May 26, 2017

Fairway Holdings chairman responds to CBSL governor's claims

"Some broad generalizations made by the Governor are excessive, precipitous and don’t seem to be grounded in established facts”, says Hemaka de Alwis, Chairman of Fairway Holdings.

He was responding to an article published by the Sunday Island on May 20, which cited several claims made by the Governor of the Central Bank relating to the apartment development industry.

“I know we are living in a post truth world, but some of the broad generalizations made by the Governor are excessive, precipitous and don’t seem to be grounded in established facts” Mr. de Alwis said.

He was reacting to the Governor Indrajit Cooomaraswamy’s claims that the apartment construction industry appeared to be overheating, was using credit lines meant for SME’s and provided a safe haven for black money.

The apartment construction sector, despite the recent removals of tax concessions, has been one of the few robust segments of an otherwise lethargic domestic economy. The growth in the industry is driven by several factors. Despite 2/3 of the population living on 1/3 of the land area around the Western Province, Sri Lanka is one of the least urbanised countries in the world. In fact Sri Lanka’s urbanization rate of 20% is well behind the average for South Asia and half that of the global average. The UN World Urbanization Index of 2011 puts Sri Lanka at 199 out of 203 countries.

In recent years however the natural drift towards urbanization has been intensified by a high degree of centralization, particularly of educational institutions, around Colombo. This combined with weak traffic management, inefficient arterial roadways and lack of an effective mass transport system has created a strong real demand for vertical urban housing around Colombo.

While agreeing that there is a possible bubble in the segment identified as luxury by the governor, Hemaka de Alwis explained that “mid-range market is driven by solid fundamentals, underlying a gradual move towards modern city life. Sri Lanka is not an isolated case but part of a global trends towards urbanized vertical living - there is clearly no bubble, there is no unrealistic pricing but strong trend of demand driven growth. Surely when highest segment sells at double the price per square foot of the mid-range, there is every possibility of an unrealistic element in the pricing because the cost/quality base is the same – but the point is we can’t all be tarred with the same brush.”

 Given the robust market fundamentals and short project cycle times of two to three years, banks might be disposed to favour the industry. But when it comes to purchasing, only 10% of Fairway’s customers use bank loans to finance the purchase, and 75% of the customers ‘buy to live in’. Both indicators suggest that people are converting existing assets into apartments to support an urban lifestyle change.

Meanwhile the World Bank has highlighted the fact that urbanization is a vital driver of economic growth, job creation and prosperity, and it goes on to warn that a failure to address urban housing, public service and infrastructure will retard such benefits.

De Alwis went on to say “the banks not offering SME’s sufficient credit, the existence of black money are clearly financial regulatory issues. Conflating them into an apartment development issue is irresponsible and damaging.”