The residential property market in Chennai, Bangalore and Hyderabad remains stable in contrast with Delhi and Mumbai where a price correction is imminent
Amidst talk of an imminent correction in residential property prices in major metros like Mumbai and Delhi, the scenario in the southern cities of Chennai, Bangalore and Hyderabad continues to look stable, despite concerns over the increasing home loan rates.
While there is sluggishness in offtake in certain pockets in the southern metros and their suburban areas, for reasons that are more local, property developers are far from pressing the alarm bell.
Take, for instance, the case of Chennai. Residential property prices in the city have seen a 25-30 per cent increase over the last one year, while those in the suburban areas have witnessed a 10-15 per cent growth. With Chennai being a predominantly end-user market, the city has hardly witnessed any price correction, even at the height of the global recession a couple of years ago and prices have been heading only one way - up. Industry watchers feel the spurt in prices in Chennai is much higher than in Mumbai and Delhi, in percentage terms.
"In Chennai, the prices have risen sharply over the past year or so, but the demand continues to be extremely good for all city-based development and we continue to do very well. Buyers have more or less factored in the increase in home loan rates and it has not impacted the market so far, since purchase decisions are not based on interest rates alone," says TSS Krishnan, COO, Appasamy Builders, a leading player focusing on city-based projects.
"Even during the recession in 2008 and 2009, there was no significant drop in prices, even though there was a drop in volumes. As a result, most builders tweaked the size of apartments to meet market requirements. Post 2009, prices have started escalating, taking the capital values of residential property prices in Chennai to an all-time high," says Sanjay Chugh, founder, Skylines, a property advisory focused on residential and retail segments.
"The land supply for new projects within the city limits is very low. Hence, developers lap up whatever little that comes up, leading to high land prices. However, since the demand for city-based homes continues to be very good from end-users, stocks fly off soon after launch," explains T Chitty Babu, managing director, Akshaya Homes, which focuses not only on city-based projects but also in suburban and peripheral areas of Chennai.
According to him, Tamil Nadu reportedly accounts for around 11 per cent of the country's estimated housing shortage of 28 million units by 2012. "That's almost 3 million homes. As a result, the city's suburban and peripheral areas like OMR, GST Road and Oragadam are seeing a spurt in activity with many projects being launched by both city-based developers as well as national brands like Tata Housing and Godrej," he said.
In the case of Bangalore, there has been no dearth of new launches, even though louder voices are being heard about the steady increase in home loan interest rates, since a bulk of homebuyers happen to be from the salaried class.
According to Ashutosh Limaye, local director - strategic consulting, Jones Lang Lasalle India, in Bangalore the low- to mid-income segments are invariably the most affected by a hike in home loan interest rates. That said, the impact of increased cost of borrowing is not as severe as that of the decreased allowable percentage of borrowing. Where this used to be a steady 85 per cent of the overall cost of the property, most banks are now not extending more than 75 per cent of the cost. "The fact that the salaried class now has to make a higher contribution to the cost of their homes is having a very tangible impact on demand," Limaye says.
"Higher interest rates are really a cause of concern. Ideally, it should be in single-digit. Anything above will raise concerns. But it is too early to conclude that a spike in interest rates has pulled back demand. I don't think any developer has decided to withdraw or postpone the launch of a new project due to higher interest rates yet," says MS Jai Ganesh, vice-president, marketing & sales of Bangalore-based Pashmina Builders & Developers.
"The impact will be more on second-home buyers. People would not postpone the first purchase, but second-home buyers would show some reluctance," he points out.
JS Nathan, managing director, V3 Group, another Bangalore-based developer, is of the view that half of the property buyers are first-time buyers, who may decide to buy a property despite higher interest rates. On the other hand, second-home buyers, who would look at it as an investment opportunity, may postpone or rethink their buying decision.
Appasamy's Krishnan feels residential properties give just about three per cent return on investment per annum, unlike commercial properties. "But investors will continue to invest in residential properties if there is good scope for appreciation in capital value, which is the case in Chennai," he says.
In the case of Hyderabad, the concern is more about political stability, coupled with the Telangana agitation, than over rising interest costs that have had a strong bearing on the residential segment of the real estate market. While the offtake has improved to a large extent over the last year, high-end real estate prices are yet to hit the peak levels that were witnessed prior to the recession.
Developers had also corrected prices during the recession and they remained stable with the buyer sentiment remaining low. To attract customers, developers offered free amenities like furniture and modular kitchens, free cars parking space and pre-EMI schemes. These have reportedly improved sales.
Some developers have also attempted at novel designs to attract customers. Sunway Opus launched what it called 'flexi villas'. These villas, though they look like villas, accommodate 4-6 flats each.
According to a recent Jones Lang LaSalle India report on Hyderabad, developers of projects that were nearing completion increased the prices as they witnessed an improvement in sales. This led to many new launches in the affordable housing segment. "Projects like Aparna Sarovar and Ramky Towers witnessed good sales and so they increased their prices. However, a large amount of unsold inventory is lying with the developers in projects which are in the initial stages of construction," the report said.
The demand is much higher for two- to three-bedroom apartments in areas like Kondapur and Hitech city in Hyderabad, where most of the city's IT crowd is concentrated. "Sales of projects offering residential units in the price bracket of Rs 35-40 lakh are picking up rather than high-end villa projects. However, there is a demand for high-end projects as well, but major developers are now opting to introduce smaller projects on 5 to 10 acres. Most customers opt to pick up properties that are nearing completion and hence funding constraints for high-end projects remain a challenge," said PS Reddy, chief advisor, AP Real Estate Developers Association.
" In the past one month, we have observed that customers are looking at spending a little extra than what they typically spend on a three-bedroom apartment and are opting for a villa. We are now looking at launching projects that would have a mix of affordable villas and apartments. These would range between Rs 50-75 lakh for villas and Rs 30-40 lakh for apartments located on the outskirts of the city," said DR Patnaik, head - sales & marketing, Ramky Estates.
Although the investment sentiment dropped in Hyderabad, prices of properties in the prime areas of the city are much more affordable compared with prime locations in other metros in the country, the Jones Lang Lasalle report says. The increase in hiring activity in Hyderabad is an opportunity for investors, as it is expected to lead to a surge in demand for rented houses. Investors can therefore capitalise on this opportunity with the prevailing low capital values, the report added.