The island of Sri Lanka’s capital markets are going through a period of high capital investment. With the end of a 26-year civil war in 2009, the country is opening up tourism, international shipping, international trade and scaling up domestic businesses. There are many commercial and investment opportunities in the Sri Lankan real estate markets. This interview with Hardy Jamaldeen covers the full array of options from virgin beaches waiting for resorts and tourists to office space near Sri Lanka’s expanding port terminals to agribusiness in this tropical paradise.
Mr. Jamaldeen has been manager and director of Steradian Capital with his business partner Archie Warman since 2010. Mr. Jamaldeen’s previous posts specializing in real estate during more than a decade working in London included Barclays Capital and Newbridge Capital Investment Limited where he was a director. Mr. Warman, a qualified chartered surveyor (MRCIS), also worked at Newbridge Capital as Asset Management Director before starting up Steradian with Mr. Jamaldeen in Sri Lanka.
Since returning to Sri Lanka, Mr. Jamaldeen has actively participated in his native country’s business community most recently being appointed as a non-executive director of local conglomerate Hayleys PLC. Mr. Jamaldeen has degrees in engineering and business from Warwick University. A Fellow of the Association of Certified Chartered Accountants, Mr. Jamaldeen is engaged in all aspects of property investment with a focus on transactional analysis, financing and tax structuring. Steradian also specializes in advisory services, distressed real estate, development, corporate situations and other special situations that create quality investment opportunities.
Jon Springer: Although you are a native Sri Lankan, have you had to adapt to a different business culture in Sri Lanka from your career in the United Kingdom?
Hardy Jamaldeen: You have to. The culture is definitely different. Even though you know you are a trained professional, there is no room for arrogance here at all. The culture is such that you need to be humble when working with large conglomerates and high net worth individuals. This is a change from life in England where you need to be confident and at least slightly arrogant in the board room environment. Here, you need to be more humble in your approach. You need to make people here understand that you are talking sense and that you will be helping their bottom line.
Compared to England which is a mature market, I find it refreshing that here there is so much going on. The government wants things to happen; and people that have been part of a country that had a 30 year civil war that were resilient and profitable through that period are now even more keen to build on those platforms.
In terms of professional advisory work, things here take a little bit longer. We are finding that the key thing is not to get distracted by this and to focus on what we are doing next in terms of the investment work and advisory work. Compared to London, there is a rush.
The rush is transactions happening and people wanting to do deals. By comparison, in London after the 2009 crash doing business was really difficult because there was a real lack of credit and everyone was in a 'wait and see' mode. There was a lot of waiting and managing and mitigating. Yet the exposure navigating through that period most certainly gave me insights into defensive corporate decision making to protect value erosion of assets under management. Even now, apart from high-end residential in London which is heating up, the commercial market is still the same situation of working through the bad assets, so its very much manage, 'wait and see' there.
Whereas here in Sri Lanka now, people are gearing up to carry out development work: they want to build hotels, they want to build offices, they want to build warehouses, the government is building infrastructure, there are expressways built and more being built, the government wants the country to be a world class logistics hub, there are new port terminals being built and enhanced in Colombo and Hambantota, domestic airports have been expanded to 16, railways now are operating across the country, and people are now ready to act. In 2009, people had the energy to expand then but the country was not ready. The euphoria was there at the time the civil war ended, but now people are ready to act.
Springer: From the various types of investments your firm does, what is the range of the investment rate of return (IRR) you expect for your clients after all fees?
Jamaldeen: It is between 20% and 50%, though there are some instances where we have made multiples. In England if I said anything more than 15%, people would look at me like I’m off my head.
Here, there’s one transaction we had that was 20%. Another transaction that we had with 6 dwellings in terraced housing in Colombo, we have a return of 50%, and this is a conservative estimate. This is mostly money we make for our investors and we make some money along the way.
Rather than focusing on IRR, we first look at fulfilling our investor's objectives. Do they want income yield, capital growth or how long they want to be invested? We tailor our investments to meet our clients' requirements.
Springer: How is the real estate investment climate different now from 5 years ago in 2009?
Jamaldeen: In 2009, the war ended, there was euphoria and the energy levels were high. However, after nearly 30 years of civil war, the infrastructure was really not in place for the real estate market to thrive. The Central Business District [CBD] had been a high security zone during the war. The capital city of Colombo was really fortified with security, check points and main roads closed to traffic [for security purposes]. The government has now taken away most of these check points and opened up the roads.
As a real estate developer, you are in a better place to make decisions about real estate in Colombo. In 2009, you just didn’t know if the CBD would ever be fully opened up, if all the main roads would be opened. So since 2009 the existing buildings in the center have had occupancy levels go up in part because developers were not ready to develop new buildings. Now, the area is primed and we can make real decisions to develop real estate in Colombo.
In terms of the country, road, rail network, internal airports, ports; the infrastructure has been built up and is being built up further. This alongside new regulations becoming clearer provides us a platform to start making decisions and investments. For example, when Archie and I came in 2010, we wanted to go to Jaffna [in the north of Sri Lanka]. It took us 12 and a half hours to go by car in absolutely torrid conditions. Now, we make the same journey in 5 hours in comfort. The road network is much improved. And, even faster, the air network is now open and we can fly to Jaffna in 50 minutes. This was not possible in 2010. Our ability to do business in Jaffna is more feasible now when it is possible to fly there and back in one day than when we had to plan two days of driving for one day of business there.
In terms of how the investment climate is from 5 years ago, it is much more ripe in Colombo and in the country as a whole.
Springer: The Central Bank of Sri Lanka and the government decided to take measures to cool the economy in 2012 and parts of 2013 after strong economic growth in 2010 and 2011. How correlated are real estate valuations to GDP growth?
Jamaldeen: Interest rates were 20% plus during the civil war. When the war ended and the rates came down to 11 or 12%, suddenly companies were seeing their bottom line improving by doing nothing. There was also more finance coming on stream.
What happened in the stock market is people always look at PE ratios. So, people who looked at the PE ratios without understanding the fundamentals saw greatly improved earnings with the only change really being the lower interest rates. What they then saw in 2013, companies were doing as much or more business but the bottom line was not as pretty because interest rates were higher; dividends were lower; and the stock market had a huge correction in valuations.
As to correlation of the real estate market, it is highly coordinated. GDP per capita is about $2,750. The spending capacity of average Sri Lankans is limited. With growth in the medium term – 5 or 6 years – the GDP can quite easily double and get to $5,500 or $6,000. This is when things will really start to get exciting for real estate investment. That’s when you can convert land into townships, when spending power is such that the needs and wants of professionals change; and urbanization of other towns begins. We expect interest rates will be lower then than today so an element of financing can be brought in. This is when GDP supports the affordability that will allow us to be confident to make big investments into proper townships like we have seen come into being in Malaysia, Dubai and Indonesia.
Right now, there are enough opportunities in the big cities, tourism and leisure. For large-scale residential opportunities, those opportunities will be ripe when GDP hits the $5,000 mark. But, you have to prepare for that moment now as a real estate investor because if you start looking for land in 5 or 6 years, it will be too late to do it.
Springer: The Central Bank has predicted per capita GDP of $4,000 by 2016.
Jamaldeen: I am a bit more cautious as I am an accountant by profession. I cannot be as aggressive as the Central Bank over the next two years. I think the hard work is to happen in the next couple of years to get off the block but once we do, it will almost certainly snowball. I think by about 2020 we should reach $5,500. In short I am happier to take a very positive medium term view.
Springer: When you try to assess what should be fair value for Sri Lanka’s real estate in the future, how does Sri Lanka’s real estate values compare to other country’s markets?
Jamaldeen: If you look at major capital cities around the world, we’re very cheap. If you look at capital cities in similar markets, we are still cheap. I think it comes down to supply and demand. I think when the regulatory environment changes, interest from overseas will come in and push the market higher.
If you look at commercial office space for sale in Colombo, you are looking at between $150 and $200 per square foot. High-end residential apartments fetch $250 per square foot now and some new projects coming up will push that higher.
One point that is really important to remember is that real estate prices peaked during the peace negotiation process in 2004 when there was a cease fire agreement. Land prices peaked in Sri Lanka at this time in 2004, not after the war in 2009. The reason for this is two-fold. Firstly, a lot of the diaspora that was living overseas wanted to put money in and they started to buy when the cease fire happened. Secondly, freehold ownership of land (not property, but land) was possible for foreign investors at that stage. A lot of foreigners were buying up land during that period. At that time, land prices peaked, and since then they have dropped off in Colombo. The highest price you can get for prime freehold land in Sri Lanka today is $270 per square foot (this was the price paid for the land of the new Shangri-La Hotel and Resort that is being built overlooking the water down the street from the President’s House). When you look at that compared to major cities in the world, real estate here is really cheap.
Springer: Government data expects tourism to rise from its nadir of less than 500,000 annual tourists in 2009 to 2.5 million tourists by 2016. Sri Lanka has a lot to offer tourists with important religious and historical sites, scenic mountains, wildlife safari, beaches, spas and luxury resorts. Is there significant current investment in hotels and leisure? Are there good opportunities remaining for further investment?
Jamaldeen: There is significant room for more investment in the hotel and leisure sector. Both Malaysia and Thailand each had more than 25 million tourists in 2013 compared to our 1.2 million. 15,000 hotel rooms is all we have in Sri Lanka across all star classes. It is really a very small number. From that perspective, we have 5.4 million room nights. That’s nothing for this country. We hit the one million mark in terms of tourist arrivals last year for the first time since the end of the civil war in 2009. So if those tourist arrivals of one million had averaged a stay of 6 nights, we would have been short of rooms.
There is a lot of building work going on: Shangri-La, Sheraton, Movenpick, John Keells' Waterfront project, Vallibel’s Queensbury, ITC Hotels, Lotus Tower and Mall, maybe Crown. There are a significant number of hotel rooms coming on stream yet there is room for more. The southern coast is quite heavily built up. The northwestern and eastern coasts [which were strongholds of the LTTE during the civil war] still have significant potential. For me, some of the northwestern coast has more beautiful beaches and more natural beauty surrounding it than the south yet it is not built up. It is only time before these developments take shape.
There is only 18 nautical miles between the northwest coast and India. There was a ferry in the past and Jaffna airport in the northwest used to be an international airport. These were closed during the civil war and have not reopened.
The northwest coast and east coast are primed for development. There is more development in the east than the northwest at present. There are some five star hotel chains opening up in the east and the infrastructure is now in place in the east. The east will open up next as these hotels begin to market it and push the destination.
The investment in the sector goes hand in hand with the growth of the sector. When various chains come in, they are plugging us into their network maps, into their loyalty programs and marketing Sri Lanka. The growing number of integrated resorts will also add significant weight to increasing our tourist numbers and attract a different type of tourist than our average tourist at the moment.
Historically, the tourism board targeted Europe as the main source of tourism. In the recent past, England was the leading source of tourism, then Germany and Scandinavian countries. Our neighbor India was at the bottom of the list and China wasn’t on the list; these are two markets the tourism board is focused on cultivating now. The tourism board is putting more energy toward, and creating the foundation to, facilitate people from India, China, Malaysia, Indonesia and across Asia to come to our country. This is the growth area in terms of outbound tourists around the world. These foundations, and repositioning, have been put into the place over the last two years and we will see the benefits in the years to come.
Springer: One of your firm’s specialties is long-range land investment planning: buying property you develop for particular purposes now with plans to develop it for other purposes in the future. Could you compare the real estate pricing in the developed south to the east and northwest to explain the advantages and challenges of investing in the eastern or northwestern shores of Sri Lanka? And can you provide an example of your long-range investment planning?
Jamaldeen: The government rightly expects people to buy property and build it up. They want long-term investors and we structure plans for our investors that is good for our investors and even better for Sri Lanka.
The southern coast is peaking in terms of pricing. The highest value is $1.15 million for an acre. Then, beachfront land in the east’s peak price now is about $200,000 whereas in the northwest peak prices are $10,000 per acre.
The tricky part in the north and east is to ensure you buy a clear title. We want to be sure the deeds are institutional, that a bank would be happy to lend against the title. During the war, a lot of land registries were burnt. You must make sure the owners of the title are the actual owners. We do all the legal due diligence, but we also physically go to the local village and talk to people about the pedigree of the landowner.
With many areas of the east and northwest coasts of Sri Lanka being accessible for the first time in decades and tourism rising, it is important to innovate multipurpose uses of land while awaiting the anticipated economic development to arrive and the anticipated tourists to arrive.
We have land in the north near Pooneryn. It is like a sand bank, dunes, white sands, clear waters, 12 nautical miles from Katchateevu Island and you can go to Jaffna by boat quite easily from there. We are effectively between Jaffna Lagoon and Palk Strait. It is absolutely beautiful.
The people of the north are not yet ready in terms of hospitality. They are farmers that know agriculture very well. They are not so service oriented yet. They have not had the need during 30 years of conflict; there was no such activity. So now even in the hotels that exist in Jaffna, you notice that the service level when you compare it to the south is very poor. We decided that rather than beating the market and developing our land for tourism or a township that is not economically ready, on our land we are doing agricultural projects at the moment. We have planted long-term crops such as coconut, mango and banana. For these crops we are using staff from the area, putting people from local village into jobs they are skilled at. When it comes to the next stage when we develop some chalets on the beach, then we will look at training up staff to provide a high standard of hospitality service.
Springer: Agriculture is 13% of Sri Lanka’s GDP. Sri Lanka is known for being the second largest tea exporter in the world, but also exports a significant amount of rubber, rubber products, coconut, spices, fruits, vegetables and fish. Are there different rules governing investment in agribusiness? Where are the good opportunities for foreign investment across agribusiness?
Jamaldeen: There is nothing stopping foreigners from investing in agriculture. The new eastern province land administration is pushing agriculture in a big way. They are packaging up investment projects up for overseas investors. They will provide details of the project proposals to the foreigners and want to make foreigners life easier by getting all the plans in place for them, et cetera.
There’s definitely good opportunities for foreigners across agribusiness supported by the government. The government wants to increase agribusiness, they want more self-sufficiency, they want more exports. The government is also looking at integration; for any form of processing products they are giving concessions and tax breaks to foreign entities that will do that, from food processing to canning.
Springer: Sri Lanka’s capital of Colombo has a lot of interesting development going on. There is a plan to add about 575 acres of land-filled land near the new port terminals. It is called the Colombo Port City Project, a joint venture between China Communications Construction Company Ltd and the Port Authority of Sri Lanka (video). What are the plans for these 575 acres and how will it change the geography and value of other districts in Colombo?
Jamaldeen: It is difficult to get absolute certainty on what they are going to do. My understanding is that it will be a mixed development, everything from commercial space to hotels and residential apartments. This Chinese company that has been awarded this project, they have to execute this project at their cost yet they have to lease the land at 8 million Sri Lanka rupees a perch ($220 per square foot) and they have to build specific projects on it. The whole idea is something like a $15 billion project. The Chinese company will reclaim the land and then in accord with the Port Authority and Sri Lankan government, they will have to lease out the land to various parties to allow for this mixed development. I think the plan is formulating as we speak and I don’t think things are firm and finalized yet, but the land filling has commenced.
It should not impact the pricing in the Colombo market. Land is scarce currently in the CBD. Yet today you can buy land here at less than $220 per square foot anyway. Yes, if there was going to be a huge supply, there might be an impact. However, they are putting a minimum number of $220 per square foot on the Colombo Port City development; this is relatively high and today you can buy property for 20% less in the CBD. Thus, if the contractual terms with the Chinese company dictate the types of real estate development that need to happen on each parcel of land as well as this pricing, then it is pretty controlled. In this sense, we have a new port city developing that is fully vested. If anyone can do it, it is China.
The idea behind the build up of both Colombo’s port as well as Hambantota’s port is part of Sri Lanka’s plan to be a logistical hub. If you look at the shipping routes both today and historically, all the major shipping routes between Africa and Asia, between the Middle East and Asia and between Europe and Asia, almost all of these pass within 10 nautical miles of Sri Lanka. Both of these ports [Colombo and Hambantota] are expanding with Chinese support.
The strategic location really interests China in terms of ports and port cities. Over 200 ships pass Sri Lankan waters daily. Sri Lanka’s economic stability and the fact that the government of Sri Lanka has shown it has a real will to execute projects and develop the economy adds value to the Chinese interests. Effectively the Port of Jebel Ali in the United Arab Emirates is being used as a benchmark for regulations and design for our ports.
Springer: Could you discuss some of your commercial and residential projects in Colombo to paint a picture of how the city is developing?
Jamaldeen: In terms of high-end residential, I think the pipeline is quite heavy. I would not put my investors into that segment of the market because I think there is a huge supply that is going to come on stream and that makes me nervous. For residential, in Sri Lanka right now you can do business at the lower end.
However, if you look at office I think it is a different situation. There is a huge lack of good quality commercial office space in Colombo. Also, the existing good quality office space is almost fully occupied. By example, the World Trade Center at the heart of the CBD was built in 1996; during the civil war it had about 30% occupancy. The CBD was a target during the civil war with bombs going off there, it was a high security area with checkpoints and roads closed to traffic was the norm. This created a secondary market for secondary commercial office space. But since the war finished, all the checkpoints have faded away, the roads have opened and the CBD is properly the financial center. Colombo generates a little more than 50% of Sri Lanka’s GDP. Now what you are seeing is that all the prime office blocks in the CBD are almost fully leased.
What happened is because of the lack of supply of good commercial space, the leases are often in favor of the landlord. An area where we see a real opportunity is to build good quality commercial office space in the CBD with more flexible leases. I am very bullish on commercial office space. Though, fundamentals apply: location is key, well planned common areas, nice loos and elevators. Having worked in a mature market like London, we know what to produce based on what we produced in London.
At the moment, we are doing a commercial project called Lincoln’s Inn Court near Sri Lanka’s high courts in the Hultsdorf section of Colombo. Some lawyers now work there out of the back of their cars, there’s a real lack of space. The current office space that exists has them squeezed in 6 people per 200 square feet of space. Rents there are high so we saw this as an opportunity. We are building a brand new building for lawyers there that should complete by June this year.
For residential, we are for example looking at an affordable housing project 400 meters from the expressway between Colombo and the airport. It is low cost housing for young professionals. Effectively the travel time into the CBD from this area is 20 minutes with the new expressway and that has become a game changer. Thus, we decided that with a lot of young professionals working in the CBD that earn about $800 per month, we will ensure that a 3-bedroom house with freehold land is sold to them at a price that this earnings capacity can afford. It’s the lower end of the market, but it is where there is need and demand that we think is worth looking at.
In our advisory capacity, we are working on some projects for some five star hotels which I can’t discuss the details of due to the privacy of our clients.
Springer: Tax structures for foreign ownership of real estate in Sri Lanka is a bit complicated. Up until last year there was an official 100% tax on foreign real estate transactions. There is now a new law coming in this year. With both laws, there tends to be a lot of exemptions and legal structures to work around the laws. At the same time, when I speak to some local people about these exemptions and legal structures, they feel it violates the “spirit of the law.” Can you explain how the pending new real estate law impacts foreign ownership and the structured ownership preferred by Steradian to mitigate the foreign ownership laws?
Jamaldeen: Essentially, different real estate agents and advisors in Sri Lanka have various structures for foreign investors. Our structure is such that foreigners will own no more than 25% of a local corporate entity and we ourselves as partners will invest into the transaction. Our foreign investors in general would like to be passive investors and prefer to invest through loan notes or debentures as part of their investment. Our structure was designed by KPMG Sri Lanka. The important thing for investors to know with any structure used or with any exemptions employed is that they should be able to comfortably invest their money and exit in due course within the framework of the existing regulations. Over the last three years, the government has made the regulatory environment more friendly for investment. I can assure you that the government is doing their utmost to provide an improved regulatory environment enabling FDI to flow easily into Sri Lanka.
Springer: If you were pitching a real estate investor who was considering Sri Lanka as one country among many to invest in across Asia, what would your sales pitch to them be on why Sri Lanka is the best country for them to invest in today?
Jamaldeen: We are emerging from a 30 year conflict. We have all the right ingredients to be successful: economic stability, economic growth, good government initiatives, hub initiatives, infrastructure falling into place, a good talent pool in terms of knowledge, good natural resources and we have the prospect to be a gateway country. We have a lot of catching up to do to attain the stature we had in the 1970s. In essence Sri Lanka has all the ingredients to be successful and grow rapidly over the next decade.
Jon SpringerContributor for Forbes
I have been published in the UB Post and a frequent contributor to Seeking Alpha in the past. Frontier and emerging markets research and writing is my work, with a focus on Asian economies.