Delay in 2017 Budget move locks billions of capital in listed firms

• Govt. urged to gazette previously-announced lifting of restrictions imposed on foreign-controlled PLCs via Land (Restrictions on Alienation) Act of 2013
• Further delay may impact $ 13 b investment projects envisaged in Port City; divestiture of Hilton and Hyatt and execution of PPPs
• Steradian Capital says CSE’s market capitalisation of $ 20 b is equivalent to value of only four-and-a-half-square kilometres of Colombo
• Colombo’s market capitalisation four times less than regional peers due to policies discouraging foreign investors
• Capital of companies and family wealth offices stuck in land and building; 2017 Budget move implementation will free up billions, fund next phase of economic value creation

A near year-long delay in gazetting a 2017 Budget-approved liberalisation move is locking up billions of capital in listed firms and discouraging a higher inflow of foreign investment into the country, according to property sector experts.
In November last year, the Government via the 2017 Budget promised to introduce laws which would enable Public Limited Companies (PLCs) even with 51% foreign ownership the freehold right to land.
However, despite almost a year having passed, it hasn’t been gazetted yet and the delay and continuing ambiguity has jeopardised the country›s chances of attracting a higher inflow of foreign investments and additional economic value creation across various business sectors.

“Ideally, if Sri Lanka is keen to draw higher foreign investments for every economic or business sector, those which are best-in-class globally must be encouraged to take controlling stakes. This cannot be done at present because most of listed companies have land and property in them and under the Land (Restrictions on Alienation) Act of 2013 there are prohibitions on transfer of land of a company where foreign shareholding is direct or indirectly 50% or above. This 49% foreign ownership limit discourages foreign investors who are looking to buy a controlling stake in a listed entity,” Real Estate specialists Steradian Capital said.
“The current ambiguity is a big concern and discourages real higher foreign investment not only in real estate but in other economic sectors too,” Steradian Capital Co-Founders Hardy Jamaldeen and Archie Warman told the Daily FT.

“This issue needs to be fixed soon if work to be started on promotion of Port City projects, estimated to generate $ 13 billion investment. It has a bearing on effective implementation of much-discussed Public-Private Partnerships policy of the Government and the planned divestiture of non-strategic State assets such as Hotel Developers (Hilton), Hyatt, etc., which have a portion of freehold land,”they added.

“In the Port City, the office space envisaged is 70% of Singapore office space. If the Government is keen to attract FDIs and make Port City a success as well as harness Sri Lanka’s strategic hub status benefits, then some of the archaic restrictions must be eased,” they emphasised.

They noted that CSE’s market capitalisation of $ 20 billion was equivalent to the value of only four-and-half-square kilometres of Colombo. Market capitalisation of regional peers is at least one time the GDP, which is $ 80 billion, so Colombo›s market capitalisation is four times less.

“Why we are of that shape and size is due to because of the lack of foreign participation due to the absence of encouraging policies. At the moment foreigners are only taking passive stakes in companies and that too as a means of diversification of geographical portfolio/exposure,” they said, adding that “higher market capitalisation and greater liquidity will attract big foreign funds and investors».

“As a country we must bring in higher quality technology, best-in-class processes and improve the skill set of our talent pool to be internationally competitive. If this is our aspiration we must pave the way from a regulatory perspective to enable world leaders in specific industries to either setup in Sri Lanka or take controlling stakes in listed companies to develop our local companies and take them to the next level. At present one of the options is a very slow burn whilst the controlling stake is not an option at all.

“If you look at the top 10 listed companies, how many people can buy or sell control? Maybe a very few. To improve size and shape and productivity, Sri Lanka needs to have a bigger cluster. Singapore transformed Marina Bay by easing restrictions and attracting a host of like-minded companies to develop that infrastructue in terms of property assets.”

Another point stressed by Hardy and Archie was that the capital of companies, conglomerates and family wealth offices on their balance sheet is tied up in land and buildings. Given the fact that borrowing cost is around 16-17%, the balance sheets are stretched.

“They don›t have the capacity or new capital for the next growth phase. If these segments can do a sale and long lease back arrangement, instead of borrowing at high cost, they can free up capital for expansion and next growth phase. This will trigger a wider economic growth scenario with more jobs and income to people, which the Government is keen to ensure. For this to happen we need a higher degree of foreign investors.”
The duo also pointed out that whilst free hold land issue remained very sensitive politically, “it is the exact point which the Government needs to decide whether it sincerely wants FDIs or not to usher greater development”.

“The sensitivities may be valid if small plots of land from individuals are being grabbed by foreigners, but via a new listed entity or existing listed entities, foreign investment will be for larger development purpose such as socio-economic infrastructure including affordable to mid-tier housing, leisure, mixed developments office space and industrial warehouses,» they emphasised.

“Sri Lanka is a very compelling destination within emerging markets. This is most certain for long-term property development, especially infrastructure in the property space such as office space, industrial warehouses, for which existing locked-up capital must be freed,” Steradian Capital co-founders added.

They dismissed the notion that the property sector is experiencing a bubble. Steradian is of the view that from a critical evaluation Sri Lanka remains underdeveloped, hence scope for further growth in the property market is logical.

“For the envisaged demand 10 years from now, we will need more capacity – be it office or industrial warehouse space, leisure properties or affordable housing,” they added