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Chennai Property Price have gone too high too quickly

Monday, November 23, 2015

Chennai Real estate market is marred with government inactions and lot of dampening in interest due to Nokia and Foxcon. Commercial real estate had been very weak. However, commercial properties market are doing reasonably well now. First, due to government inactions, power cuts and less regulatory approvals in last 2-3 years, not many developers showed any interest in launching new projects in this segment. Second, post 2007-08 slowdown, commercial properties capital value has been mostly flat which is yielding very good lease rentals.

After clarity on state bifurcation, Hyderabad has emerged as a formidable competitor to Chennai to attract businesses. State government has renewed its focus in bringing up the commercial demand by recently organized Tamilnadu investor summit where about USD 20 bn of MoU’s are signed. This will be big positive for the sector.

Residential real estate sales are down by almost 70% YoY in Chennai. Land cost used be only 20-30% of whole project cost, now it is almost 50-70%. So overrunning cost due to delays, interest and regulatory hurdles can make a project unviable. Lots of townships (designed on the lines of mini smart cities) in and around Chennai have been flop because there is no transport infrastructure in place and no social ambience around townships. Government spend in transport infra is utmost important to propel the townships/smart cities/affordable housing in suburbs.

The problem is that even in suburbs, price have gone too high too quickly and matching the areas with adequate transportation infrastructure. This anomaly will be corrected by both price and time correction.
Developers are shying away from doing lot of advertisements because they know that with so weak sentiments, A&P cost won’t change anything. Lot of issues like regulations, plan approvals, NOC, environmental clearance, taxation (stamp duty etc) and arbitrary guidance value (Government rate which is higher in some areas than prevalent market rates) are taking toll on the whole commercial and residential space. PE players are taking advantage of this residential slowdown by doing value bulk buying at 20-40% discounts right now.

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