Sri Lanka Macroeconomic Update
International Monetary Fund
As the country staggers through its worst economic crisis in decades, Sri Lanka has sought out assistance from the IMF to ease its financial burden until the debt is restructured. It was announced that the government has now achieved a Staff Level Agreement with the IMF, on a set of comprehensive economic policies financed by a four-year, USD 2.9 billion Extended Fund Facility (EFF). After Lazard & Clifford Chance concludes Sri Lanka’s foreign debt restructuring process, the Parliament will be required to approve the EFF prior to the IMF Board.
In the World Bank’s bi-annual update, the authorities emphasized the importance of restructuring Sri Lanka’s debt and implementing a deep reform program, which are deemed critical for Sri Lanka’s economic stabilization. Sri Lanka’s economic crisis is deepening with unsustainable debt and a severe balance of payment crisis on top of the lingering scars of the COVID-19 pandemic.
Shown below is the timeline for the debt restructuring process:
Consequent to the conditions IMF has placed, Sri Lanka is in the process of reforming its fiscal policy to drive posterity by increasing revenue, removing subsidies, ensuring a flexible exchange rate and rebuilding its foreign reserves.
Public Debt
As at the end of June 2022, public debt stood at 122% of the GDP, assuming a 2022 nominal GDP of LKR 23.84 trn | GBP 56,623.26 m | USD 65,620.7 m. This is believed to include state backed debt that includes credit line facilities for essentials, and bilateral swap lines with the People’s Bank of China, the Reserve Bank of India and the Bank of Bangladesh.
Sri Lanka’s total debt of USD 54bn, also consists of the external debt of the Government and State-Owned Enterprises which includes a variety of bilateral creditors. Out of the overall bilateral debt of USD 13.8bn, we have a USD 9.9bn in direct exposure (includes credit lines given for essentials) and USD 4.2bn in indirect exposure (arrears as at end June 2022).
The country’s top ten creditor’s hold up to 95.7% of the total external public debt. China, Japan and India rank high on the list with 83.5% out of the total.
Tax Reforms
In an effort to obtain the EFF and generate revenue during the current economic crisis, a number of tax measures relating to income tax, corporation tax, CGT, VAT, telecommunications, betting and gaming have been proposed through an amendment to the Inland Revenue Act, which is currently in the ‘Bill’ stage. The Parliament still needs to debate the said Bill before it can be gazetted and adopted as a law, and there are several petitions in the Supreme Court against the Bill. Accordingly, we expect (and hope) that there might be changes to the Bill.
The proposed Bill raises the standard corporation tax rate from 24% to 30%. Additionally, the standard tax rate for NGOs, Unit Trusts, and Trusts will also be increased to 30%.
The Bill also proposes to end the 14% concessionary corporation tax rate that presently applies to exporters and the 18% rate that currently applies to certain industries, including healthcare, education, and SMEs; it has been proposed to increase such taxes up to 30%. Significant tax exemptions will be eliminated, including those for renewable energy projects, dividends paid to non-residents (withholding tax will be reimplemented at 15%), and IT and related services.
VAT was increased to 15% from the current rate of 12%, with effect from 1st September 2022.
CGT from the realization of an investment asset owned by a company will be subject to additional taxes ranging from 10% to 30%. Such profits from the divestment will be taxed at 30%, unless those shares are quoted on the stock exchange.
The current income tax exemption which is granted to non-resident shareholders who receive dividends paid out by Sri Lankan companies will be discontinued as well, the proposed withholding tax applied is suggested at 15%.
With effect of the law's enactment, mandatory withholding on employment income will once again be implemented. The proposed Bill would lower the tax-free allowance from its present level of LKR 3 million | GBP 7.125.41 | USD 8,257.64 per year to LKR 1.2 million | GBP 2,850.16 | USD 3,303.06 per year and individuals with income surpassing LKR 100,000 | GBP 237.51 | USD 275.25 per month will be liable to pay taxes. Additionally, the highest individual tax rate will rise to 36%. Each additional LKR 500,000 | GBP 1,187.57 | USD 1,376.27 earned annually will result in a rate increase of 6%, 12%, 18%, 24%, 30%, and 36% for the progressive tax rates.
Interest Rate and Bonds
The current standing lending facility rate is 15.5%, and the standing deposit facility rate is 14.5%, both of which have not changed since the previous quarter. The Central Bank has decided to maintain the same rates. The Average Weighted Prime Lending Rate (AWPLR) as at 30th September 2022 was 26.16% (this has reduced by 200 basis points as of yesterday).
The National Consumer Price Index records an increase of 66.7% and 70.2% during July and August, respectively. Currently, the LKR one-year bond is providing a yield of 29.6%, and the 10-year bond rate is 29.96%.
Foreign Reserves
The USD exchange rate as of 31st October is 363.30, and the GBP exchange rate is 421.03. The USD has increased marginally by 0.95%, and GBP has decreased by 3.63% since the end of last quarter. Gross official reserves as of September 2022 is estimated to be USD 1,717 mn and include the swap facility from the People’s Bank of China, equivalent to approximately USD 1.5 bn, which cannot be used as it is subject to conditions.
USD FX rate - LKR 363.30 and GBP FX rate - LKR 421.03 as at 31st of October 2022
Additionally, the construction and manufacturing industries have been negatively impacted by the temporary import ban that was enacted in August that covers 300 products (IT equipment, building supplies, machinery equipment, etc.).
FINANCIAL OVERVIEW
Share Price Performance
LRI’s share price closed at LKR 13.60 (30th September 2022) with the share touching a monthly high of LKR 16.70. LRI share has declined by 9.9% (ASPI increased by 9.5%) for the month of September and increased by 13.3% (ASPI increased by 35.3%) for the quarter ended September 2022.
Public Float
As of 30th September 2022, the public float stood at 42.19%.
Share Turnover
LRI's quarterly share turnover increased from LKR 64Mn | GBP 159,095.27 | USD 176,357.12 in the quarter ended June 2022 to LKR 65Mn | GBP 161,581.13 | USD 179,112.70 in the quarter ended September 2022.
(FX rate for GBP- LKR 402.27 and USD - LKR 362.90 as at 30th September 2022)
Annual Performance
We feel the Company's financial performance demonstrates tenacity in challenging times. The Company achieved a 187% increase in Group revenue to LKR 1,240.4 m | GBP 2.9 m | USD 3.4 m in the year under review compared to LKR 432 m | GBP 1.03 m | USD 1.2 m earned during the year ended 31st March 2020/21. This revenue growth is mainly accredited to our commercial assets which upheld their occupancy rates as well as achieved new lettings and strong sales and collections on Mulberry Residence. Due to the negative economic and political climate in the country, the leisure properties made a minimal contribution to the total revenue. We are hopeful that the tourism industry will recover very soon and we are beginning to see encouraging signs and grassroots.
The company reported a Profit After Tax of LKR 1,278.1 | GBP 3.0 m | USD 3.5 m during the year under review compared to the Loss After Tax of LKR 201 m | GBP 0.5 m | USD 0.6 m recorded in the previous financial year.. This increase was mainly due to the rise in fair value gain on the investment properties, which amounted to LKR 1,986.7 m | GBP 4.7 m | USD 5.5 m.
An 18% increase was showcased in Total Assets at LKR 17,987.5 m | GBP 42.7 m | USD 49.5 m in the year under review compared to LKR 15,275.4 m | GBP 36.3 m | USD 42 m during the year ended 31st March 2020/21. Total Non-Current Assets recorded an increase of 20% to LKR 15,393.8 m | GBP 36.5 m | USD 42.4 m compared to LKR 12,873.5 m | GBP 30.6 m | USD 35.4 m as at end of March 2021. Total Current Assets showcased an 8% increase to LKR 2,593.8 m | GBP 6.2 m | USD 7.1 m compared with LKR 2,401.9 m | GBP 5.7 m | USD 6.6 m as at end of March 2021.
Click here to download the complete Financial Statements for the Annual Financial Overview of 2021/2022.
For the Quarter Ended 30th September 2022
Balance Sheet Analysis
Total Assets have remained unchanged with only a marginal decrease of 2% at LKR 17,698.5 m | GBP 42 m | USD 48.7 m compared with LKR 17,987.5 m | GBP 42.3 m | USD 49.5 m as at end of March 2022. Total Non-Current Assets recorded a slight increase of 0.57% to LKR 15,481.0 m | GBP 36.8 m | USD 42.6 m compared with LKR 15,393.8 m | GBP 36.6 m | USD 42.4 m as at end of March 2022. The Total Current Assets showcased a 15% decrease to LKR 2,217.5 m | GBP 5.3 m | USD 6.1 m compared with LKR 2,593.8 m | GBP 6.2 m | USD 7.1 m as at end of March 2022. The decrease in Current Assets was mainly due to the decrease in inventories.
P&L Analysis
Overall consolidated revenue increased by 202% to LKR 524.1 m | GBP 1.2 m | USD 1.4 m in the quarter ended 30th September 2022 compared with LKR 173.3 m | GBP 0.4 m | USD 0.5 m in the corresponding quarter of the previous year. This increase was primarily due to the increased contributions from sales at the Mulberry residential apartments. As a result of the above, the corresponding direct expenses demonstrated an increase of 325% to record LKR 503.1 m | GBP 1.2 m | USD 1.4 m for the quarter ended 30th September 2022 compared with LKR 118.4 m | GBP 0.3 m | USD 0.3 m during the comparable period in the previous year. 66% of the overall operating cost was attributed to the development of Mulberry Residence. The operational loss recorded for the quarter was LKR 36.9 m | GBP 0.1 m | USD 0.1 m compared with the operating profit of LKR 6.1 m | GBP 0.01 m | USD 0.02 m recorded during the quarter ended September 2021. Please note that interest rates have increased by c. 28% during the quarter.
Click here to download the complete Financial Statements for the Quarter Ended 30th September 2022.
ASSET MANAGEMENT
Unity Plaza - On'ally Holdings PLC
New Lettings and Renewals
We are pleased to inform you that we have signed 4 lease renewals and 2 new leases during the quarter.
Short-Term Investments
Total funds available for investments amounts to LKR 600 m | GBP 1.4 m | USD 1.7 m as at 30th September 2022. During the quarter the Company invested in LKR. 433.5 m | GBP 1.0 m | USD 1.2 m in three-month treasury bills with interest rates ranging from 29% to 33%. Weighted average effective rate of return recorded in September 2022 was 29.04%. There has been a significant increase in the treasury bill rates since the previous quarter hence the funds which were invested in fixed deposits have now been invested in treasury bills for a higher return.
Year-end financials
On’ally Holdings PLC showcased a 17.25% increase in revenue growth, amounting to LKR 213.04 m | GBP 0.5 m | USD 0.6 m during the year under review, compared to LKR 181.70 m | GBP 0.4 m | USD 0.5 m earned during the previous financial year. This growth is mainly attributed to increased rental income and service charges. In the year under review, the profit after tax increased by 304.80% to LKR 660.36 m | GBP 1.6 m | USD 1.88 m from LKR 163.13 m | GBP 0.4 m | USD 0.5 m in the previous financial year. The rise in rental revenue and the investment property's fair market value gain to LKR 674 m | GBP 1.6 m | USD 1.9 m are credited with this rise.
Click here to download the complete Financial Statements for the Annual Financial Overview of 2021/2022.
Quarter Financials
The revenue for the quarter that ended on 30th September 2022, was LKR 69.7 m | GBP 0.2 m | USD 0.2 m, which was increased by 56% from LKR 44.8 m | GBP 0.1 m | USD 0.1 m, over the same period the previous year. The profit after tax increased by 98% during the quarter to LKR 66.3 m | GBP 0.2 m | USD 0.2 m from LKR 33.5 m | GBP 0.1 m | USD 0.1 m in the corresponding quarter last year. The growth of the rental income has significantly contributed to this gain. The total assets have increased by 3% to LKR 3,871.7 m | GBP 9.2 m | USD 10.7 m from LKR 3,754 m | GBP 8.9 m | USD 10.3 m in the previous quarter of the prior year.
Click here to download the complete Financial Statements for the Quarter Ended 30th September 2022.
Dividends
The company's declaration of the largest dividend payout to shareholders in On'ally Holdings PLC’s history is another remarkable accomplishment from the year under review. We paid out a final dividend of LKR 0.60 per share for the year ended 31st March 2022, as well as an interim dividend of LKR. 2.10 per share. The total dividend for the year under review amounts to LKR 251.1 m | GBP 0.6 m | USD 0.7 m at LKR. 2.70 per share. Lanka Realty Investments PLC earned a dividend of LKR 127.8 m | GBP 0.3 m | USD 0.4 m from the investment in On’ally Holdings PLC.
Footfall Analytics
The following is an analysis of footfall traffic generated during different seasons, days, and promotional events. The insights generated will be used to evaluate the optimum shop mix, design store adjacencies, determine the success rate of an event or sales promotion and to ensure timely promotions. Due to the economic climate, footfall has decreased.
Installation of the glass façade
Installation of the glass façade is currently underway, and the total cost incurred is LKR 67 m | GBP 0.2 m | USD 0.2 m. Installation on the west side of the building is completed, and the civil work on the south side has commenced. Currently, the glass façade has been installed on three columns of the south side. The estimated completion is pushed back until March of 2023 due to the current economic status.
HQ Colombo - Lanka Realty Developments (Pvt) Ltd
We have reached 87% occupancy. Essentially all the rent-free periods provided as incentives to the tenants have now expired. Rental arrears as at 30th September 2022 is LKR 27.12 m | GBP 0.06 m | USD 0.07 m, but our team is encouragingly collecting them.
Rooftop
HQ Colombo is in the process of completing the construction of the roof-top area as a restaurant and bar, which will create a green space for tenants in the building and occupiers in the immediate vicinity to have a stunning view of Colombo alongside a dining/entertainment experience.
We have completed the steel roof structure (total cost amounted to LKR 2 m | GBP 4,750.27 | USD 5,505.09) and the installation of roofing sheets and gutters (total cost amounted to LKR 1.5 m | GBP 3,562.71 | USD 4,128.82). Furthermore, we have completed the kitchen layout, and we are now at the stage of designing the layout for plumbing, electricity and the gas line. Currently, the plumbing works are carried out for the toilet block. We have also received the quotations for aluminium and glass work, cladding, bathroom tiles and fittings. The total cost incurred so far amounts to LKR 6.9 m | GBP 16,388.44 | USD 18,992.57, and 60% of the civil work is already completed. The estimated completion will be in Q3 of FY2022.
Mulberry Residence - Mulberry Holdings (Pvt) Ltd
Property Highlight
Location: Colombo 09, 4KM from the CBD.
Development: Extending over 03 towers, each with 15 floors (11 residential floors, 03 parking floors & rooftop). 121 apartments, consisting of 2-3 Bedroom units.
Expected Completion Date: Q4 2022
Construction
We are pleased to report that the superstructure is 100% complete.
Construction has been severely impacted due to power outages and supply shortages. In addition, with the temporary import ban which was imposed in August, we have experienced delays in clearing the imported materials (eg: pantry boards/granite).
We also face issues with payments after the production is completed at the factory and suppliers are not able to ship the products to site due to the dollar crisis, as we have not been able to make overseas payments through banks.
Sales
Sale & Purchase Agreements have been signed for all 87 apartments sold.
Site visits and viewings have declined compared to the first quarter of the year. Initially, it was due to the uncertainty in the market. Subsequently, we experienced political instability in the country and of late there has been ambiguity over the introduction of VAT on apartment sales that fall under the Condominium Authority. A runaway GILT market doesn't help either. The proposed imposition of 15% VAT and imposition of the Social Security Contribution Levy of 2.5% on condominium sales represents a combined tax increase of 17.5%.
We are happy to announce that we have made 03 sales during the quarter under the current backdrop. It should be further noted that we are continuing to drive our sales campaigns to gain more reach in the market.
Collections
Encouragingly, cash collections remain strong. Please see below the collection summary as of 30th September 2022.
Out of the 87 confirmed purchasers, 21 purchasers have paid in full. 31 have paid over 75% of the purchased price. 30 purchasers have paid between 50% - 75% while 5 buyers have paid less than 50%.
W15 Weligama - Almond Trees (Pvt) Ltd
Current Status and Outlook
The hotel sector in Sri Lanka continues to struggle against the current economic state of the country. Tourist arrivals have declined significantly owing to the negative reputation the country has garnered over the past 06 months on account of the civil unrest and political instability. Sri Lanka saw a marginal increase in arrivals after Q1 of FY2022 following the lifting of the travel ban. So far Sri Lanka has had 526,000 tourist arrivals to the country during the year. However, the month of September only had 29,802.
Although we have not been able to achieve the same level of occupancy as we did early this year, we are continuing to drive local and international sales with attractive offers and events to boost revenues. Occupancy rates have declined by 16% in Q2 of FY2022 as opposed to Q1 of FY2022, generating LKR 14.7m | GBP 0.03 m | USD 0.04 m during the quarter.
We have seen an increase in the number of bookings so far during the quarter.
W15 Ahangama - Ilook Villa (Pvt) Ltd
Current Status and Outlook
We are in the development stage of converting the existing property into a Surf and Wellness retreat. Sri Lanka has been recognized throughout the world as a growing hot spot for all levels of surfers. The Surf Industry in Sri Lanka has not been fully exploited and is still considered to be untapped. Our high-end surf and wellness packages will range from $1,500-4,500 for individuals and families. Due to the declining numbers of tourist arrivals and shortages of supply in the country, the Surf Retreat project cannot be implemented until the economy is stabilized.
W15 Colombo - Alexandra Holidings (Pvt) Ltd
Future Plans
Out of six, two of the six townhouses on the property have been refurbished already. The management is considering disposing of this asset as it does not fit into the group's main line of business. The value of the property is set at LKR 948.5 m | GBP 2.3 m | USD 2.6 m for the sale.
W15 Yala - Lanka Realty Leisure (Pvt) Ltd
The Property and Future Plans
The extent of the property is 7 acres, and it is on a 99-year lease commencing May 13, 2014. The immediate plan for the Yala property is to develop 30 tented lodges within the world-famous Yala National Park.
N.B: We are planning to commence development works immediately after the tourism sector fully recovers from the economic crisis, and the lawsuit is resolved.
W15 Ambalangoda - Lanka Realty Ambalangoda (Pvt) Ltd
The Property and Future Plans
The property is situated in a much sought-after coastal destination with access to the historical city of Galle. The extent of the property comprises of 278 perches. The Dusit Thani and the well-known Nikki Beach will be located within 1 mile of the property once completed. The site is on a 50-year lease that commenced on the 12th of December 2013.
The conceptual plans are for a 53-room hotel. The final approval from the Coastal Conservation Department and other relevant development permits have been obtained.
Mulberry Ja-ela - Thudella Holdings (Pvt) Ltd
The Property
A greenfield site of 804 perches (5.02 acres), strategically placed 1/2 km off the CKE Motorway. The land is very well located to take advantage of Sri Lanka’s proposed push towards creating a Megalopolis.
Current Status
Currently, we are working with MODE and China Building Technique Group Co on a flat-pack housing project. The potential project will take 18 months to complete. The target is to complete the construction within a total cost of USD 50 per sq. ft. Solar panels will be installed for the villas and it will be one of Sri Lanka's first sustainable projects. We are also considering working with MODE and China Building Technique Group on Baseline Mulberry (below).
Mulberry Baseline - Baseline Holdings (Pvt) Ltd
Location: Baseline Road, Colombo 9. Baseline Road is one of Colombo's main arterial routes.
Current Status
Preliminary planning permission has been received for 410 apartments for affordable housing units. The only pending approval is the Condominium Management Authority (CMA) approval.
Once the above approval is obtained, we will receive the development permit from the UDA.
Mulberry Darley Road - 285 Darley Road (Pvt) Ltd
The Property and Future Plans
Prime freehold land, measuring 214 perches (1.34 acres), with excellent frontage onto Darley Road (Colombo 10), a main thoroughfare of Colombo and within a 2.0 km radius of the Central Business District. ‘Square’ in shape, the land benefits from the dual road frontage, increasing access and making the plot one of Colombo’s principal development sites.
The property is held in a Board of Investment company (Oak Street Pvt Ltd), eligible for tax concessions and has preliminary planning clearance from the Urban Development Authority for a 1.1 million square feet mixed-use development.
Amtrad - Amtrad Ltd
Value of the Company
Amtrad's land is valued at LKR 209.5 m | GBP 0.5 m | USD 0.6 m (LKR 279,000 | GBP 662.66 | USD 767.96 per perch). The property is valued at LKR 372.5 m | GBP 0.9 m | USD 1.0 m including land and building. Amtrad is located within close proximity to the expressway and with improved connectivity and easy access to main cities in the country. Construction sector is severely impacted, and prices of raw material have risen exponentially along with the fuel shortages.
Lanka Realty Investments PLC
Public Limited CompanyLanka Realty Investments PLC operates within the residential, commercial and leisure markets. The organization prides itself in developing properties that are at the helm of their industry.