The Influence of Upcoming Infrastructure Projects on Sri Lanka’s Property Market

Executive Summary

The Sri Lankan property market, having navigated a period of unprecedented economic turmoil, is now entering a new phase of growth. This resurgence is not merely a natural rebound but is being strategically shaped by a select group of large-scale infrastructure projects. These initiatives are not just facilitating development; they are actively creating new market segments, redefining investment geography, and fundamentally altering the landscape for real estate. This report provides a detailed analysis of the causal links between these projects and market evolution, offering a nuanced perspective on the opportunities and risks for investors and other stakeholders.

The analysis indicates a cautious but robust recovery across the market. This is evidenced by rising land prices, a stabilization of the condominium sector, and a palpable return of investor confidence, particularly in suburban areas. Strategic projects are driving a dual-speed market: a high-value, internationally-oriented segment in purpose-built zones, such as the Colombo Port City, and a broader, more distributed uplift in value across newly accessible suburban and rural regions. Despite this positive momentum, the path forward is not without significant challenges. Institutional, financial, and political risks persist, which can temper project execution and long-term market stability. The report identifies key opportunities, such as investment in luxury and services, and strategic land banking in suburbs, while also highlighting salient risks related to project delays, regulatory uncertainty, and institutional inefficiencies.

The Macroeconomic Foundation: A Return to Stability

The current momentum in Sri Lanka's real estate market is fundamentally predicated on a return to macroeconomic stability. This is a direct consequence of decisive government policy and the successful negotiation of the country's debt crisis. In a pivotal development, Sri Lanka finalized an agreement with Japan in March 2025 to restructure 2.5 billion dollars of debt, and a new 500 million dollar loan from China's Export-Import (Exim) Bank has been secured to resume key projects.¹ This financial restructuring has been a critical catalyst, allowing the government to declare itself free from bankruptcy by the end of 2024 and to resume over 87 previously stalled foreign-funded projects, 76 of which are Chinese-funded.¹ This coordinated effort to restore financial credibility has been instrumental in renewing both local and international investor confidence.

Market momentum has been further amplified by the Central Bank's monetary policies. The Central Bank's deflationary approach and a significant 7.75% reduction in its Overnight Policy Rate have made credit more accessible.³ As a result, commercial banks are now offering home loans at approximately 10% interest, a rate that has revitalized demand and made property ownership more attainable for middle-income earners and other segments of the population.⁴ This restored affordability is a direct mechanism translating macro-level stability into tangible demand within the real estate market.

The effects of this resurgence are visible in key performance indicators and a distinct geographic shift. According to data, land prices in the Colombo district rose by a notable 14.4% in the first half of 2025, with commercial land also showing robust growth at 11.5% and industrial land at 8.4%.³ The condominium sector is also stabilizing, with modest quarter-on-quarter and year-on-year increases in both price and sales volume.⁶ However, a critical trend underscores a significant change in the market’s center of gravity: the property market's most dynamic growth is occurring in the suburbs rather than the city core. Suburban areas in the Colombo district, such as Piliyandala and Athurugiriya, saw land price increases of 16% and 14% respectively, significantly outperforming central Colombo's more moderate 7% growth.⁴ This trend is not a coincidence but a direct outcome of planned and ongoing infrastructure projects that are effectively reducing the functional distance between suburban and urban areas, making less congested, more affordable locations increasingly viable for both residential and commercial development. This shift simultaneously helps to address the country's mounting housing deficit by unlocking new, accessible land for supply.⁷

Data from Central Bank of Sri Lanka and LankaPropertyWeb.³ Data for 2025 H1 is compared year-on-year to 2024 H1.

The Engine of Growth: Flagship Projects and Their Micro-Market Impacts

The Colombo Port City Special Economic Zone (SEZ): A New Urban Model

The Colombo Port City (PCC) is a flagship project that is not merely influencing the existing property market but is actively creating a new, separate market segment entirely. Positioned as Sri Lanka's largest foreign direct investment (FDI) initiative ⁸, Port City represents a strategic national shift from traditional, manufacturing-focused Special Economic Zones (SEZs) like the Katunayake Export Processing Zone to a hub centered on high-value services.⁹

The project's value proposition is its purpose-built design as a "city within a city," featuring a progressive legal and regulatory framework that simplifies business operations and offers investors attractive visa schemes and full property ownership.¹⁰ A key aspect of this design is its distinct financial system, which is "economically ring-fenced" to allow for free transactions in 16 designated foreign currencies.¹² This strategic isolation from the domestic economy is designed to provide an investment sanctuary, insulating investors from the very macroeconomic shocks and currency fluctuations that have historically deterred FDI. This structural feature is a critical element, as it seeks to establish a new benchmark for trust and stability in Sri Lanka.

The project is specifically targeting high-net-worth investors and "globally mobile residents".¹¹ It directly addresses a pent-up demand in the luxury residential sector, as no new luxury residential developments have been launched since 2017.¹¹ With over 5.65 million square meters of planned luxury development space, Port City is set to deliver a new standard in urban planning, offering opportunities in luxury marina residences, hotels, and a new financial district.¹⁰

The Central Expressway Project: Redefining Connectivity and Suburban Value

The Central Expressway Project (CEP) is another critical initiative whose resumption signals restored national momentum. Construction on the long-delayed Section I, from Kadawatha to Mirigama, has recently recommenced with a fresh 500 million dollar loan from China's EXIM Bank.² The project is strategically vital as it will eventually connect the capital city of Colombo with the central city of Kandy, significantly improving travel efficiency and alleviating crippling road congestion.¹⁴

While real estate marketing campaigns often promote a direct, value-creating relationship between expressways and land prices, a closer examination reveals a more nuanced picture. A case study on the Southern Expressway found a very weak correlation between land prices and proximity to interchanges.¹⁶ The study concluded that land values were more strongly influenced by other factors, such as proximity to Colombo and essential amenities like economic centers, schools, and supermarkets.¹⁶ This suggests that the real estate value of the Central Expressway will not manifest as a simple land bubble around its interchanges. Instead, its primary impact will be in reducing travel time, making the entire corridor from Colombo to Kandy functionally more integrated and accessible. The uplift in property values will be a result of this improved regional connectivity and convenience, rather than a direct, simplistic effect of the road itself.

Bandaranaike International Airport (BIA) Expansion: Fueling the Tourism and Hospitality Sectors

The expansion of the Bandaranaike International Airport (BIA) is critical for Sri Lanka's tourism and hospitality sectors, which are vital for real estate growth. The project's strategic goal is to increase annual passenger capacity from 6 million to 16 million, solidifying BIA's role as a regional transportation hub.¹⁸ However, the project's troubled history provides a crucial case study in the risks of institutional and project management volatility.

Despite its strategic importance, the BIA expansion has been plagued by delays and mismanagement. Parliamentary reports from 2025 cite a "botched job" on the new terminal's foundation, alleging a lack of qualified oversight and deviations from approved standards.²⁰ These issues have resulted in compounding costs and a semi-constructed building that represents a significant risk to project completion.¹⁹ Furthermore, the project's financial stability has been compromised, with officials admitting that the initial rates of the concessionary loan from the Japan International Cooperation Agency (JICA) are no longer applicable due to current market conditions.¹⁹ The chronic mismanagement, financial instability, and institutional unreliability evident in this project create a significant risk profile, demonstrating how public sector volatility can temper the positive effects of a strategically vital infrastructure project on the surrounding property market.

Diversifying the Development Landscape: Regional and Sectoral Impacts

From Agriculture to Opportunity: The Mahaweli Water Security Investment Program

While flagship projects like Port City and the expressways focus on urban and peri-urban development, other infrastructure initiatives are shaping a different class of property. The Mahaweli Water Security Investment Program, a comprehensive government initiative funded by the Asian Development Bank (ADB) and the government of Sri Lanka, is designed to provide water security for agricultural and drinking purposes in the northern dry zone.²¹ The program includes the construction and rehabilitation of over 260 km of canals and reservoirs, with a specific focus on areas where 70% of rural dwellers depend on agriculture for their livelihoods.²² By improving the reliability of water supply and mitigating the effects of climate variability, the project is creating new, fundamental value for agricultural land. This represents a strategic, dual-pronged approach to national development—one focused on a globalized, services-oriented city and another on strengthening the rural, agricultural foundation of the economy.²³ This investment in foundational infrastructure is designed to reduce poverty and improve living standards in rural areas by enhancing the land's utility and long-term economic output.²³

Strategic Urban Development: The Rise of Secondary Cities (Kandy and Galle)

Beyond the major flagship projects, the government's Strategic Cities Development Programme (SCDP) is driving growth in secondary cities like Kandy and Galle. This initiative, led by the Ministry of Urban Development and Housing, aims to improve urban services and enhance public spaces to foster economic growth and livability.²⁶ Public investments in Kandy include the rehabilitation of parks, water supply infrastructure, and the construction of a new bus terminal.²⁶ Similarly, in Galle, projects range from bridge reconstruction to the rehabilitation of the historic Fort Rampart and the improvement of public drainage systems.²⁶ These improvements are making these cities more attractive for both commercial and residential investment, as evidenced by the availability of diverse property types, from colonial-style bungalows to modern houses and commercial properties.²⁷ This approach highlights a decentralized development strategy that aims to spread the benefits of infrastructure beyond the capital, creating new hubs for investment and a more balanced national economy.

Risks, Challenges, and Future Outlook

While Sri Lanka's infrastructure-driven property market shows significant promise, it is essential to recognize the persistent risks that could affect its trajectory. Financial and political vulnerabilities remain. The Central Expressway's reliance on a new 500 million dollar foreign loan raises concerns about the country's debt-to-GDP ratio and adherence to fiscal discipline under the IMF program.²⁸ A history of political instability has previously led to the halting of high-profile projects, and allegations of irregularities and lack of proper procurement persist in past reports.⁸ The BIA expansion, for example, has seen its costs increase due to alleged irregularities in its execution, highlighting a systemic risk of institutional inefficiency and a lack of proper oversight.²⁰

Regulatory and social hurdles also pose challenges. The construction sector has historically been shackled by cumbersome approval processes and heavy taxation on materials, which can weigh on profit margins.⁸ From a social perspective, land acquisition and involuntary resettlement have proven to be significant challenges, leading to public dissatisfaction and project delays, as documented in the case of the Central Expressway.³⁰ The industry also faces a reported shortage of labor and persistent concerns over low health and safety standards.³¹

The outlook for Sri Lanka's property market is one of cautious optimism, shaped by a strategic and multi-faceted development approach. The successful navigation of its debt crisis has restored the necessary macroeconomic stability for the market to thrive. The Central Expressway is poised to distribute value beyond the capital, while the Colombo Port City is creating a new, globally-oriented investment segment. Concurrently, regional initiatives are strengthening secondary cities and agricultural sectors. The key to sustaining this momentum will be the government's ability to address the institutional, regulatory, and financial risks that have historically plagued large-scale projects, thereby ensuring that these foundational investments deliver their full economic potential.