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Indian real estate sector is going through a period of correction at this moment. From the heady days of high double digit growth rate, we have observed the housing price growth slowing down to single digit figure across Major cities of India ( We will like to point out that this is still enviable compared to the anemic growth figures seen in US and Europe). Within India, we believe that South India provides better growth prospect in the long run. The focus of this article is Bangalore, the crown jewel of southern cities. Several contributing factors point to strong return from real estate investment in Bangalore. We elaborate them here and delve into their impact on real estate sector.
In terms of transparency levels across 20 major cities in the country last year, southern cities have been ranked among top ten in terms of availability of market information, reforms in urban local bodies, protection of property rights, progressive business environment and inclusive and sustainable development. . According to Urban land Institute and Price Waterhouse Coopers, Bangalore is the tenth most sought- after city in the world in terms of global investment ahead of Mumbai and Delhi who lost their previous year’s exalted positions to 15th and 12th ranks respectively.
A standard yardstick of real estate performance is to look at absorption (or the converse, unsold inventory) of housing. Recent data suggest that absorption levels are better in the south in general and for Bangalore in particular. For instance, according to Kotak institutional equity and Knight Frank, Bangalore absorption level stood at 49 million sq ft in the residential segment, while in the fourth quarter of 2011 alone demand for office space was a good 3.4 million sq ft, higher than any other city in the country. Low unsold inventory implies that a healthy growth in price is just around the corner.
Why do we mention about the speculators? Because a market dominated by speculators invariably leads to price bubbles (thus subsequent busts). Bangalore is relatively safe from speculators. It is a fairly stable market driven mostly by IT firms providing sturdy employment and stable incomes to qualified professionals. Here the real estate development is essentially end-user driven and not investor-driven. A recent study analyzed the pattern of first purchases (purchase straight from developer) by end-users. The conclusion is surprising and comforting fact that 81.2 percent of first purchases in Bangalore were by end-users and not speculators or investors who look for just financial returns. This figure in locations such as Mumbai was as low as 40 percent (source: www.track2realty.com). This bodes well for long run investment as we expect high average growth with low volatility compared to its northern peers.
Physical infrastructure development (roads, flyovers, metro rail etc.) always boosts real estate projects in a city. Travelling from one corner of the city to another for business or entertainment is convenient and quick, facilitating more work-related interaction and social networking. This in turn makes this a city that has the amenities to enhance the quality of business output and living in general. Hence, the periphery of a city suddenly sees tremendous growth in importance and hence in value. E.g. after the completion of the first phase of Bangalore Metro rail, the city has seen significant surge in real estate prices (from Rs 3000 to Rs 6000 per sq ft) in the corridor which has prodded the developers to start new projects in the vicinity. There is also excitement regarding the second phase that is due for completion by end of 2012. The property prices which are expected to rise by 15% to 20% in anticipation of Metro follow the same pattern as witnessed in Delhi Metro corridor
This one is a no brainer; given the available skilled workforce, its inherent brand value, growth prospects, Bangalore has become the technology capital of the country. It has a steady influx of migrants seeking jobs in the many existing and upcoming technology companies.Tthere was and still is a huge demand for housing and other infrastructure including hospitals, schools and shopping centers. Given the growth of real estate sector in the last decade, and the visible changes in the city’s infrastructure, it can be said that the city grew mostly due to the demand from this segment. For example, a sleepy hamlet like Marathahalli near Bangalore got a complete makeover thanks to the IT boom. It is centrally located and is close to the old HAL airport and the outer ring road passing right through it. It is a hotbed of residential property development as many IT firms and nearly a lakh employees will be stationed here. The locality will see development of nearly 20 million sq ft of commercial and residential space.
NRI’s are looking for investment opportunities in a time in which alternative investment opportunities elsewhere have dried up. Among real estate investment prospects, Bangalore is a natural choice for most home-hunters for its moderate climes, better amenities, and affordability and stability of house prices. Given the recent depreciation in Indian rupee, housing in the city should become more lucrative for the NRIs to invest. Bangalore may be in readiness to absorb such demand emanating from the expatriates as well as from domestic populace alike. According to a Knight Frank study, the housing demand in the city has always been increasing owing to increasing tech population and 70% of total construction goes into residential real estate. As of March 2012, there are as many as 1, 19,000 residential units under various stages of construction within a reasonable price range of Rs 25 lakhs to Rs 75 lakhs. In FY 2012 alone, 9700 housing units were launched to be completed in 2 to 3 years’ time. Furthermore, various real estate developers are coming up with their premium residential projects to meet the demands of the high net worth individuals and the high income tech professionals. There are many lifestyle options (villas and penthouses) available for these enthusiasts to invest in the Bangalore real estate.
We conclude with a word of caution though. Bangalore as a whole is a good investment destination, still thinks local when it comes to any investment as there are significant variations within Bangalore. Compare the pros and cons of each area and decide accordingly. As an exhibit following chart shows the year over year (Y-o-Y) growth rate of Residex Index (source :NHB) for three key time periods. Here are some key features of interest:
During 2007 through end Q1’2010 the property market collapsed and this is in line with the global economic/real estate slowdown. Bangalore market as a whole dropped by more than 30% during this time.
A remarkable recovery across the board during Q1’2010-Q1’2012 in Bangalore as whole. Zone C (Lavella road and neighboring area) saw a spectacular growth of more than 100 %(i.e. Doubling of the price from the bottom). This is followed by Zone D (Richmond Town, Indira Nagar, HAL II & III stage, among others ) that experienced a growth of more than 80% during this period. Bangalore as a whole grew at more than 40% during this period. With Zone E and F showing more modest growth.
Zone | locality | 2007-Q1'2010 | 2007-Q1'2010 |
---|---|---|---|
Zone C | Lavella Road and Neighborhood | -29% | 168% |
Zone D | Richmond Town, Indira Nagar, HAL II & III stage, Domlur Layout, Sadashiv Nagar, Benson Town | -33% | 84% |
Zone E | Jaya Nagar,Rajaji Nagar, Koromagala,Air Port Road, Basveshwar Nagar, Malleshwaram, J P Nagar, Banashankari, R.T | -40% | 23% |
Zone F | Madivala, Banaswadi , Jagjeevan Ram Nagar, Yeswanthapura, Mathikhere, BTM Layout, Sultanpalya, Lingarajpura, BCC | -33% | 12% |