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.