Colombo: An Empirical Analysis by RG Ariyawansa and UGM Dilhani, Sri Lankan Journal of Real Estate (2009)

26 On Point Real Estate in Sri Lanka - Prospects and Potential

Authors
Himadri Mayank Assistant Vice President, Research and REIS himadri.mayank@ap.jll.com +91 99756 12304 Robin S Assistant Manager, Strategic Consulting robin.s@ap.jll.com +91 87544 04800

Advisors
Ashutosh Limaye Head, Research and REIS ashutosh.limaye@ap.jll.com +91 98211 07054 Simon Thomas Assistant Vice President, Strategic Consulting simon.thomas@ap.jll.com +91 98400 68451

Special Contributors

Gagan Singh Chairperson, Sri Lanka Operations gagan.singh@ap.jll.com +94 777 444094 +91 98111 51610

Shankar Arumugham Senior Vice President, Strategic Consulting shankar.arumugham@ap.jll.com +94 776326888 +91 99400 66869

On Point Real Estate in Sri Lanka - Prospects and Potential 7

K-Zone

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 011 global revenue of more than USD 3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the companys investment management business, is one of the worlds largest and most diverse in real estate with USD 47.9 billion of assets under management. Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 20,800 employees operating in 77 offices in 13 countries across the region. The firm was named the Best Property Consultancy in Asia Pacific at The Asia Pacific Property Awards 2011 in association with Bloomberg Television. For further information, please visit our website, www.ap.joneslanglasalle.com

About Jones Lang LaSalle Sri Lanka

Jones Lang LaSalle Lanka is a leading professional services firm specializing in real estate in Sri Lanka. Based out of Colombo, the firm provides investors, developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, transactions, project and development services, property and asset management, integrated facilities management, real estate capital markets across the office, hotel, land, industrial, retail and residential sectors. The Firm aims to combine local market knowledge with its access to global multinational relationships and capital sources, to provide Sri Lankan corporates, government agencies and clients with superior execution, towards transforming their real estate portfolios into efficient inventories, as well as in raising capital for real estate assets. For further information, please visit www.joneslanglasalle.com

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