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Scarcity of multi-tenanted Grade A office buildings in Colombo

Foreign Operations/Joint-ventures that have entered the local market Source: BOI Sri Lanka 2009-2015 statistics
Foreign Operations/Joint-ventures that have entered the local market
Source: BOI Sri Lanka 2009-2015 statistics
in office real estate, vacancy
levels in prime commercial areas play a vital role in deciding who shall have
the better bargaining power while executing the transactions. Minimal vacancy
levels in commercial pockets give developers an edge while negotiating. Office
occupiers always find it tough to find the right office space in such landlord
market conditions.
The current situation in Colombo
office market is no different. Presently, Sri Lanka has eight Grade A office
buildings with a total area of 2 million sq ft, all of which are nearly fully
occupied and located in the CBD of Colombo. The occupancy rate of these
buildings is as high as 95% as at the end of 2015, up from 60% in 2009.
A stable and business friendly
environment generated by the government helped restore investor confidence. On
one hand, domestic companies showed stable growth, and on the other a surge was
recorded from 2009-2010 of foreign companies entering the country. The
government’s infrastructure developments including the development ports and
roads led to the construction industry expanding over the past years. Among the
MNC’s, construction, food processing and IT businesses showed interest in
opening up offices.

Ms. Gagan Singh, Chairperson – Jones Lang LaSalle Sri Lanka
Supply & Demand for Grade A Office space Source: JLL Research 
Future trends indicate that the
demand for office spaces in upcoming years is likely to be robust. Macro
indicators of Sri Lanka support the hypothesis. In 2016, out of 189 countries,
the World Bank listed Sri Lanka at 107, as opposed to 113 in 2015, in terms of
“Ease of Doing Business”. Recent policy changes proposed in 2015-16 budget are
expected to impact private and foreign investments positively. Revival signs in
the Sri Lankan economy can be seen from the promising GDP growth expected in
the next few years. According to the Asian Development Bank, the GDP growth
rate is forecast to reach 7% in 2016 from 6.3% in 2015. Meanwhile, as Sri
Lanka’s commercial capital, Colombo is considered one of the upcoming
commercial hubs of South Asia, it is expected that greater activity in
commercial real estate will soon be observed.
From the market research done
earlier by JLL in 2015, there were clear signs that the office space demand
would be greater than the quality supply by end of 2020. Although there is a
pipeline of 2.6 million sq ft for supply in medium term, demand of 1.5 million
sq ft from the IT/ITeS sector alone is expected in the upcoming years.
Ms. Gagan Singh, Chairperson – Jones Lang LaSalle Sri Lanka
Ms. Gagan Singh, Chairperson –
Jones Lang LaSalle Sri Lanka
The new government’s plans of
making Sri Lanka the most competitive economy in South Asia will contribute to
the incremental demand of office space not only from BPOs but also from FAOs
(Financial Accounting Outsourcing). Furthermore, Travel and Tourism is expected
to grow with the new budget of 2016 proposing the promotion of the MICE
(Meeting Incentives Conferencing and Exhibition) sector.
Interestingly, for the past four
quarters, due to the limited quality space available, CBD sub-market rents have
increased 7-10% y-o-y in almost all Grade A buildings. New entrants such as MNC
firms are likely to be flexible and ready to pay premiums for space that meets
their specifications.
It is going to be a
prime need for the authorities to make the path for the occupiers to source
office spaces better. Some suggestions are:
  • City development authority can notify some of the
    land parcels from neighbouring submarkets to commercial development use to
    ease pressure on the CBD areas. Commercial office developments in those
    pockets will allow occupiers some more options to choose from in the
    medium term. 
  • Developers should look at sustainable buildings
    as a strategy to control their costs considering the long term
    perspective. Green buildings will become a necessity in the future and
    will also improve the working environment of the occupiers.
  • The local authorities and town planners need to
    provide a greater focus on the infrastructure front, and issues such as
    parking, traffic congestion, and sewage management.
  • Dedicated spaces can be developed for open spaces
    and recreational areas to create a better environment. Successful
    implementation will lead to a well-rounded development of the commercial
    hub Colombo.  

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