THE REAL ESTATE DYNAMICS OF SATELLITE TOWNS

Subhankar Mitra, AVP - Strategic Consulting, Jones Lang LaSalle
Meghraj

The immediate impacts of satellite town formation - and the primary
advantages - would be an at least partial decongestion of the central city and
a rise in property valuations in the satellite town. The appreciation rate would
depend on what kind of infrastructure has been/is being put in place in the
satellite town, and what other market drivers it features.

PRICE DYNAMICS

Since appreciation is of paramount interest from an investment point of view,
this aspect deserves amplification.
Property prices are a function of demand and supply. Demand is created by a
suitable combination of market drivers such as employment potential,
infrastructure and overall quality of living. If a satellite town offers these in
sufficient magnitude, and if there is sufficient connectivity to the main city by
means of road and rail, this new area can often put a slight downward
pressure on property prices in the more centralized regions while showing a
steady upward trend on its own property price graph. This, however, happens
only under optimum conditions, which must be created by meticulous town
planning and proactive local Government support.

THE DOWNSIDE

Of course, living in a satellite town is not everyone’s cup of tea. There would
be a perceived disadvantage for those use their home in the satellite town to
travel to their workplace in the central city, especially if the necessary degree
of road/train linkage has not been created. Also, buying a home in a satellite
town can lead to a sense of isolation and general dissatisfaction if the location
does not feature the kind of social life and entertainment that would be seen
as necessary lifestyle quotients.
Some central city dwellers would choose to move to such satellite towns in
response to the available relief from city-related stress and cheaper property
rates. However, the majority of metropolitan inhabitants would choose not to
relinquish their foothold in the main city. Many satellite towns coming up today
are of greater interest to migrant populations rather than core city inhabitants,
and local developers tend to zero in on this population while planning their
projects.

DEVELOPERS’ DELIGHT

A classic example of best-scenario satellite town planning would be the
Pimpri-Chinchwad Municipal Corporation (PCMC) of Pune, which is an
industrial hub in its own right. Within the PCMC area, Pradhikaran has
emerged as the location of choice for mid-to-high level management staff
working in the various surrounding industries, and various local development
concerns such as Pharande Spaces have recognized and focused on this
potential. Areas such as Navi Mumbai and Pune's PCMC are planned
developments that have their own social infrastructure as well as distinct
resident profiles social character.

If satellite townships have been meticulously masterminded by the relevant
town planning authorities, they will incorporate their own economic drivers
such as employment opportunities, social infrastructure and lifestyle quotients.
Simply put, such a combination of factors opens up a new growth area for the
real estate market. Under suitable circumstances, office, retail and residential
property will work in tandem to create a symbiotic growth pattern.

Moreover, once such a satellite town is established, it tends to attract various
industries specific to the available workforce, further boosting this pattern. The
overall effect is one of economic diversification of a possibly congested metro
into new directions. This naturally spells nothing but good news for the
region’s real estate market.

THE TIER II / III REAL ESTATE STORY – THEN AND NOW

Sanjay Dutt, CEO – Business, Jones Lang LaSalle Meghraj

The demand fundamentals of the India story are now focused around all cities that have sufficient economic activity, be it industrial, service sector-driven or incentive-driven programs by the State Government. In Gujarat, which has seen considerable industrial progress, the key cities of Ahmedabad, Surat and Vadodara come readily to mind. Baddi in Himachal Pradesh and Pantnagar and Rudrapur in Uttaranchal attracted a lot of residential developers that met with success, thanks to proactive Government policies. In the South, Coimbatore, Vizag and Kochi emerged, either thanks to a large investor segment or as the outcome of sufficient economic activity. Towards the West, Pune, Nasik and Nagpur are noteworthy in this context. In all cases, developers positioned their development close to industrial hubs, targeting a totally different price segment and making the most of it.

WHAT WENT WRONG

This said, every developer was inspired to create a national footprint three to four years back. While this was a worthy ambition, it was poorly conceived as a plan since many of them did not factor in State Government-level regulatory challenges such as local municipal laws. They also did not consider that they may not have had the requisite financial resources, organizational depth and knowledge of the local markets to manage and execute projects in Tier II and Tier III cities. Nor had they accurately gauged the demand fundamentals of these locations.

Such developers proceeded to enter into land acquisition on their own equity and were caught short-footed, not realizing that the property cycles were then at their peak, and that there was bound to be a correction – if not a fall.

THE DAWN OF REASON

Major players are now going to re-align their positions vis-à-vis unexplored territories. There is now a very clear realization that it is extremely difficult to become a genuine Pan India player in every geography and real estate segment. Moreover, developers today have woken up to the fact that there is only limited capital available to real estate players today – capital that is earmarked for residential projects, construction funding against achieved leases and signed contracts, or for cities displaying sufficient demand even in subdued market conditions.

In the current context, it makes sense for developers to re-strategize and focus on their core geographies. For example, if a certain developer is extremely accomplished as a residential players in the South, having high credibility and sufficient brand recall in this region, such a company would ask itself how wise it is to experiment in the North or the West, and whether it would not make more sense to expand in the South.

Likewise, developers accomplished in IT projects would now concentrate on geographies that feature a healthy IT component, and avoid branching out into cities that lack a sufficient volume of such activity. Such developers would see the virtue of focusing on IT-centric cities such as Bangalore, Hyderabad, Chennai, Mumbai, Gurgaon and Pune, and re-think on plans to invest in cities that lack Information Technology activity.

THE RISE OF THE LOCAL DEVELOPER

Tier II and Tier III cities still represent a great story, especially in terms of affordable housing for industrial workforces. However, this story may no longer be suitable for some of the larger developers. These are locations where the strength of regional players will come into play.

There is at least one strong developer in every region. For instance, Panchshil Realty, Magarpatta, Paranjape Builders and Kumar Builders are very powerful local brands in Pune, with a company like Pharande Spaces practically spearheading the residential drive in Pune’s PCMC area. These brands have demonstrated that they understand their geographies better than any players who arrive from the outside to experiment on the Tier II / Tier III story.

The success of these local developers will inspire larger developers from beyond a region’s borders after the fundamentals of that area’s demand are captured sufficiently and the markets are sanitized in terms of municipal and financial market stabilization. In the next one to two years, developers will have realigned their business strategies sufficiently to leverage the potential of Tier II / III cities that have sufficient market drivers or are witnessing considerable investor activity (such as Kochi, Surat, Mohali and Chandigarh).

MCHI gets outstanding response for 2nd ‘Budget Property 2009’ expo

Mumbai, August 05, 2009: Maharashtra Chamber of Housing Industry (MCHI), the most prominent body of real estate builders and developers in India has received an awe-inspiring response to their recently organized 2^nd Budget Property exhibition simultaneously held at R City, LBS Marg, Ghatkopar (W) (central suburbs) and Raghuleela Mall, Kandivali (W) (western suburbs) during July 31 to August 2, 2009. The visitor’s turnout was 9,696 and 17,241 at Ghatkopar and Kandivali exhibition respectively.

This three days exhibition was inaugurated by Shri. Arun Kumar Agarwal, General Manager & Business Head (PB) - I, State Bank of India & Shri. Shubhash Runwal, Chairman, Runwal Group, at Ghatkopar and Smt. Shubha Raul, Mayor, Mumbai at Kandivali.

Considering the rising demand of affordable housing MCHI conducted property exhibition at two locations simultaneously. The exhibition was focused on properties in the range of Rs.10-50 lakh & Lifestyle Homes above 50 Lakh as well.

“We have seen an encouraging response from the home buyers as our exhibition was held when the large numbers of buyers were looking out for an affordable housing at various locations in the western and central suburbs of the Mumbai. The response also had confirmed that the trend is in favour of affordable housing as well as quality lifestyle homes”, said Mr. Pravin Doshi, President MCHI.

“It was a co-incidence that the central government announced a special incentive one percentage point interest subsidy together with the tax benefit that makes home loans really cheap. It had created a positive impact on the exhibition with potential buyers rushing towards the expo to grab the opportunity of the affordable homes showcased in the exhibitions.” said Mr. Harish Patel, Convener, Exhibitions MCHI.

“We are extremely happy with the success of the Budget Exhibitions, the concept MCHI unveiled last year to cater the changing need of the housing and also aided in reviving the market sentiments in general. The Budget Exhibitions also have mutually benefited the buyers and developers very well”, said Mr. Deepak Goradia, Co-convenor Exhibitions, MCHI.

As many as twenty one leading developers and builders from India including Ackruti City Ltd, Lodha Group, Mayfair Housing Pvt. Ltd., Rustomjee, Arihant Universal, Disha Direct Marketing Services Pvt Ltd., Dosti Group, Neelkanth Mansions Ltd, Everest India Limited, Nirmal Lifestyles, Neptune Group, Runwal Group, Mittal Builders, Royal Palms India Pvt. Ltd. , Godrej Properties Ltd., had showcased their properties at the exhibitions. Properties from Andheri to Virar and beyond were displayed in the western suburbs exhibition at Kandivali while properties from Ghatkopar/Chembur to Mulund, Thane, Kalyan, Navi Mumbai, Panvel and beyond were displayed in the central suburbs exhibition at Ghatkopar in the 2^nd Budget Expo 2009. Among the HFIs were State Bank of India, ICICI Home Finance and HDFC Ltd. at both the locations.

About MCHI:

Maharashtra Chamber of Housing Industry (MCHI), formed in 1982 is the most prominent body of real estate builders and developers in the country. MCHI brings together members dealing in real estate development on one common platform to address issues facing the industry. Members of MCHI account for 80 of new residential accommodation in Mumbai and its vicinity. MCHI helps both the Central and State governments in meeting their objectives of providing housing, which is a basic necessity. MCHI works towards raising awareness among the general public, real estate and construction industry while providing them with detailed information on projects and new developments in and around Mumbai. With over 400 well-recognized and reputed member builders and developers, MCHI is affiliated with leading industry associations like FICCI, IMC and CREDAI.

CHENNAI’S REAL ESTATE MARKET – Hurdles To Optimum Growth

Ramesh Nair, Managing Director (Chennai), Jones Lang LaSalle Meghraj

Few cities in India have managed to maintain a more or less even keel in the recent market turbulences, but Chennai definitely numbers among them. Being an essentially conservative market, it has managed to maintain its inherent potential while many other cities showed some rather extreme variations.

Nevertheless, there is still potential for positive change, and quite a few come to mind while considering the roadblocks to further progress on Chennai’s real estate front.

ORGANIZED RETAIL

To begin with, organized retail space in Chennai is in short supply. The only additions scheduled to augment the current supply of full-fledged shopping centers (Spencers and City Centre) over the next one year will be Ampa Skywalk (450,000 sq.ft.) on Poonamallee High Road, Express Avenue (8 lakh sq. ft.) on Whites Road, Coromandel Plaza (250,000 sq. ft.) on the OMR and Spectrum Mall (1.2 lakh sq. ft.). in Perambur, North Chennai. All other supply will take at least two years.

The total incoming supply over the next year accounts for only about 1.5 millions square feet. Considering that all brands perceive Chennai as a high-potential market in terms of consumption given the high spending capacity, and that they are very bullish on expansion, this supply is indeed an inadequate trickle to fails to exploit Chennai’s fullest retail potential.

The city indubitably needs more organized retail. What stands between the current retail potential and vastly expanded one is the ongoing and seemingly chronic mismatch between developers’ lease rental expectations and the paying capacity of occupiers’ business models. This needs to be addressed by an open dialogue between developers and retailers about what works and what doesn’t in Chennai’s highly individualistic retail milieu. Until this happens, there will be no incentive for organized retail to make a bigger footprint in the city.

COMMERCIAL SPACES

In terms of Chennai’s commercial real estate sector, there is a huge oversupply of IT space. These projects cannot be reinvested into other formats, since the Government has stipulated a lock-in period of five years for projects built to the higher FSI allowances made for IT / ITES. Chennai’s developer lobby has made several representations to the State Government to have this lock-in period removed. For commercial real estate in Chennai to recover more decisively, this move should be put on fast track.

RESIDENTIAL SECTOR

Chennai’s residential sector was never a speculator’s market, and therefore, prices did not shoot up as much as in most other metropolitan cities in India. By that coin, the downward slide was not as severe either. Sales on a month-on-month basis are picking up, and affordable home projects have been announced by all developers. Since the manufacturing sector in Chennai is as fast-paced as ever, the demand for homes is bound to increase.

However, delivery of these projects is delayed because the granting of regulatory approvals takes too long in Chennai. Speeding up the process of granting project approvals would boost the city’s housing sector.

‘Most of the housing demand in Chennai comes from services industries such as IT/ITES. Close to 48% of the total non-working population in Chennai falls under the age bracket of 15–59. We foresee a large proportion of this nonworking population to graduate and commence working. This will lead to an increase in the number of double-income-no-kids (DINK) families in Chennai and will result in a rise in housing demand over the same period.’ (Affordable Housing In Chennai: Calibrating The Ticket Size – Real Estate Intelligence Services, Jones Lang LaSalle Meghraj).

MANUFACTURING

Finally, a thought on one of Chennai’s key growth areas – Sriperumbadur. This is a very important manufacturing location in Chennai. As an automobile hub, it already boasts of names like Nokia, Flextronics, Samsung, Dell and Hyundai. However, Sriperumbadur suffers from a lack of connectivity between its manufacturing nodes and also to the main city. The roads that exist are incapable of handling the demands of current traffic volumes.

This area has the capacity to be a major real estate driver for Chennai, but it needs proper Metro and road connectivity to integrate the manufacturing and hardware hubs to the main city and to each other. Providing this connectivity will also open up Sriperumbadur’s residential sector.