Chennai Property Price have gone too high too quickly

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.

BANGALORE: Mushrooming E-comm and start-ups are driving commercial real estate

Commercial properties in the city are doing very well with less than 5% occupancy rate, which is one of the least in the country. Expert are expecting less than 3% in coming years. Lease rentals have appreciated by more than 20% in last 2-3 years.

Transport infra and power cuts have been major issue affecting occupancy level in Whitefield. Ecomm and start-ups have played a major role in absorption of small offices. Flipkart took 2-3 mn sqft office space in one go which is unheard before.

REITS are showing lot of interest in city so lot of developers are cleaning their portfolio in terms of cross ownerships, clearances etc as law requires lot of transparency to enable trusts to invest. Bangalore commercial market is the best placed among major Tier 1 cities to place the bets on. Retail is doing poorly in Bangalore due to subdued interest and Bangalore being epicentre of ecommerce.

Bangalore Residential Market Segment
Bangalore market is always known to be market with less speculative activities as compared to other markets because still 70% of demand comes from end-users segment. Developers were inching up prices by 5-7% or more in all areas historically but doing this in future seems impossible.

Luxury segment is taking a big hit because luxury homes are mostly 2nd-3rd home buying for mid management IT professionals. Issues such as low salary hikes, mid management level crisis and fewer onshore opportunities are bringing down this aspiration buying. So this segment is the most hit with prices are already down by 15-20% pan India.

Emerging trend in Bangalore is lot of compact apartments launches in the size of 500-700 sqft and costing around 25-30 lacks to cater to new entered professionals.

Govt Gifts Realty Sector on Diwali

Large developers have always been better capitalized than others with more access to money and at cheap cost (relatively). 100% FDI in townships and development of housing and commercial complexes is already permissible through the automatic route. DIPP has been advised to consolidate all FDI-related instructions such as notifications, press notes and others and prepare a single booklet so that investors wouldn’t have to refer to several documents from multiple time frames.

Investments by companies /trusts/partnerships owned by NRIs to be treated as domestic investments: NRI investments in real estate are estimated to be 10-15% (or more in select markets). Larger entities owned/controlled by NRIs will lead to more investments in housing units/projects, we believe.

Amending the FDI policy on LLPs: This will also be beneficial to the sector as an LLP structure saves tax leakages on distribution.

Transfer of investments to another non-resident investor has no lock-in and can be done through the automatic route. Earlier, such a transfer also required FIPB approval. Bringing this under automatic route will bring ease and speed to such transactions, which earlier had to face procedural delays.

Restrictions on minimum area (20,000 sq. m.) and capitalization (US$5 mn) removed. This was brought down from 50,000 sq. m. and US$10 mn last year. Condition of no lock-in already existed for investment in hotels and resorts, hospitals, SEZs, educations institutions and old-age homes.

100% FDI now permitted in completed projects for operations and management of townships, malls/shopping complexes and business centers. This will improve the service in Indian real estate with more players likely to enter the market. It could also mean cheaper services on this account.