Colombo Port City Turns Into Belt & Road Initiative Cash Cow For Investors
Foreign Investors should be looking at Colombo Port City as an upcoming Singapore CBD alternative
Op/Ed by Chris Devonshire-Ellis
The Colombo Port City, Sri Lanka’s major China funded Belt & Road Initiative project, is turning into a cash cow for the Sri Lankan government, its Chinese investors, and for savvy future investors in the project. While the project captured criticism over the terms of the deal, the financial and development impact of the project has been grossly undervalued.
Six years in the making, the land re-development, which has been taking place on previously underutilized land near the Colombo Fort area, has been busy with dredging and reclamation. It includes an artificial island, a marina, deep water port and integrates commercial, residential, leisure, and entertainment functions. Intended to become Colombo’s Central Business District, the City has its eyes on attracting some HQ and back office functions away from nearby Singapore. Now the reclamation is complete, the CPC is now offering land to investors.
Delivered Under Budget & On Time
With an initial price tag of US$1.5 billion for the reclamation alone, the project has been Sri Lanka’s largest ever foreign direct investment. Chinese SOE’s China Harbour Engineering (CHEC), China Communication Construction and the Sri Lanka Port Authority have been the major players, with the Chinese stumping up the finance. However, in a rebuttal to the usual accusations of debt traps, the project came in at US$800 million and ahead of schedule. The total amount of land reclaimed amounts to 269 hectares – just over a square mile. Breakwater construction has also been completed and independently verified by Dutch experts as being ‘flawless’. This means that phase two – the actual construction build – can now take place. This is where the real foreign investor opportunities lie.
Colombo Port City Real Estate
The CPC itself is zoned, with construction having re-commenced in June, and workers adhering to strict coronavirus rules. This first phase of CPC infrastructure construction – including drainage, bridges, canal works, a park, marina and public access beach are scheduled to continue until August next year. Also underway is the Phase 1 vertical development, which includes three towers for office use, two residential blocks, and a commercial shopping mall. These are to be completed by 2024 and will take up 6.8 hectares of the total. Phase 2, which also starts now includes a Special Economic Zone with factory and office facilities in conjunction with services such as customs, bonded zones and so on. The SEZ is expected to be completed by the end of 2021 and goes hand in hand with a highway link to the existing ring road to the main Colombo international airport.
Colombo Port City Investors
The China Harbour Engineering Company (CHEC) have been marketing the Colombo Port City, mainly to investors in Asia, and has been targeting 300,000 HNW individuals for investments into the real estate construction. According to Henry Tillman of China Investment Research some 200 investment MoU have already been signed off with interested parties in Singapore, India, Sri Lanka, Pakistan and Bangladesh. However, due to Covid-19, planned investment roadshows, first in Asia and later to the global investment community have been pushed back until June 2021.
Colombo Port City Valuations
According to the Grisons Peak Investment Bank, the land valuation of the initial investment made by CHEC on the land reclamation amounted to Sri Lankan Rupees (LKR) 5.6 million per perch (91 hectares). However, since 2014 real estate values in Sri Lanka have boomed, partially as a result of the Chinese built Southern Expressway that links Colombo to the southern beach resorts of Galle and the coast. (Our take on the related Hambantota Port issues can be viewed here) That route has helped develop a multi-billion dollar tourism industry (under normal conditions) along China’s south and east coasts, while the Hambantota airport will eventually be the south-eastern terminal of choice for travelers accessing Sri Lanka’s famed east coast beaches from Asia.
Chandaka De Soysa, of Colombo’s Acquest real estate brokers states that the valuation of adjacent land in the Colombo Fort area is reaching LKR20 million a perch – a 258% increase.
PwC’s research in February this year (download here) has taken a set of calculations based upon a midpoint of two valuations of LKR5.6 million and LKR20 million a perch, giving a midpoint of LKR13 million a perch. That’s a 132% increase. At this level – which now appears understated – the Colombo Port City would generate US$3.4 billion from land sales, while the Sri Lankan Government would pocket US$1.8 billion. Foreign investors are additionally expected to purchase 70% of marketed plots at a value of about US$3.6 billion.
Looking ahead, valuations could also be reasonably expected to increase during the infrastructure and operational stages. Sri Lankan inbound FDI to complete the projects should amount to US$5.6 billion with US$740 million annual income during the operational stage. It would be worth tracking valuations to late 2023 when much of the development build is scheduled to be completed or nearing completion.
Outside The Colombo Port City
There are real estate and development opportunities just outside the CPC as well. The main area is Colombo One, also known as Colombo Fort, which has rail connections through to Sri Lanka’s second and third largest cities of Kandy and Galle. The Colombo Ring Road is shortly due to be completed, and is accessed from this area, while the Central Expressway to Kandy should be finished mid next year.
It should also be noted that zoning regulations are easier outside the CPC itself, and available plots smaller. Within 0.5km of CPC, the Colombo Fort area as mentioned is already achieving list prices of between LKR15-20 million. According to Sanjeev Nair of JLL Colombo, slightly further out, between 0.5 and 1 km of the CPC, commercial land is now achieving LKR12-20 million a perch, depending upon the zonal type and local infrastructure, and has risen considerably the past five years. Prices have flattened out somewhat during 2020 however most of this is attributable to Covid-19 project slowdowns and temporary trade reductions. Prices are expected to rise again from 2021.
The new financial data coming out of the Colombo Port City project appear to vindicate both the Chinese investors and the modus operandi of the Belt & Road Initiative. While early media attention concentrated on the huge amounts of money being spent and loaned, or on land given away, the CPC project has shown the Sri Lankan to have been further-sighted than they had been credited for. A bunch of underwater sand, dredged up from the Palk Strait now has a value of US$1.8 billion for the Sri Lankans. Add to that taxes and other soft levies that Sri Lanka will be able to levy on businesses and trade operating from the CPC – an annual, sustainable fiscal income, and it is quite apparent that the CPC will develop into a profitable exercise for Colombo and the country as a whole. It also provides a nearby solution to the expenses of operating in Singapore, and may attract back office functions from Singapore to Sri Lanka. This is especially pertinent for businesses operating between India and ASEAN – Sri Lanka being less expensive but close to hand.
It also ushers in a new realization and understanding of where the BRI is now headed – it is the soft construction and development of sellable assets and services that now dictate the Phase Two of the Belt & Road Initiative push. The infrastructure is nearing completion on nearly all of the major 2,500 BRI projects that China has financed and helped build. Now the Golden Apple of wealth creation via asset appreciation, increasing trade flows and services are beginning to kick in. Now, more than ever, is the time for foreign investors to look at where the new opportunities lie in the wake of the Belt & Road infrastructure investment reaching its construction phase completion and study where attractive returns on this investment can be found.
We are grateful to Henry Tillman of Grisons Peak for his contributions to this article. Please contact his China Investment Research company for further assistance with investing in the Colombo Port City.
- Sri Lanka’s Capital Opens South East Asia’s Tallest Tower, Using Belt & Road Funding
- China’s Belt & Road Initiative Changes Focus As Smaller Investments With Minority Equity Stakes Take Preference
- China’s Belt and Road Initiative – It’s about the Trade Opportunity, Stupid
Silk Road Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Asia, and assists foreign investors into the region. For strategic advisory and business intelligence issues please contact the firm at email@example.com or visit www.dezshira.com