Teardrop island is back in demand

The end of a decades-long civil war has sparked interest in Sri Lanka's property market.

Long regarded as a tropical paradise, Sri Lanka offers several attractive features for property investors, including 1,340km of largely undeveloped coastline.

Sri Lanka has become a hot destination for international property investors - two years after the end of a decades-long civil war.

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The renewed interest is driving up prices, especially for developable land. Several resort and second-home projects are being built, targeting the type of investors and buyers who have been focusing on such destinations as Dubai, Spain and Mauritius in recent years.

"Now is the moment in Sri Lanka that everything is happening," says Magda Knop, a property agent based in France.

Ms Knop is working with a Belgian developer building three coastal villa projects and is hoping to attract buyers from Asia, India, the Middle East and Europe.

"The only thing they can buy at the moment is older colonial properties, but there is hardly anything new," she says. "That is what will emerge now."

Long regarded as a tropical paradise, Sri Lanka has a number of selling points for property investors, including 1,340km of largely undeveloped coastline.

An international airport is under construction in Hambantota in the south, and new roads should improve access to resort areas.

Tourism arrivals for the first five months of this year were up 40.2 per cent from a year earlier, according to the Sri Lankan tourism bureau data. That followed a 46 per cent increase from 2009 to last year, with most visitors coming from India, the UK, Germany and France.

Sri Lanka needs an additional 12,000 to 18,000 hotel rooms in the next five to 10 years to meet demand, according to the property consultancy Jones Lang LaSalle.

"This has triggered strong interest from domestic and international players who are now strengthening their existing lodging portfolios and scouting for new hospitality sites across the country,"a Jones Lang LaSalle report said.

To bolster property targeting international visitors, the government is offering land to developers at low lease rates, discount capital through state banks and tax breaks on the import of construction materials.

The government is also developing port facilities, hoping to attract trade traffic from other Asian countries. Foreign direct investment jumped to a record US$236 million (Dh866.8m) in the first quarter of this year, a 160 per cent increase from a year earlier.

"As long as the government continues along the line of aggressive infrastructure, the country is poised for growth," says Nathan Wills, the chief executive of Ataraxia Capital Partners, an investment company in Sydney.

Ataraxia has launched a $20m fund tracking the Sri Lankan stock market, hoping to capitalise on the country's GDP growth, which is expected to exceed 8 per cent a year. "It's on the radar of a lot of investments funds," says Mr Wills.

Property investors are focusing on undeveloped land that can be used for future projects. Attractive coastal parcels are available for€60,000 (Dh320,000) to €75,000 a hectare, much less than other tropical destinations.

Developers in Asia have been particularly active in the past year, proposing some of the largest projects in the island's history.

The Chinese company CATIC is backing a 4-hectare hotel and shopping mall complex in Colombo, while the Singapore investor SPTao is behind the $350m Havelock City, a 6.8-hectare mixed-use development under construction in the capital.

Also in Colombo, the Hong Kong-based Shangri-La Asia is building a 500-room Shangri-La hotel, the first in Sri Lanka. The teardrop island is also attracting second-home buyers and pensioners, who see the country as an alternative to more well-travelled destinations.

"I now get far more enquiries from people living in the UK as well as expats in Hong Kong, Singapore, Dubai, UAE, and my clients from Thailand who are looking to invest elsewhere," says Sue Fitzgerald, the managing director of Property Perfect, a consultancy in Hong Kong.

Foreign nationals are allowed to own property on the island, but there is a 100 per cent transfer taxon individual purchases. To get around the tax, most foreigners use a corporation to buy property, agents say.

Although there is little hard sales data available, Sri Lanka property prices missed out during the global property boom of 2005-07. Bargains can still be found inland, where a plantation on 40 hectares can be picked up for less than $200,000, Ms Fitzgerald says.

Several projects are under development on the east coast, which was heavily affected by fighting for many years, opening up new areas for tourism and people wanting to buy second homes.

"Prices rose dramatically after the war ended," says Ms Fitzgerald. "But now they are rising more steadily as foreign owners try to cash in and the remaining local sellers in popular areas … have a better understanding of the value of their land."