JLL warns of oversupply in retail space beyond 2019

By Zohara Ghaffoor and Nishel Fernando

Colombo continues to suffer from the severe shortage in grade A office space, with 3.5 million sq ft shortage this year, while shortage in retail space is expected to narrow in 2018/2019, a leading international real estate consultant stated in its latest report.

A recent research by JLL indicated that the stock of Grade A office space in Colombo will surpass 1.5 million sq ft this year, from 1 million sq ft recorded last year. It highlighted that the occupancy of a new office space has already reached 100%, which includes the Shangri-La mixed development project, which is set to come into the market in 2019. It further indicated that there Grade A office sector continue to gather pace, buoyed by strong demand.

JLL Sri Lanka, MD, Steven Mayes speaking to Ceylon FT last month said the current shortage in grade A office space was likely to remain over the next three years.

Meanwhile, JLL warns that retail real estate sector would risk potential oversupply issues and may suffer further with a lack of new brands entering the market beyond 2019.

“The retail market looks less sustainable in the medium to longer-term”,JLL stated.
However, JLL noted that those malls nearing delivery will clearly benefit from first mover advantage which includes Colombo City Centre (CCC), Shangri La mixed development project and others.

The retail space in Colombo is set to double this year, nearing approximately 2 million sq ft of retail space. However, the supply remains way below the current demand which is approximately 4 million sq ft. However, JLL predicts that the large supply-demand gap will narrow after 2019, with other Malls coming on stream in Central and Secondary Business Districts (SBD) and residential zones.

“The long-term success of the retail sector is heavily dependent upon government policy, especially with import tariff rates and infrastructure spending, on roads and public transport, as traffic congestion is a major impediment to retail growth”, JLL further stated.

In terms of rental yields, the residential sector is projected to decline by 0.3% to 4% this year, while office rental yield will almost remain same with a slight decline of 0.1% to 6.5% which would be due to the impact of Port City land being released to the market and due to oversupply in luxury condominium segment.

Commenting on future rental yields of condominiums in Colombo, Mayes said, “Rental yields are reaching the top of the cycle now and pressure on rentals would be downward in the future.”

Furthermore, JLL stated that the shortage in A grade office space has resulted in an uptick of grade B office spaces in Colombo, with buyers forced to compromise with alternative Grade B office spaces.