PUNE - OVERALL REAL ESTATE MARKET OUTLOOK

Source : Jones Lang LaSalle Meghraj


Residential Property Markets

After witnessing tremendous growth from 2003, Pune’s residential property markets have slowed down over the last 3 to 4 quarters. Sales for most projects have dropped significantly and are presently the lowest observed over last few years. Increase in property prices, coupled with upward movement in the interest rates for housing loans, are the key reasons for drop in demand.

Developers are still holding on their prices, but there are increasing instances cash discounts during negotiations or offers of incentives such as:

• Developer paying part or all of the EMI amounts during the construction period
• Developer paying part or full amount of stamp duty charges
• Developer offering free white goods/partly furnished homes
• Developer offering four/two wheelers with every flat booking

However, such offers and schemes are predominantly observed for projects at peripheral locations, and they are primarily by Tier II/III developers and fringe players on the market.

Developers are consciously making a shift towards budget/mid segment homes with product offering between Rs. 30-35 lakh for 2 BHK apartments.

Considering the trend over the last 6 months, there are limited possibilities of demand picking up over the next two to three quarters. Customer sentiments are at their lowest, and most buyers are anticipating further reduction in property prices before making their decision. There are chances of a meltdown in property prices by about 10-15% over the next few months. The suburban areas are most likely to be affected during this downturn. Also, considering the liquidity issues, there are high chances of projects getting delayed.


Commercial Property Markets

Pune has emerged as one of the prominent destinations for IT/ITeS spaces over the last few years. About 6 IT/ITeS SEZs are in various stages of construction. These SEZs are likely to add about 10 million square feet over the next two years. Most of the anticipated supply is in the PBD, while moderate and limited supply is anticipated in the SBD and CBD respectively.

In fact, the demand for commercial spaces is primarily driven by the IT/ITeS sector. Approximately 50% of the absorption for 2008 is in IT SEZs, about 45% in STPI units and the remaining 5% in non IT/ITeS office spaces. The absorption for 2008 till date is estimated at about 3.2 million square feet.

Apart from the competing supply from within the city, Pune is also competing with cities like Bangalore, Chennai and Hyderabad. During such times, apart from real estate costs, the city level infrastructure (hard and soft) also plays an important role in attracting clients for IT/ITeS and office spaces.

Over the last few years, strong demand from IT/ITeS players as well as corporates had driven the lease rents and occupancy levels northwards. However, in light of the global financial meltdown, the demand from corporate clients has slowed down. Most companies are treading a cautious path, with a focus on cost control, and are delaying decisions on expansion plans.

Sluggish demand over the last few quarters has reflected on the lease rents for IT SEZs as well as office spaces. The prevailing rents for IT SEZs are in the range of Rs. 30-34/sq.ft. (apart from EON and Blueridge, which are quoting in the range of Rs. 38-40/sq.ft). These rental figures have witnessed a dip of about 10-15% over the last quarter. Similarly, the average asking rents for office spaces in the SBD have witnessed a drop of about 5-10% and are presently in the range of Rs. 60-75/sq.ft. pm.

The pressure on lease rents is likely to continue in the short term due to competing supply and the global financial scenario. Developers have adopted a wait-and-watch approach and have delayed plans of launching new projects.


Retail Property Markets

Pune is yet to witness its first complete mall development – a development catering to retail, leisure/entertainment and eateries under a single roof. The existing retail developments are predominantly clusters consisting of one anchor tenant and vanilla retailers.

That said, Pune is likely to witness a retail revolution in the next two to three years, with a supply of about 7 million square feet to be delivered in various pockets of the city. Three 1-million square foot+ malls are under construction, apart from numerous malls ranging between 2-5 lakh square feet. Most of this supply (over 80%) is anticipated in eastern Pune (Yerawada, Nagar Raod, Vimannagar, Kalyaninagar, Koregaon Park and Hadapsar).

Considering the general slowing down of the economy, a definite impact has been observed in transactions for spaces in malls. This is also accentuated by the wait-and-watch approach adopted by retailers and delay in moving forward with their expansion plans. Transactions have been observed at high streets, as there is demand from retailer’s for ready properties.

Considering the competition, the pressure on lease rentals is high and there are strong chances of the rents moving downwards.

Tier II/III developers with plans for malls have adopted a wait-and-watch approach.


Land Markets

Land markets have been extremely sluggish over the last two to three quarters. Transactions have drastically reduced and developers – the prominent buyer segment have in most cases stopped buying land. Key reasons being:

 Drop in demand for ongoing projects
 Pressure on prices of ongoing projects
 Liquidity crunch

Developers are offering joint venture/joint development proposals instead of outright purchase to reduce the entry cost. Liquidity crunch has forced the developer to focus on completion of existing projects rather than venture out for buying land.

Land prices are still intact in most micro markets inspite of pressure on the sale prices for constructed assets. Some marginal movement downwards is anticipated in land prices in the next few quarters.

Pune Vis-à-vis Other Markets

Pune has the distinction of having more than one economic engines of growth. Apart from the burgeoning IT / ITeS Sector, the economy is also strongly driven by manufacturing sector (auto & auto ancillaries). Education and Administration are also the other prominent economic generators for the city.

Advantages of Pune

• Proximity and excellent connectivity with Mumbai
• Pleasant weather year round
• Availability of talent pool and resource pool
• Stable political and social environment

Limitations of Pune

• Infrastructure projects like airport, road, metro rail etc need to be given a priority. Most of these projects are delayed/slowed down
• Public transport system needs improvement

The property prices in the city are still realistic and reasonable in comparison to several similar cities in the north. The average property prices for residential apartments at suburban location are in the range of about Rs. 3000-3500/sq.ft.

The growth in Pune property markets has been on the back of strong end-user demand. Speculators operating in the market at any point in time were extremely low, and this has benefited the markets as property prices have not witnessed high correction despite sluggish demand over the last few quarters. Going forward, there would be pressure on prices, but the downward movement is anticipated to be between 10-15%.

It can be definitely said that strong demand still exists in the market, and that there are still buyers at the right price.


Guidance for the Future

In a falling market, it is important for developers to be realistic in the pricing structure. As discussed earlier, there is still demand for the right price and right product. Developers should also:

• Demonstrate cost control by either adopting new technologies or improving existing processes
• Focus on customer satisfaction and ensure timely delivery
• Focus on affordability of the target consumer and right pricing of products
• Offering better quality products and differentiate from competition
• Having another look at specifications and reducing unnecessary items