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March 20, 2017

As Sri Lanka tackles its long-term strategic and structural development changes this year, its finance minister Ravi Karunanayake has said that the country is on track for economic growth of about six percent in 2017. This comes as the government has approved reforms to make state firms more efficient, in line with the International Monetary Fund’s requirements.

Attracting Foreign Direct Investment (FDI) is a priority for the island-state this year.

“After a slump of 54 percent in 2016, the country is aggressively targeting FDI to the tune of US$3 billion in 2017,” says Arumugham Shankar, Head of Operations – Strategic Consulting, JLL India and Sri Lanka. “The policy framework to attract FDI is much clearer than before, especially for the real estate and construction sectors.”

The country also entered JLL’s Global Real Estate Transparency Index for the first time in 2016, at 69th place, just after Vietnam at 68th.

New government initiatives

The real estate sector has showed promise in the last couple of years. “With GDP growth to continue at about six percent, it is likely there will be sustained demand for commercial offices, in particular grade-A office space, from the banking and financial services, and even government agencies over the course of the year,” says Steven Mayes, Managing Director of JLL Sri Lanka. “The luxury residential sector has reasonably good supply considering the growing average absorption, while middle income housing is also performing well.”

The country is considering several initiatives to boost investment. The ongoing discussion to introduce REITs to the market is reportedly in the final stages which, when legislated, will enable small and medium sized investors to invest in real estate projects. When set up, the much anticipated Agency of Development will be empowered to approve projects in 10 working days, while the Ministry of Megapolis and Western Region Development is overseeing the US$40 billion Western Region Megapolis Project. “This project covering a total area of 3,600 sq km will serve as a blueprint for redeveloping Colombo and its surroundings suburbs,” notes Shankar.

The area has already generated some interest: International Enterprise (IE) Singapore signed an agreement to collaborate in this space and South Korea’s Minister of Land, Infrastructure and Transport, Kang Ho-in, has also signed a Memorandum of Understanding to develop new towns. But the crown jewel in the Megapolis is undoubtedly Colombo Port City, a US$1.4 billion development by China Harbour Engineering Company (CHEC). About 269 hectares of land is being claimed for Colombo Port City, which is expected to complete by end 2019. “Once completed, the area will see an estimated 5.7 million square-meters of built-up space spread across residential, office, retail, hospitality, leisure and other ancillary uses and is estimated to bring in over US$13 billion in FDI,” says Shankar who’s also providing advisory services for the project.

Challenges ahead
But recent events have shown Sri Lanka’s vulnerabilities and highlighted the additional reforms needed to keep investors interested.

The government’s 80 percent divestment of the Hambantota Port to a Chinese firm sparked outrage in the port city earlier this year. And the Head of the Board of Investment (BOI), Upul Jayasuriya, has spoken out against roadblocks against investments such as judicial inefficiencies, delays by local authorities and lack of electricity approvals.

“It is evident more needs to be done to smoothen the investment process and improve transparency in Sri Lanka,” says Shankar. “But since the government started taking steps to address these structural issues, improvements can be seen. Sri Lanka is gradually moving in the right direction.”

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Steven Mayes
Managing Director of JLL Sri Lanka

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