When visiting Sri Lanka, it may well be the case that you fall in love with the country- its people, culture and beauty. And you might be tempted to set up a holiday home there, or who knows- even want to retire there! Furthermore, we wouldn’t argue against the theory that Sri Lanka ironically represents a lucrative investment in these troubled financial times, given that the economy is emerging from a twenty year civil war and has been pretty well down and out for so long.
If this is the case, listen up– as we have been through this process ourselves and learned a few things we’d like to share with you that you’re unlikely to find on a real estate agent’s website… 😉
The first thing you need to bear in mind when considering making any investment in a property in Sri Lanka is the words of the canny investor, Warren Buffett:
“Euphoria is an investor’s worst enemy; pessimism is his best friend.”
In other words, no matter how good a deal seems- think twice and think again after that. Why? Because Sri Lanka is still the Wild West and if you think that you will have any legal recourse should things go awry, forget it. It’s all about finding people you can trust and establishing transparency and clarity in a business culture that is inherently corrupt and is going to stay that way for some time to come. Your leverage is your cash and soon as you have given that over, you are very much on your own. So ask yourself what your motives are before jumping in the deep end, as if you’re looking for a solid investment that is liquid and safe, this is not the place for you.
However, if you’re able to afford a bit of fun and want to add some color to your life without going bankrupt in the process…then why not? If you’re not putting all your eggs in this particular basket and can afford it, you might even make some capital gain in the long-term. Having said this, please do believe us when we give you some tips, as we ourselves have been down this road for better or worse!
Here are three facts on the ground that may help you:
* If a foreigner buys land in Sri Lanka, there is a 100% land tax. Obviously, this is completely prohibitive- but it can be gotten around by setting up a local company that owns the property, whereby you will own all the shares of this company. Bear in mind that this company will need to be “active” and so you’ll be bearing approx. $1,000 in legal and accounting fees every year
* The real estate agents in Sri Lanka are not licensed or regulated. So any Tom, Dick or Harry can say that they’re an agent while having no qualifications or ability for you to hold to account. In addition, they take an extortionate 10% commission of the sale- 5% from the buyer and 5% from the seller. Unbelievable, we hear you say and we agree!
* There is a weird metric system in Sri Lanka when it comes to measuring land: perches. Prices will nearly always be quoted in terms of Sri Lankan Rupees per perch. One perch is 25 square meters, so 160 perches is one acre. Become familiar with this as quickly as possible.
Our advice would be that you resist all the amazing deals of the century you find on your holiday and if you really are considering buying a property– come back and rent first. Learn the lay of the land before you commit your hard-earned shekels to a fantasy. The only possible downside to this is that you miss the gold rush and Sri Lankan real estate suddenly is competing with Manhattan overnight. Talk to the other expats who have bought properties, learn from their mistakes and find contacts of people you can really, really trust via multiple and solid recommendations. Don’t forget- these will likely be your neighbors also, so be smart and don’t go showing off! Otherwise, everyone will want a piece of you- Sri Lanka can become a small place very quickly!!
So what do we suggest if you are interested in buying a property in Sri Lanka?
** Don’t rush– rent a house for a year in the area that you are interested in buying a property in and take your time learning what is what & who is who.
** Find one single estate agent that you like/trust and negotiate a lower commission than 5% from your end. For buying or renting, we recommend Ivan at Sri Lanka Real Estate. With Ivan (don’t tell him we told you about negotiating on the commission!), what you see is what you get and he is an authentic professional in this industry. And unlike many other agents, he won’t abandon you after the purchase and will continue to help & look after you. There are a disproportionate amount of agents for such a small real estate market as Sri Lanka and many of them are foreigners who have been around for years supplementing their passive income. If you can pick one single agent, your life on the social front will be much smoother!
** Find a trustworthy lawyer who will represent your best interests and not the seller’s. We recommend Bindu Wickramasekara ([email protected]) for the Galle area. A lawyer like Bindu will charge 2% of the purchase price, but he will do so much more for you than just legal searches, paperwork and the usual that one might expect in the West- he will be your eyes and ears on the ground and be able to help you see the wood from the trees…
** For setting up your company in Sri Lanka, there is only one law firm that can be recommended: Simon and Associates in Colombo. With Simon you are in the safest hands possible and sleep at night knowing that you are protected by the best. This is going to set you back approx. $3,000.
** For banking, by far the easiest to use is HSBC in Colombo. At the minimum you will need to set up what is known as a SIERA account (share investment external rupee account).
** If you are buying a plot of land or an old property, get quotes from a builder who you have decided to use before you buy, and not after. As a rule of thumb, the cost of building in Sri Lanka with a high end finish is approx. $400 – $500 per square meter. So for a large house of 500 sqm (say 4 bedrooms, large living space, etc)- that’s $250,000. Allow another $50,000 for your landscaping, pool and other external costs and you’re talking about $300,000 for building a beautiful house that is done to your specifications. Of course you will get cheaper quotes than this, but you already know where that will lead you…disaster. And add to this the cost of the land you bought. Also, bear in mind that while one might assume otherwise, renovation can cost as much– if not more– than building from scratch with demolition, etc. Plus in many places (especially within Galle Fort), you will need building permits for any building or renovation work. We recommend Neilan William, owner of Siem Construction. Neilan is a rare breed: an honest builder and as the owner of an established company with a good reputation, he can be trusted to stay in budget and on schedule.
** The Sri Lankan currency is traditionally weak against the major world currencies, so factor in some depreciation of the SL Rupee. You will find that the sellers will choose whatever currency suits them best at the time, but our advice is to stick to an offer in USD so that you know exactly where you stand- whatever the volatility of the currency markets.
** Sri Lankan sellers are always going to assume that you, as a foreigner, are very wealthy and will therefore try and achieve a selling price well above market value. You must be prepared to bargain hard.
** Now here is an idea for you…
Maybe you can see from the above that buying property in Sri Lanka is no picnic. So instead of going through all the inevitable emotional and psychological turmoil of this torturous process, why not buy someone else’s hard work and effort for a song? By buying a property from an expat who is wanting to sell up for whatever reason (leaving, fed up, cashing in on a gain, divorce, etc…) you are going to avoid a lot of hassle and be able to buy the property as a company without all the aggro. Yes you might be spending an extra few dollars from what you’d pay a local for the property (and even that is debatable!), but trust us when we say that this is money well spent!
Anyway, we hope that this post has been of some help to those of you seriously considering buying a property in Sri Lanka. If you would like some additional advice or help, do drop us a line– we have no axe to grind and will be happy to let you know the real deal! 🙂
Photo via Tisara Villas
Originally posted on October 7, 2010 @ 5:37 pm