APPD Market Report Article

Colombo

August 26, 2022

Dr Samantak Das, Head of Research, India & Sri Lanka

26.3%

LKR 434

Rents
Rising

Absorption remains steady across the market

  • The demand for Grade A offices continued its growth momentum during 2Q22, despite the growth in rentals amid economic headwinds.
  • A noteworthy positive absorption was observed in the CBD micro-market, substantially shifting the demand towards high-end office spaces.

Vacancy rates continue to ease across micro-markets

  • Despite soaring rents, vacancy rates continued to decrease, reaching 16.7% by end-2Q22, down 235 basis points y-o-y from 19.05%, as recorded in end-2Q21.
  • On the other hand, the Grade A office market stock remained unchanged due to delayed completions. Originally slated for opening in 2Q22, three major buildings, Mireka Tower, Ekroma and JFI Tower, continue to push forward with construction amid disruptions prompted by economic uncertainties.

Exchange rate depreciation further elevates rentals

  • Overall Grade A rents continued to surge in 2Q22, driven by the significant depreciation of the LKR against the USD. Consequently, the LKR value of rental prices, quoted in USD, has been considerably elevated, resulting in an average rental of LKR 401.87 at the end of 2Q22, which translated to an overall market rental growth of 13.15% q-o-q and 23% y-o-y.
  • Depreciation of the exchange rate coupled with heightened policy interest rates continued to put further pressure on rents amid the increasing cost of debt for developers and investors.

Outlook: Leasing demand and rents likely to soften

  • In the short term, increased supply is expected to enter the market, likely bringing down rental prices. Rental prices are therefore predicted to ease in the medium term.
  • Macroeconomic imbalances have temporarily slowed the decision-making in companies, and this is anticipated to weigh on the leasing demand, particularly from domestic businesses.

Note: Colombo Office refers to Colombo's overall Grade A office market.

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