Why invest in Sri Lanka: Sri Lanka has become a potential investment destination for both international and local investors. Strategically located on major shipping routes to South Asia and the Far East, the island of Sri Lanka is emerging as one of the most attractive investment locations in the South Asian region.
Sri Lanka has positioned itself as the service and trade hub of the vast Indian subcontinent.
Today, Sri Lanka is ranked as the most liberal economy in South Asia. The protection of foreign investment is guaranteed by the Constitution. An advanced legal and regulatory framework exists, for example, settlement of disputes through intellectual property, arbitration, company law, etc. assuring equal investment for foreign and local investors under the country’s investment and common law.
The economy has benefited from policies that give freedom to the private sector with fewer barriers to trade and investment. External trade relations have been strengthened by the expansion of bilateral, regional, and multilateral trade arrangements.
Why invest in Sri Lanka?
Property purchase process in Sri Lanka
Foreigners can purchase property independently until ready to pay land tax for foreigners on 100% of the property. One option is to lease the land for 99 years, bringing the tax to 7%.
When purchasing a property, it is necessary to hire a lawyer, who will prepare the contract. No sale is considered final without a legal transfer of ownership from the seller to the buyer.
The legal owner of the property is the only one who is allowed to sell his property; In cases where more than one person is considered the legal owner of the land, each owner must agree to the sale. In most cases, an estate agent will ensure ownership of the property before a public offering. The actions should be investigated by a lawyer in the Land Registry.
Both parties sign the transfer contract in the presence of a lawyer. The buyer also pays in full. The transfer is considered valid by both parties from the moment of signature. After which, the lawyer then registers the property in the name of the buyer.
In cases where you do not have enough money to buy the property in one go, most locals accept an advance deposit for the property. It is expected that the deposit will be 10% to 20% of the value of the property. The money can be deposited by a lawyer, trustee, or any other middleman.
The period between the advance and the last is a better buy. It is advisable to be in Sri Lanka for the final purchase. Being in Sri Lanka avoids additional lawyer fees, which have been legally issued by the buyer to finalize the sale in cases where the buyer is not present.
The stamp duty is LKR100,00 (US $ 962) before the purchase price for each additional LKR100,000 (US $ 962) and LKR3,000 (US $ 29) for LKR4,000 (US $ 38).
Transaction cost table
The cost of a round-trip deal includes all the costs of buying and renovating the property – notary fees, registration fees, taxes, and more.
Land tax
Foreigners will have to pay 100% land tax on buying property in Sri Lanka.
Stamp duty
Stamp duty of 3% to 4% is levied on the value of the property.
Legal fee
The legal fee is about 1% of the value of the property.
The luxury market dominates the rental market.
Sri Lanka’s small rental market – renting only 5.4% of the total housing stock – dominates in high-end luxury apartments. Middle-market- and low-income rents are almost non-existent.
According to local real estate analysts, rents have increased by an average of 11% in recent years. According to local developers, the average rental yield is around 5% to 6%. These yields are low, given a prime lending rate of 10.6% and a mortgage interest rate of about 12%.
Economic growth is heating up
Based on CBSL projections in 2010, the Sri Lankan economy is expected to grow from 7.5% to 8% in 2010, a GDP growth rate of over 3.5% in 2009. From 2003 to 2009, the country experienced impressive economic growth after a disastrous high-debt case in 2001, with an average annual GDP growth rate of 6.3%.
In 2009, the budget deficit was 9.9% of GDP, but the government promised to reduce it to 8% of GDP in 2010 and 5% of GDP in 2012.
Tourism is expected to boom
To promote tourism, the government has legalized gambling despite religious opposition. The return of peace is likely to bring a ‘peace dividend’ to the tourism sector.
House prices have increased so much that rental yields are low
The fare continues to increase. According to Lanka Property Web, in 2018, the average monthly rent of homes in Colombo increased by 6% to LKR 354,000 (US $ 2,025). Apartment rents increased 14.6% y-o-y to an average of LKR 274,000 (US $ 1,567) per month.
Rent yields on Residential Property
Rental yields on residential properties in Colombo were around 2% to 3%, as reported by Echelon. The gross rental yield is higher for luxury residential property. Luxury apartment rentals in the central business district decrease by 4-5%.
Gross rental yields are not attractive for the long term, you will have no trouble making a good return to an apartment located in a good location with an ocean view.
Sri Lanka has a small rental market – renting only 5.4% of the total housing stock. It is dominated by high-end luxury apartments.
Interest rates are high, and the lease market is short
Sri Lanka has a very small mortgage market equivalent to around 3.6% of GDP in 2018. This is not a very high interest rate and limited loan offerings. Bank of Ceylon, Sri Lanka’s largest bank, offers mortgage loans with interest rates ranging from 12.5% to 14.5% in November 2018, from 9.5% to 12.5% three years ago.
In November 2018, the Central Bank of Sri Lanka (CBSL) raised the Permanent Deposit Facility Rate (Repo Rate) from 75 basis points to 8% and the Permanent Credit Facility Rate (Reverse Repo Rate) from 25 basis points to 9%.