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.

JLLM announces RESIDENTIAL REAL ESTATE INVESTMENT HOTSPOTS - 2009

The economic slowdown has combined with the real estate market’s inevitable efforts to assume rationality. For Indian residential space developers, the dream run is over – but for the sector’s end-users, an Era of Reckoning is at hand. Properties that would forever have stayed out of the reach of India’s less privileged middle-class denizens are about to be put on the table.

Yes, it is a buyer’s market now. Residential rates are crashing across the country. Overheated pockets in our metros and the more prominent Tier II cities are now tasting humble pie. Is there any scope at all left for residential property investors?

The answer is a simple ‘yes’. There will be no more short-term killings in Indian real estate, but certain areas in the very cities that most now shake their heads over retain their mid-to-long term potential. While other areas in these cities are headed for correction, these locations will hold their own and even grow. The Indian residential real estate story is writing its sequel – and this time, it features real players, realistic settings and a believable storyline...

Anuj Puri

Chairman & Country Head, Jones Lang LaSalle Meghraj

MUMBAI

Mumbai has witnessed some of the highest selling prices in the residential market till the beginning of this year. Clearly, those prices were not sustainable, since buyers for super luxury homes are shrinking fast. One of the focal areas was central Mumbai (specifically Lower Parel and Worli) which witnessed the highest price escalations. These now faces the challenges of the slowdown.

The current slowdown has curtailed the investor segment in the residential property market. The driver for what demand exists now are real end-users. In Mumbai, there is no dearth of those desperate to find homes within an affordable range - affordable housing is therefore now the silver lining on the dark cloud of today’s slowdown.

Mumbai has three different directions in which growth can still be observed. Appreciation is not a factor currently, but these are the areas that will sustain their prices – while other areas in Mumbai will correct.

1. The extended western suburbs - the Vasai-Virar sub-region. This region is known for budget housing.

• Drivers:

1. Economic drivers such as the MP SEZ by DHL, BIO tech SEZ by Mahindra and IT SEZ
2. Connectivity is going to increase by introduction of additional suburban trains from next year

Prices are in the range of Rs. 2500-3500/sq.ft

2. The area adjoining Panvel

• Drivers:

1. This region is benefiting significantly from trunk infrastructure enhancements such as the upcoming new airport, the Trans-Harbor Link, a railway terminus, mono rail etc.
2. Positive impact from the upcoming Mega SEZs by Reliance and others.
3. The expansion of JNPT.

Many developers have already initiated large township projects in this region. The price range are Rs. 3000-3800/sq.ft.

3. Bandra-Khar area

Prime property hunters are still focused on this area.

• Drivers:

1. It will witness increased connectivity by the Bandra-Worli sea-link, the proposed Metro Line 2 and also the upcoming Santacruz-Chembur Link road.
2. This region is always a preferred destination for prime property seekers because of its elite profile, and because of the high level of available shopping, healthcare, education and recreation facilities. Developers there are offering products in redevelopment schemes.

The prices range from Rs. 18000–25000/sq.ft.

DELHI

Currently, there is a definite slowdown in growth in the suburban residential market. Construction has stopped on new projects, resulting in a stabilization of rates for ready-possession flats. This scenario also reflects in Delhi, where the rates for good properties rates are now stable.

However, the areas around the 150-meter road that will eventually connect Gurgaon to Dwarka – specifically, Sectors 103-111 – have significant growth potential.

• Drivers:

1. A lot of developments will come up in this area, and one can expect a year-on-year appreciation of at least 5-7% even now.
2. The area is currently under-developed – however, when residential projects there reach completion in 2-3 years, the appreciation will be between 30-35%.
3. A lot of this depends on the ability of developers to raise enough cash to complete their projects. Those who do not have the requisite finances will miss out on an extremely lucrative opportunity.

The current rates in this belt range between Rs. 2200-2300/sq.ft. In Dwarka, the rates are between Rs. 4000-4500/sq.ft and in the further locations of Gurgaon between Rs. 3500-4000/sq.ft.

CHENNAI

Chennai’s residential real estate scenario is considerably depressed at the current time. Developers who have projects along the once booming IT corridor are all set to reduce their rates by as much as 20%.

However, the Mogappair-Porur composite region continues to hold mid-to-long term investment potential.

• Drivers:

1. This overall location is very close to the prime residential catchment of Anand Nagar and also to Chennai railway station and the bus terminus.
2. The fact that it is not near the IT corridor also increases its potential.
3. The rates there are competitive at Rs. 2800-3000/sq.ft.

The expected appreciation for residential properties here is between 20-30% long term).

BANGALORE

Bangalore is surely feeling the brunt of the IT slowdown. However, established suburban areas like Koramangala, Bannerghatta, Outer Ring Road and Bellari Road continue to be good investment destinations. As in the case of Mumbai, appreciation is not a focal point in the current scenario - these are the areas that will sustain their prices, while other will correct.

Koramangala

• Drivers:

1. No scope for fresh developments
2. Close to Electronics City
3. Residential demand is high

Rates are between Rs. 7000-8000/sq.ft.

Bannerghatta, Outer Ring Road and Bellari Road

• Drivers:

1. Close to IT hub
2. Outer Ring Road is close to Whitefield and is a commercial area.
3. New developments are coming up on Bellari Road, which is also close to the Devenhalli airport.

Rates – Rs. 3500 – 5500/sq.ft.

Appreciation potential between 5-8% short term. Long term 10-15%.

PUNE

With Talegaon not picking up in the anticipated manner, Pune’s new growth corridor now encompasses Kharadi and Nagar Road. This can be safely considered as the most lucrative real estate investment zone for 2009-2010.

• Drivers:

1) Eon IT Park – 4 million square feet of prime IT space in the last stages of completion

2) Other IT SEZs as well as commercial ventures also on the anvil

3) Proximity to revamped airport

4) Improved connectivity, largely via the opening of the VIP Road connecting Viman Nagar to the airport

5) Imminent arrival of 5-star hotels such as JW Marriott, Grand Hyatt and Leela

6) Reasonably low entry costs:

Rates – Rs. 2700-3500/sq.ft

HYDERABAD

Hyderabad continues to hold its own in the current slowdown scenario, though significant growth has now been restricted to certain specific areas.

Residential real estate investment growth potential in Hyderabad will center primarily around Gachibowli and Tellapur.

• Drivers:

1) Proximity to the financial district, which is where the highest growth of IT and other commercial projects is happening

2) Could become another CBD over the next ten years

3) Outer Ring Road (Phase 1 in advanced stage, phase 2 scheduled after six months) in the vicinity will reduce commuting time of residents to key workplace locations

Rs. 3000-3500/sq.ft.

Appreciation in these areas will be about 5% in 2009 and might increase in further years.

Micro Markets – The new growth engine for 2008

Micro Markets – The new growth engine for 2008
According to latest 2Q 2008 Asia Pacific Property Digest research from Jones Lang LaSalle

India, 20 August 2008 - The office property markets have continued to post growth over the past few years. However, the last few quarters, have witnessed a polarization of office markets in terms of growth in demand across the country, reports Jones Lang LaSalle Meghraj in its second quarter 2008 Asia Pacific Property Digest (APPD), a comprehensive quarterly report providing market update, significant trends in office markets in India.

The office markets, across six Indian cities including Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad and Kolkata, can categorized into three broad segments

(1) first segment includes markets which are likely to be “susceptible” in terms of retarded demand growth for the remaining half year of 2008.
(2) second segment includes micro markets which are “strong” in terms of maintaining demand growth for the next two quarters, and
(3) third set includes micro markets which have “high potential” in terms of improving demand growth for the rest of the year.

Anuj Puri, Chairman and Country Head, Jones Lang LaSalle Meghraj says, “It is interesting to note that the “high potential” office micro markets, anticipated to clock increased growth in demand, would do so essentially on the back of affordable product values, improving infrastructure and enhanced product being delivered. It is expected that over the next 8-10 quarters, such markets could witness strong pre-leasing commitments by occupiers despite robust supply pipelines, which are in place.”

Source: Jones Lang LaSalle Meghraj 2Q 2008 APPD; CBD-Central Business District; SBD-Secondary Business District

In case of the susceptible markets, demand from occupiers in the IT/ITES segment, could be rationalized on the back of economic slowdown in the US. This coupled with the strong supply pipeline in many of these markets could lead to a potential consolidation in the respective markets, leading to relatively higher vacancies, although, this may not immediately manifest itself in any marked rental consolidation in such markets.

If the global economic slowdown sustains, we foresee the vacancies to rise in these micro-markets due to strong supply volumes. This might put some pressure on the rental values next year. Rental values are consolidating across all vulnerable markets, however, no major rental fall is expected in these markets this year.

Moreover, it is increasingly becoming evident over the last two quarters that micro markets which are dependent on demand from IT/ ITES occupiers, are likely to be more sensitive to the occupation cost variations as compared to those micro markets which derive demand from non IT/ITES occupiers.

This is evident from the fact that many of the CBD areas in cities such as Delhi, Mumbai, Chennai, Hyderabad, Bangalore and Kolkata continue to enjoy captive demand from corporate occupiers mainly from BFSI, Consulting, and other service industries. The consistency in most of these office markets is also attributable in part to the relatively limited growth in the supply pipeline over the last few years.

Supply Trends
In terms of new office supply completions in the first half year 2008 as compared to same period in the previous year (2007), it is interesting to note that the cities (including all micro markets) that have clocked the highest positive growth rate in terms of delivered supply on a year-on-year are Kolkata, Chennai, Mumbai and Delhi. In fact, Bangalore and Hyderabad are two cities which have actually posted negative growth in terms of stock completion in first half of 2008 vis-a-vis same period 2007.

Source: Jones Lang LaSalle Meghraj 2Q08 APPD

Outlook
A remarkable insight to note is that Hyderabad, Delhi, Mumbai, Chennai and Bangalore have more than half of the total expected office stock completions planned to be delivered in the remaining half of 2008. Whereas, in Kolkata the situation is just reverse, where about a third of the total stock completions are due to be delivered in the remaining half of 2008.

On the demand front, the second half of 2008 is expected to witness high pre-leasing activity in most IT SEZs and, IT parks developed by blue chip developers. While the slowdown in the IT/ITES sector is a known story, the slowdown has been only in terms of a deceleration in the estimated growth rate to 21-24% for 2008-09 vis-a-vis the recorded 28.2% growth in FY 2008. Further demand from emerging industries like pharma, biotech, semiconductor, R&D operations and logistics will top this IT/ITES demand. Thus, taking cognizance of the supply-demand scenario, the next two years will witness strengthening of the real estate office market fundamentals in terms of market behaviour, rationalisation of demand-supply, and increased consolidation.

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2007 global revenue of USD2.7 billion, Jones Lang LaSalle has approximately 180 offices worldwide and operates in more than 700 cities in 60 countries. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.2 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than USD54 billion of assets under management. For further information, please visit our website, http://www.joneslanglasalle.com/.

Jones Lang LaSalle has over 50 years of experience in Asia Pacific, with over 16,000 employees operating in more than 70 offices in 13 countries across the region.

About Jones Lang LaSalle Meghraj

Jones Lang LaSalle Meghraj, the Indian operations of Jones Lang LaSalle, is the premiere and largest real estate professional services firm in India. With an extensive geographic footprint across ten cities (Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 3300, the firm provides investors, developers, local corporate and multinational companies with a comprehensive range of services including research, consultancy, transactions, project and development services, integrated facility management, property management, capital markets, residential, hotels and retail advisory. For further information, please visit www.jllm.co.in

Biotechnology to contribute to the Indian Realty boom!!

Biotechnology is the next. After the Information technology, the industry that is fast thriving is the bio-technology sector. Bio-technology sector is all set to bring another boom in Indian property market.

According to the data showcased by real estate consultant, Jones Lang LaSalle Meghraj the biotechnology industry is expected to need around 100 million sq ft of space in the future. Thus the real estate industry is believed to gain a lot by the development of biotech parks and manufacturing units as per the report.

Currently there are six biotech parks in India and around nineteen are to be developed. Indian realty is growing at tremendously and also attracting large investments with a market size currently being $12 billion (Rs 47,880 crore). The biotechnology industry furthermore is giving a hard push to the demand for quality commercial spaces as the estimated demand from the technology sector alone is likely to be 150 million sq ft of space by 2010.

To add to the fact that few years down the line demand creation for commercial space by the technology sector will be huge, the overall investment in the sector has also seen escalation. The investment has grown from $ 137.2 million in 2003 to $366 million in 2006. Out of the huge investment being made in the bio technology sector will go in setting infrastructure facilities and development centers. The major areas where the potential is and is needed to be tapped are cities like Hyderabad, Bangalore, Chennai, Mumbai, Pune, and National Capital Region.

India for quite sometime has been one of the most sought after destinations in terms of real estate investments and now it is to become a center of biotechnology industries.

Contributed By : Karan Vinayak

IT Companies eyeing Tier II and Tier III cities

IT companies are voicing a big ‘NO’ to tier I cities as the prices of commercial properties going through the roof and the increasing attrition rate in tier I cities.

As per a report by renowned manpower consultant the average attrition rate in the IT companies operating from Tier I metro cities of Delhi, Mumbai etc is as high as 25-40 per cent annually.

On the contrary the same at a Tier II city like Chandigarh and Pune for instance is comparatively low at 10-25 per cent and is expected to be far less than this in Tier III cities.

A ballpark estimation says that nearly 95% of the IT outsourcing activity (both domestic and international) is concentrated in the six, tier-I cities. Now, cities such as Chennai, Hyderabad, Pune, and tier III cities like Jaipur, Chandigarh, Mysore and Ahmedabad are to make the mark in BPO sector, says the data showcased by India Executive Report 2007.

Whereas in tier II and III cities high salaries, vibrant work culture and environment are the main highlights luring more and more people to look forward to BPO jobs. On the other hand since the rates of commercial properties are less in those tiers II cities and the retention of manpower easier IT companies finding is a prudent effort to mark their presence in tier II and tier III cities.

Talent getting skimmed in metros is another reason for these companies to ponder over moving their stations to tier II and III cities but at the same time the problem these IT companies can come across is the unavailability of proper and adequate infrastructure.

However, there is a win-win situation for IT companies if they move to smaller cities. The reports nevertheless corroborate that IT giants like TCS, Infosys, Wipro and Satyam have openly launched their operations in Tier II and Tier III cities like Mysore, Goa, Chandigarh, Indore and Bhopal in the recent times.





Contributed By : Kaustubh Jarag