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Sri Lanka rating agency warns of real estate market downturn
Real estate news By Property Bubble
23 October 2007 18:11:12
Lanka Rating Agency has warned of a possible slump in the property market which has been growing rapidly in recent years and shows signs of a classic 'bubble'. It said in a statement that real estate firms, banks and regulators would do well to learn lessons from other Asian property bubbles that collapsed causing heavy losses to investors. "Sri Lanka too has seen the property market being driven by the prospects of the cease-fire and the economic dividends that followed," said the statement by the Investor Education Division of Lanka Rating Agency (LRA).
These dividends were flushed liquidity, low interest rates and higher inward foreign remittances coupled with favourable macro-economic conditions. "However, these property market drivers are dissipating and this may trigger a reversal of trends in the fortunes of real estate," the rating agency warned. "Weak regulations and the lack of information regarding property markets in Sri Lanka, compared to other East Asian economies, are likely to further aggravate this situation. "Hence, real estate companies, financial institutions, investors and regulators alike would do well to take a lesson from the experience of our Asian counterparts."
LRA said that property development and housing construction have become "very lucrative money spinners" and are perceived as being a sure way to make quick profits. Furthermore, lending against real estate is fast being considered almost risk free, it added. "This euphoria has led many a financial institution to venture into and lend against real estate, without being fully conscious of the risks and the impact of over-lending towards this sector, especially in the light of these institutions accepting public deposits and using such deposits to venture into real estate business." Sri Lanka in recent years has seen a surge in construction and sale of apartments, housing schemes, and shopping and office complexes. The property market began to surge with companies buying large tracts of land, especially rubber estates, and subsequently developing, sub-dividing and selling these properties.
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