APPD Market Report Article

Colombo

November 28, 2022

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

32.2%

LKR 431

Growth
Slowing

Absorption turns negative despite heightened market activity

  • Leasing activity picked up pace in 3Q22, with many projects receiving increased enquiries and inspections, particularly for small spaces in Grade A properties. This indicates that the market is stabilising, following a period of volatility.
  • Despite the higher leasing activity, negative net absorption was recorded during 3Q22 as more vacant space re-entered the CBD micro-market.

Overall vacancy soars during 3Q22

  • During the quarter, the overall vacancy rate inclined by 2.82% from the previous quarter to 19.5%. While this reflected only a negligible 0.63% y-o-y growth, it was the highest volume indicated since 1Q21.
  • Although no new supply entered the market during 3Q22, the completion of ongoing projects is expected to accelerate as the government relaxes import restrictions on several construction-related items.

Rents signal stability as exchange rate volatility eases

  • Although average overall Grade A rents increased 27.9% y-o-y to LKR 399.7, this represented a marginal q-o-q decline of 0.5% from LKR 401.8 in 2Q22.
  • With many landlords switching to USD-quoted rentals, tenants with local operations have appeared not to be very receptive to the exchange rate risk, especially for long-leasing tenures. As a result, these occupiers are finding the market less alluring.

Outlook: New supply is set to enter the SBD market in 4Q22

  • The highly-anticipated Mireka tower, which will add 600,000 sq ft (GFA) to the SBD market, is scheduled to debut in 4Q22. This is poised to change the Grade A SBD micro-market dynamics, currently saturated with only 0.56% vacancy.
  • Increased leasing demand from international occupiers is expected in high-end projects, as rates remain competitive to peer economies with the depreciation of the LKR. However, given the anticipated short-term changes in the country’s fiscal policy, these tenants continue to make cautious decisions.

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

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