Several cities are seeing high growth turning them into the next investment destination for residential realty. Even as various studies point to their emergence, an investor would do well to carry out proper due diligence
Home buyers are no longer content with a roof above their head, or a space they can call their own. They are approaching the entire purchase process with the mindset of an investor. Even as they are looking at comfort and other amenities, their sights are fixed on the appreciation potential.
The country’s real estate market is also witnessing the rise of a new class of customers: double income couples who form a significant proportion of second home investors.
Even as this new class has taken to calculating risks against returns, it is usually family elders, friends and local brokers whom they turn to for advice. Decisions are based on limited information, gut feel or some tip about possible returns. Basing one’s decision on such supposedly time-tested strategies could result in a bad investment.
As an investor, one should remember that the realty sector is no different from any other investment avenue, and professional guideposts can help one identify good investments and also give a framework to base one’s decision.
The Demand Drivers
The demand for residential units in India has surpassed the limited supply a decade ago. This continued shortfall has translated into property prices going out of reach of the average buyers in most metros. However, demand keeps increasing. As a result, two trends have surfaced over the last several months. One, due to non-affordability, significant demands have shifted to Tier-II and Tier-III cities, which has turned them into locations that could potentially yield good returns. Second, prices began to stabilise at the higher level in metros but with a strong basis for further appreciation in some pockets due to high demand.
These cities also have other demand-raising and hence price-hiking drivers such as on going and planned projects in infrastructure, a growing service sector, manufacturing base, huge business investments and employment-generating opportunities.
The heightened economic activity in these regions could make them hot-spots for for the next wave of real estate investment. Compared to the ever-ballooning demand the supply is marginal at present. This widening gap that is not being filled fast enough, explains the slow but steady rise in property prices across all segments.
According to a report by the Ministry of Housing and Urban Poverty Alleviation, the current estimated shortage inclusive of existing and future demand is of 18.78 million urban houses. This total demand is expected to increase at a compounded annual growth rate (CAGR) of 2.8 per cent across India.
The HOT SPOTS
In one such study, the global real estate consultancy Cushman & Wakefield (C&W) India has reported that the new, future demand (not factoring in the existing demand) for residential dwellings in the period 2012 – 16 will be 11.8 million units across India.
The firm has identified the top eight cities, which will constitute 18 per cent or 2.1 million units of the total demand across categories. Of the total additional demand in these locations, the mid-priced segment is estimated to be highest at approximately 59 per cent or 1.3 million units, followed by demand in the high-end segment which is 4.51 lakh units.
“The demand creation in such cities is a reflective of the economic strength that these cities have, and that it attracts new settlers as well as creates conducive environment for natural population growth.” says Sanjay Dutt, executive managing director, C&W, India.
The low-end segment is expected to see fresh demand of approximately 3.62 lakh units in these cities in the next five years. The top on the list of eight regions is Ahmedabad followed by Bangalore, Chennai, Hyderabad, Kolkata, Mumbai, National Capital Region (NCR) and Pune.
This data indicates not just the possible demand-driven profit locations but also the segments to invest in and is calculated on the basis of past trends for population, household growth and income classification. This does not take into consideration the existing unfulfilled demand by those without homes, living in congested or dilapidated structures, living in rental houses, demand from NRIs or those wishing to purchase second or holiday homes for use or investment.
Jones Lang LaSalle India (JLLI), has adopted another framework and has put together a list of non-metros and emerging cities. In western India, Ahmedabad, Jaipur and Jodhpur are suggested while in the north, Chandigarh is favoured. In the south, it suggests Kochi and Coimbatore and Visakhapatnam in the east as one of the emerging and non-metro locations for significant appreciation in future. These locations require low capital investment as compared to the highly developed metros.
Their demand drivers are interesting. Ashutosh Limaye, head of research, JLLI, says that Ahmedabad, the commercial capital of Gujarat has one of the highest per-capita incomes in the country. Due to the ultra-progressive policies, well planned industries and infrastructure, high investment and intelligent development, it has become one of the most exciting destinations in India.
Kochi is the commercial capital of Kerala and a major tourist destination. Besides, it is witnessing a boom in the IT/ITeS sector as well. Coimbatore the big industrial centre in Tamil Nadu is becoming preferred location for the IT/ITeS industry. It offers excellent infrastructure, quality of life, highly skilled workforce and low cost of living.
Jaipur and Jodhpur — the major international tourist attractions — have an excellent connectivity to Delhi and other cities in the region, Jaipur is identified as a very promising city for BPO and IT industries. Visakhapatnam is a major port and industrial centre, and the hub for petroleum, steel and fertiliser industries. In addition to the biotech SEZ, it also hosts an IT SEZ.
Chandigarh, the capital of Punjab and Haryana is one of the most well-planned cities of India with very high per-capita income. The Technology Park has put it on national IT and international outsourcing sector map, says Limaye.
Another real estate consultancy Knight Frank India has drawn up an advisory report, which claims to address the need of the home buyer from an investment point of view over the next five years i.e. 2013-17. The report suggests 13 local areas in 5 major well-known regions across the country — Mumbai, Delhi-NCR, Bengaluru, Chennai and Pune.
“With property options ranging from Rs 3,200 per sq ft to Rs15,000 per sq ft and investor returns in the range of 18.6- 29 per cent annually, the residential real estate will emerge as a promising asset class for the next five years,” says Gulam Zia, executive director, Knight Frank India.
The final call
Various studies by real estate professionals and consultancies, both global and local, show that different drivers would impact the demand-supply gap and hence the appreciation. These reports can only suggest the possibility of an outcome but by no means can it guarantee one.
Over the next couple of years, development in these hot-spots would increase, which in turn would reduce the gap between local demand and supply resulting in slower appreciation or even stagnancy of prices. One may end up missing the investment bus then. There is, however, no foolproof way to predict the behaviour of the real estate markets. Professionals can only give a potential investor a framework, with whose help a decision can be arrived at.