Emerging Investment Hotspots – Ashutosh Limaye, Head – Research & REIS, Jones Lang LaSalle India

ashutosh limMining Opportunities From The Complex Real Estate Terrain of India

Executive Summary:

Real estate is an asset class that demands specialised skills and the complexity surrounding this sector increases in the Indian context. Compared to the mature real estate markets in the developed nations, buyers in India need a higher degree of diligence before entering into property agreements. Issues pertain to ownership rights of the property, understanding the difference between usable area and saleable area in absence of standardised definitions, completion of the project and receipt of the completion certificate and so on.

Further, when evaluating multiple investment opportunities, the absence of industry standards in developer ratings, building structure comparison, price distinction across different projects and other factors create difficulties in arriving at a direct comparative approach. In brief, information asymmetries and laxity in disclosure norms need to be addressed for the sector to achieve optimum potential in development and investments.

Amidst these complexities, real estate sector in India has displayed volatility in the past decade. Prior to the Global Financial Crisis (GFC) in 2008, the macroeconomic scenario was extremely robust leading all indicators northwards; be it property prices or space absorption. However, the period coinciding with the GFC and post-GFC absorption levels and property prices showed a marked correction across all major real estate markets in India. The recovery led by the residential sector, was also startlingly quick, with property prices recovering lost ground.

However, the demand levels have shown only a gradual recovery in the office sector. A combination of piling up unsold residential inventory due to decline in absorption rate in post-GFC and rising construction costs are causing difficulties for the developers. In such a scenario, returns through capital appreciation aside, security of the invested capital has become a big priority. Therefore the investors, end users and buyers face the pertinent question – Where to invest?

With this report, we seek to provide the answer to the above question to a certain extent. In this report, we highlight a few investment hotspots across India. At Jones Lang LaSalle, a location/ submarket is categorised as a hotspot in a city when it is emerging as a self-sustained ecosystem with development at all levels.

A location focused on residential segment and low/no commercial and entertainment options is not likely to sustain for a long time. Similarly, a commercial hub with low/no residential development is likely to cause problems for the employees who may seek for alternate residential districts in the vicinity, which can reduce the commuting time to work and therefore is not sustainable. In addition to the overall real estate development, infrastructure also plays a pivotal role in developing a location. Poor infrastructure or delayed infrastructural developments can eventually reduce the investment potential of the location.

Though all-round development requires considerable time, it lends maturity to the real estate market in the location while ensuring that price growth is sustained over a longer time period. To put the above in context of individual Indian cities and specific locations, Powai in Mumbai, which has emerged as a well-developed suburb, has seen a steady increase in prices across all asset classes. As against this, there have been a few locations where speculative activity resulted in increased price volatility which was later marked down considerably when real activity on ground failed to take off.

Kharghar, a suburban location near Mumbai witnessed such a trend in a relatively short time span. With the intent of developing it as a luxury residential hub, the local authorities announced various projects including a golf course and a Millennium Business Park. Infrastructure initiatives also attracted investment by developers and investors in this location which initially resulted in a sharp price uptick. Prices rose further when another round of rise in prices occurred when the international airport was announced near Ulwe, an area adjacent to Kharghar. However, with physical activity at a standstill and airport development slowing down, investor activity has seen a decline which in turn has led to a price correction.

Considering all aspects, we have identified eight submarkets as investment hotspots across the top seven cities in India. Notable absentees in our selection are the prime business districts as they have achieved near saturation levels in terms of development and hence are not expected to either support meaningful price increments or they do not provide a large selection of investable assets.

We have intended to select destinations which are classified as either emerging or growing submarkets and are likely to be well-supported by excellent infrastructural development. According to our assessment, these locations offer a large bouquet of investable options in real estate with their relative lower price levels providing the incentives for future capital appreciation and healthy returns. The locations are:

  • Noida & Greater Noida – National Capital Region (NCR)
  • Thane – Mumbai Metropolitan Region ( MMR)
  • Navi Mumbai – Mumbai Metropolitan Region ( MMR)
  • Whitefield – Bangalore
  • Southern Suburbs – Chennai
  • Viman Nagar and Nagar Road – Pune
  • Gachibowli – Hyderabad
  • Rajarhat – Kolkata

While these submarkets offer good investment opportunities, property price appreciation is likely to vary depending upon endemic risks associated with the particular submarkets and their precincts. Further, within the submarkets, discounts on property prices vary depending on developer profile, asset class and current construction status of the project and we would advise buyers to consider every option based on their risk appetite.