Real estate in Chennai

India’s realty mart is on a high growth path with a market size of about $15 billion and currently growing at a pace of about 30 per cent annually. The real estate market is projected to touch US$50 billion by the year 2008. Besides FDI inflow, corporates that turned sick a few years ago and sitting on large tracts of land are now bouncing back with renewed vigour on seeing the real estate prices reaching dizzying heights.

India’s major cities are gearing up to face up the increase in demand due to IT and ITES sector growth supplementing both commercial and residential property growth. The secondary cities are getting a facelift at last due to their proximity to big cities and improved connectivity levels. It has been estimated that IT sector alone requires over 66 million sq ft commercial space in the next five years. According to Nasscom-McKinsey report, the size of the IT business comprising consulting, software solutions and research and development is expected to be $150 billion by 2010 compared with $18.4 billion in 2005. Significantly these estimates are considered conservative and faster innovation could spur further growth.

The report has projected BPO segment growth from $11.6 billion to $150 billion over the next five years. The BPO boom has rekindled hopes for large-scale residential property demand in major cities. So much so, smaller projects are insufficient to meet the growing residential property demand.

Though the government has reduced the area for development of townships from 100 acres to 25 acres, entrynorms at state level are still saddled with hiccups like unclear land titles, reluctance to introduce single window clearance, and lack of support to speed up infrastructure development. There is no denying that the growing demand calls for more townships to decongest the city and accommodate housing demand in major cities across the country.

Survey findings

According to Express Estates survey of 10 cities, average residential property prices rose by 24.2 per cent during 2005 in Delhi, Mumbai, Kolkata, Bangalore, Chennai, Hyderabad, Chandigarh, Jaipur, Goa and Pune. The roller coaster ride goes back to 2001 when prices rose just 10.1 per cent, fell 0.4 per cent in 2002 and then rose marginally by 6.3 per cent in 2003. The year 2004 was spectacular when prices rose 23.3 per cent compounding to 54 per cent in just two years. In fact over the past three years, prices have risen on an average by 17.3 per cent.


The fastest growth was recorded in cities like Delhi (28.6 per cent per annum), Hyderabad (24 per cent) and Kolkata (23 per cent). At the bottom of the pile are Chennai (5.8 per cent), Jaipur (6 per cent) and Goa (12.4 per cent). The survey projects the future growth in 10 cities. The IT and ITES sector continues to be instrumental in driving the real estate growth. On an average, commercial property prices rose by 15.5 per cent during last year, lagging the residential property market by 8.8 percentage points.

Yet another survey on IT and ITES companies by Trammell Crow Meghraj, international property consultants, revealed that Bangalore was numero uno destination for IT/ITES companies in the country followed by Mumbai. Hyderabad and Pune steamed ahead of Delhi with Chennai and Kolkata bringing up the rear. The survey across the country was aimed at understanding the preferential locations on varied real estate parameters. The survey also threw some interesting perceptions about Chennai and Pune. While perceptions about Pune matched expectations, Chennai offered more value than perceived to be. And Hyderabad appeared to have a better perception than what it is offering in reality.

What is the outlook for 2006 and beyond? While residential property prices will continue to rise in 2006, commercial property spaces in select cities are expected to go up by 20 per cent in Hyderabad, 13-17 per cent in Chennai, 13 per cent in Delhi, 10-12 per cent in Kolkata and 7-10 per cent in Chandigardh, according to the survey.

Residential property scenario

The residential property market is 80 per cent of the total real estate market in India and the gap between demand and supply is estimated at 41 billion sq ft. Considering that the office market is expected to increase to 66 million sq ft over the next five years, the paramount need to proportionately increase the residential supply need not be overstressed. Is an irony that major cities are ill equipped to handle such a large requirement within so short a time. Even though FDI in integrated township projects had been allowed under automatic route, not much impact has been felt across the country.

Global construction giants have already entered into strategic partnership in select cities for township development. There are still impediments at the state level with regard to zoning regulations, absence of single window clearance, rigid floor space index rules and prolonged delay in giving planning permission. Infrastructure is yet another major hurdle in cities like Bangalore, Hyderabad, Lucknow, Delhi, Mumbai and Chennai where unprecedented growth is being witnessed in real estate development.

Lower interest rates, easy availability of housing finance, escalating salaries and job prospects have been lending buoyancy to the residential sector. The net yields (after accounting for all outgoings) on residential property are currently at 4-6 per cent per annum. However, these investments have benefited from the improving residential capital values. As such, investors can count on potential capital gains to improve their overall returns. Capital values in the residential sector have risen by about 25-40 per cent per annum in the last 15-18 months.

Commercial property scenario

The increase in demand from the IT / ITES and BPO sector has led to approximately 20-40% increase in capital values for office space in the last 12-15 months across major metros, says Knight Frank India research. Grade-A office property net yields have come down from 12-14 per cent in 2003 and currently average around 10.5-11 per cent per annum. The fall in yields has resulted from decreasing interest rates and increasing appetite from investors. This has in turn resulted from abundant liquidity options available coupled with the acceptability of real estate as an conventional class of asset.

Retail scenario

Indian retail sector is a $210 billion pie, according to a recent survey by PricewaterhouseCoopers, which is witnessing a healthy pace of five per cent per annum. Of this, organised retail now accounts for only three per cent but is expected to growth to 10 per cent by 2010. The ongoing retail upsurge is expected to translate into 8 million new jobs over a period of five to six years. Though FDI in retail is still a far cry, Prime Minister Manmohan Singh’s assurance for a major decision in six months offers scope for opening up the sector to FDI. As rightly pointed by out by CII National Retailing Committee member Krish Iyer, organised retailing in India is expected to touch a whopping Rs 1,10,000 crore by 2010. If it were to happen, it would need about Rs 20,000 crore investments.

According to Knight Frank India research, the retail market in India has been growing due to increasing demand from retailers, higher disposable incomes and dearth of quality space as on date. Though the net yields on retail property have registered a fall from 10-12 per cent per annum reported earlier to 9-10.5 per cent per annum. Currently, the capital appreciation in this sector is close to 20-35 per cent per annum. However, the risks associated with this sector are higher as retailers are prone to cyclical changes typical of a business cycle. Changing consumer psychographics combined with increasing disposable incomes will ensure further growth of the retail sector in India.

Outlook

India’s population is likely to cross 1.3 billion mark by 2020 and what is more, urban population is set to grow by 85 million over 10 years. The demand for dwelling units will grow to 90 million by 2020, according to ASSOCHAM report on real estate development, which in turn would require a minimum investment of $890 billion (Rs 40,05,000 crore). In such a scenario, the paramount need is to initiate a multipronged strategy to tackle the crucial issues plaguing the housing sector like reforms in legislation, infrastructure development and removal of barriers to ensure smooth implementation of projects.

There is no denying that with the liberalisation of FDI in real estate development and the entry of global players enormously aided by realty funds, real estate development will scale a new high in the coming years. And Indian consumers will have access to better product quality, quicker turnaround time of projects and more value for money. For investors of course, the search for higher returns will continue to accelerate the growing volumes across the Indian cities, driving improvements in market transparency and liquidity. After all for every rupee invested in housing, Re 0.78 is added to the GDP of the country.

Home ownership trends

The Indian consumer is upgrading from basic apartments of 900 – 1,000 sq ft to an average of 1,500 sq ft
apartments, with high quality constructions, leisure amenities and services.
The average age of home ownership has come down from over 40 years to 32 years.
A number of business houses are investing in residential real estate.
Over the past four years, the home loan market has been growing at a compound annual growth rate of 40 per
cent.
Over $11 billion was disbursed in 2004 as home loans; the figure is projected to grow to $15 billion in 2005.
The furniture, furnishings and home products market is estimated at $5 billion. It is growing at 10-12 per cent a