What Is ‘Spillover Demand’ In Real Estate? – Arvind Jain, Managing Director – Pride Group

arvind jain1In real estate investment circles, we often hear the term ‘spillover demand’ or ‘spillover effect’. It is a very important concept and serious real estate investors must have a clear grasp of it. Basically, the spillover effect in real estate pertains to the impact that a certain event or series of events in a locality has on adjoining localities.

The term spillover demand is most often used when a certain location is either reaching saturation point in terms of development potential, has begun commanding high property rates because of high demand, or both. When this happens, budget-bound home seekers who are interested in this area because of its location benefits or the desirability of the neighbourhood are forced to look for options in the immediate vicinity. This is spillover demand.

This is a predictable process with which both real estate developers and property investors are very familiar. Developers study the locality’s surrounding areas and analyze them for possible land acquisition and development potential. Builders with sufficient vision will have acquired surrounding land parcels well before the original location has reached its ‘popularity peak’.

There is an obvious ‘first mover’ advantage for developers who sense and act on such opportunities well before the actual spillover demand hits the ground. Land prices tend to be lower, and the available plots tend to be of larger sizes. This enables them to plan larger projects at a future stage, which make for better brand positioning and also higher leverage when it comes to influencing the overall development of the area.

However, there are also risks involved. The city planning and municipal authorities may be slow in providing basic infrastructure such as roads, sanitation and electricity and water supply in the areas adjoining the parent location. If this is the case, projects built in these areas will fail to attract home buyers and investors until the locations themselves become viable. In a best-case scenario, a developer will have ensured that the city’s development plan has indeed scheduled infrastructure enhancements to the new location.

In Pune, some of the prime examples of spillover demand and infrastructure working together to successfully raise the real estate profiling of locations are Wagholi (spillover demand from Kharadi), Dhanori (spillover demand from Viman Nagar), Charoli (spillover demand from Dhanori, Viman Nagar and Kharadi), Baner (spillover demand from Hinjewadi) and Wakad (spillover demand from Hinjewadi and Baner). Timely infrastructure has been the common thread throughout these success stories.

Likewise, the demand for homes in Mumbai spilled over from the unaffordable parts of the MMR to the Mira-Bhayander, Vasai-Virar and Kalyan-Dombivali belts. However, Navi Mumbai has arguably been the greatest beneficiary of the spillover demand from Mumbai, thanks to superior infrastructure ensured by CIDCO. thus, the real estate market in now-prominent areas like Vashi, Koparkhairne, Airoli, Ghansoli and CBD Belapur is perpetual boom mode even today.