Housing Market In Sri Lanka Construction Essay

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"The essence of formulating competitive strategy is relating a company to its environment" (Porter, 1980).

Sri Lanka popularly known as the pearl of the Indian Ocean is blessed with the most extraordinary and varied beauty from endless palm-fringed beaches to tea-carpeted and mist-enveloped hills, its differing landscape and salubrious climate make it the most bio-diverse island of its size in the world, boasting a rich cultural heritage with numerous world heritage sites and many examples of early triumphs of civilization.

The total land mass of the country is 65,610 sq. km. and Colombo (pop. est. 1.3 million--urban area) is the commercial capital and Sri Jayewardenepura-Kotte the capital.

It is a fast developing country and boasts of a diverse cultural and multi-ethnic population of 20 million with an Annual Growth Rate of 1.1%. The Economic Statistics in 2008 indicate a GDP of $40.7 billion with an Annual growth rate of 6%.

The end of a thirty year conflict has brought immense hope and the dawn of a new era with emphasis on reconstruction. The majority at present live in sub-standard accommodation and there is no proper structured housing strategic market, unlike in developed countries. The Government has plans to invite the private sector to participate in the development of the housing market as the need for housing has become urgent.

Locals are showing growing interest in real estate and expatriate Sri Lankans domiciled in the United States (USA), United Kingdom (UK), Australia, Canada and other European and Middle Eastern (ME) countries are buying into the market. Central bank statistics indicate that this segment accounts for 50% of buyers of condominiums in Sri Lanka making it a sizeable focus group. Figure 1 depicts a map of Sri Lanka showing its geographical position.

Figure 1: Map of Sri Lanka

Source: Surveyor General, Survey Department, Sri Lanka.

1.2 Industry Definition and Overview

The purchase of a house is typically the single biggest investment an individual makes in a lifetime and GCM being the hub of commercial activity is an ideal housing market.

New construction in GCM is slated to remain strong; inducing developers to invest as the market flourishes due to increase in demand for housing.

This is further propelled by extreme importance attaching to location that distinguishes large developers from small-timers.

These large developers have taken advantage of this market driven by high demand that exceeds supply, mostly contributed to the influx of a large migrant population into the city seeking employment, resulting in their significant presence in the housing market. Figure 2 shows a map of GCM.

Housing is essentially a local business as each location has different characteristics and poses a different degree of risk to the developers, but there are some elements that are common to the entire housing market.

1.3 Residential Homebuilding Process

In identifying where to build new houses, many considerations, both physical and economic become important. First, the developer must determine the geographic location based on economic factors in that region. Next is the acquisition of developable lands. Then the building permits, land and site planning, procurement of environmental and regulatory approvals, construction of water, sewage and electrical lines follow. Design is the next process followed by actual construction.

The goal of every developer is to construct durable and highly attractive houses appealing to the market. Construction is done in phases, affording greater financial flexibility to the developer.

Most developers prefer to have an identified number of signed contracts before starting a phase. The financial strength of a large development company affords it flexibility in the various stages of construction and with its buyers.

1.4 Economic Conditions of the Industry

The housing market is highly cyclical and is greatly affected by economic trends and the industry's outlook. Given this and the length of years from land purchase to actual sale, analysis of long-term economic trends that will affect demand for houses becomes necessary. There is a correlation among the three economic variables of long-term interest rates, job growth and consumer confidence that affects the demand in the housing market.

Rising interest rates are correlated to periods of increased jobs and growth in consumer confidence and vice versa. In conjunction with these, are other economic factors that affect the individual builder and their geographic location, such as the strength of the economy, revival of the labour markets, stronger income for buyers and revival of consumer confidence. Labour markets have rebounded with net payroll increases and increase in jobs leading to greater financial security for individuals. 'Housing starts numbers' is an excellent economic indicator and of housing growth.

According to Dr. Wille Mendis, Emeritus Professor of the Town & Country Planning University of Moratuwa, Sri Lanka, between 2005 and 2010, the market is estimated to have the greatest population gains and it is imperative that a well designed structured strategy is developed by the housing industry to avoid congestion and overcrowding of the GCM.

There are certain impediments that challenge the rapid development of the housing sector: exorbitant land prices in urban areas, problems in land titles, lack of long-term lending ability of financial institutions, lack of secondary mortgage market, scarcity of skilled labour in the construction sector and rising prices of building material.

1.5 Industry Outlook

The housing industry has been growing steadily as indicated by the compounded annual growth rate. There is little evidence of oversupply in this industry, but the economic outlook and the possibility of increased interest rates in the future could slow the growth of this industry.

This is one of the most fragmented industries in Sri Lanka. The demand for houses and urban infrastructure are expanding rapidly with population growth and urbanization. Mr. Lalith Mirihagala Director, Town Planner REEL says that the long term governmental housing development policy as indicated in the 'Ten Year Vision' envisages meeting a large part of the backlog and the growing demand. He also says that the policy aims at ensuring planned human settlements taking into consideration population density, land suitability and environment sustainability.

According to Mr. Mirihagala, this housing policy includes adoption of vertical development approaches in the high and medium density areas, implementation of participatory approaches wherever possible, developing housing finance market with primary and secondary mortgage financing facilities and providing government assistance for needy groups. In addition to individual housing, government supported programmes and private sector investments are expected to provide 645,000 housing units during the ten year period up to 2016.

1.6 Trends in the Industry

The national housing market is not homogeneous, but varies from region to region. Housing cycles reflect changes in local conditions. In GCM, the market has been strong due to job growth and demographics that support its increase.

In choosing a location population growth in that region must be noted. Increased migration of people to an area makes it an ideal region for development. Convergence of people to cities from outside sees demand overriding supply leading to urgent requirement for additional housing.

Figure 2: Map of GCM

Source: City of Colombo Development Plan (UDA) - 1999

The factors that affect developers include increase in regulation of housing permits and the amount of developable land. It is no secret that the larger companies strive to become leaders through their growth strategy. Most growth comes from existing markets and areas directly adjacent to them. The ability to replicate their core business practices with ease in current markets and adjacent spaces enables developers to grow.

Growing into adjacent business space enables successful companies to outperform their competitors. They expand their market by acquiring smaller construction projects thus entering new markets not directly adjacent to the current ones.

Overall, offering high quality houses with innovative architecture, landscaping and focus on excellent customer care services and amenities give developers competitive edge over rivals.

1.7 Study of the Residential Housing Market

Central Bank Annual Reports, National Census Data Reports, UDA, NHDA Annual Reports and AC Nielsen Report on Housing Stock in Sri Lanka were sourced for this chapter. The qualitative data was obtained through interviews with professionals in the industry and quantitative data collection was through online questionnaire and telephone surveys.

Table 1 and chart highlight the current and future estimate of housing requirements up to 2010. As per analysis the requirement will reach 603,100 by year 2010. Appendix B provides details of this tabulation and a historical perspective.

Table 1: Current and Future Estimates of Housing

Total Housing Requirement of the GCM: 2006 to 2010

(housing units in '000)














Data Source: Dept. of Census & Statistics

The average increase in the housing requirement from 2006 to 2010 is estimated at about 32,000 housing units per year; 42% of the requirement is in Colombo.

Table 2 and attached chart show estimated annual increase in housing requirement:

Table 2: Annual Increase in Housing

Annual Increase in the housing REQUIREMENT IN GCM- 2006 - 2010

(housing units in '000)






Colombo Dist.






Data Source: Dept. of Census & Statistics

Housing requirement and annual increase estimated above show the total housing requirement of the entire population living in GCM. Population in any geographic location is highly diverse and falls into various social and economic classes.

Demand for housing must be analysed from the perspective of household income; thus the need to segregate the total housing requirement into various categories or classes of household income groups like 'high income housing', 'middle income housing', etc. Review of the trends in growth in income shows that we cannot expect change in the 'income class landscape' or percentages of households falling into each of the income classes in the medium term.

Table 3 and chart show estimated percentage of households falling into income classes as well as estimated housing requirement for each of the income class for the year 2005. Appendix C provides details.

Table 3: Housing Requirement Categorized into various Income Groups




Lower Income Class



Lower Middle Income Class



Middle Income Class



Higher Middle Income Class



High Income Class



Data Source: Dept. of Census & Statistics

1.8 Analysis of Current Housing Stock

The stock of houses as well as annual additions over a given period of time can be estimated from the National Census data and the existing stock of houses from the perspective of different classes. i.e., high income/ superior quality houses, middle class houses, etc. is essential.

Table 4 and chart below highlight the housing stock based on the data from National Census of 1994 and 2001.

Appendix D provides details of the workings, etc. and the estimation of above categorization including various assumptions and use of statistics.

Table 4: Estimate of Housing Stock based on Data from National Census of 1994 and 2001

housing stock of GCM - 2005

(housing units in '000)


Permanent Housing


Semi-permanent Housing


Improvised Housing




Data Source: Dept. of Census & Statistics

Tables 5 and 6 and charts below summarize the findings and present an approximate division of the housing stock into various classes of housing.

Table 5: Classes of Houses

classes of houses - 2005

(housing units in '000)


Superior Quality Houses


Typical Middle Class Houses


Houses with Basic Facilities


Houses without Basic Facilities


Temporarily houses


Total Houses


Data Source: Dept. of Census & Statistics

According to these data 8.1% houses in GCM fall into the category of Superior Quality houses, while 20.4% fall under the category of typical Middle Class houses. 78.6% of houses have basic facilities, 81% of houses in GCM are Single Houses while apartments account for only 5.4%.

Table 6: Types of Houses

types of houses - 2005

(housing units in '000)


Single Houses


Attached Houses/ Annex


Flats/ Condominiums


All other


Total Housing Units


Data Source: Dept. of Census & Statistics

1.9 Replacement of Older Houses

The analysis of demand for housing from a Property Development perspective show the demand for new housing stemming from the replacement of older houses forming an important segment. Experts suggest that the current lifespan of a house in Sri Lanka is about 20 years.

However, our findings earlier suggest that the replacement of housing due to changes in income classes is marginal. Aging population also has an impact on the replacement housing market, where they tend to move into smaller and convenient housing.

Table 7 and chart present a brief discussion on the estimation of quantum of housing units that should be replaced each year; accordingly about 25,380 houses across all income segments will require replacement every year.

Table 7: Estimated Quantum of Houses to be replaced

Estimated quantum of houses to be replaced with new houses per year during 2006 - 2010

(housing units in '000)


Lower Income Class


Lower Middle Income Class


Middle Income Class


Higher Middle Income Class


High Income Class




Data Source: Dept. of Census & Statistics

1.10 Comparing Current Situation

Demand for housing is adjusted for natural vacancy and non-residential use. Supply is the actual stock of houses and presented in various income classes while supply is also presented in various categories of houses.

Data in Table 8 and chart indicate approximate unmet housing demand as at 2006;

(i) 5,000 upper income houses/typical household, earning over Rs 100,000 per month.

(ii) 100,000 middle income houses/typical households earning Rs 25,000/50,000 per month.

(iii) 150,000 low income class houses.

Table 8: Demand/Stock - Classes of Houses



Supply/ Stock

High Income Class


Superior Houses


Higher Middle Income Class


Middle Income Class


Middle Class Houses


Lower Middle Income Class


Houses with Basic Facilities


Housing without Basic Facilities


Lower Income Class


Temporary Houses






Data Source: Dept. of Census & Statistics

Forecasted demand for housing in GCM, during 2006-2010 show that GCM would need on average 59,000 new housing catering to all income groups. Table 12 and graph provide relevant statistics and the forecasted demand of houses for 2006 - 2010.

Table 9: Forecasted Demand

(housing units in '000)






Colombo Metropolis






High Income Class






Higher Middle Income Class






Middle Income Class






Data Source: Dept. of Census & Statistics

1.11 Aim and Personal Interest in the Research

Housing is a major problem in Sri Lanka and there is an urgent need to find a strategic framework to this burning issue. The public sector lacks capital to be actively involved in this sphere. Private sector companies need large investments and without a successful winning strategy, existence in this field becomes uncertain in the long run. Therefore, companies need to have a well designed and analysed housing strategy to be profitable and to withstand the test of time.

A strategy for a business of this nature must be designed with minimum risk to the huge investments and must be long term without requiring frequent revision. For a large industry such as the housing market, Michael Porter provides a set of conceptual analytical tools, which furnishes an investor/developer/ with a 360Ο viewpoint of the industry.

Hence, it is interesting to see how Porter's Five Forces Model and the Generic Strategies could provide the necessary input and the conceptual theoretical framework to assist a company to map out a long term strategic plan for a successful housing business in Sri Lanka.

A well thought strategy will not only add value to the housing industry but will make this topic of great interest and importance to the key players in the business. Working on such a research and analysis has given the author immense personal satisfaction.

1.12 Research Questions and Objectives

The main research question is to analyze research data as to how a winning market strategy could be found for the housing industry in Sri Lanka.

The objective of the research is to find answers to the following of research:

(i) The scale of bargaining power of suppliers in the housing industry;

(ii) The degree of bargaining power of buyers/customers in the industry;

(iii) The level of threat of new entrants;

(iv) The measure of threat of substitutes in the industry;

(v) The extent of threats posed by the competitors within the industry;

(vi) The best market positioning for the housing industry in Sri Lanka;

1.13 Market Segments of the Housing Industry in Sri Lanka

At the very outset, the intention of the author is to analyze the categories of people requiring housing. This information would help ascertain the segments and types of housing that is required. Firstly, an analysis of the categories needing housing:

(i) Those who are currently on rent and desirous of obtaining ownership of house;

(ii) Those moving out after marriage.

(iii) Migrant worker populations shifting to the city for professional commitments.

(iv) Expatriate community wishing to own houses.

(v) Diaspora, investing in housing to have a foothold in their country of origin.

(vi) Upper and middle class segments claiming ownership to a second house, which is a niche market.

Analysis of the above indicates that the housing market evolved around three main segments namely the upper, middle and low income groups.

It is vital to identify the best market segment or a mixture to draw a strategic plan for the housing industry in Sri Lanka.

(i) The luxury or the niche market caters to the upper income group, i.e., condominiums, penthouses, etc., a relatively small market segment.

(ii) The middle income group attracts the largest market segment and is the focus of strategy.

(iii) The low income group, although greater in number are unable to find funding.

The research analysis is confined to the upper and middle income market segments due to their size. The above mentioned issues are analyzed only in respect of the middle income market segment in GCM.