High growth momentum for luxury real estate in Chennai

 Chennai’s luxury real estate market has seen a paradigm shift over the years. To make it simple, the concept of luxury living has a different meaning now, and it is evolving every moment, thanks to people’s aspirations due to boundless affordability.

Gone are the days when developers in the southern metropolis used to offload homes with  ‘luxury’ tag, which has homes with imported fittings and furniture, modular kitchen, designer wall cladding, swimming pool, premium flooring, hi-tech security system, ample car parking space, landscaped gardens, etc. All these are now became ‘necessary’ amenities being offered them in HIG or LIG residential projects.

People in Chennai, who were once traditionally conservative as for as buying home was concerned, are now an evolved lot aspiring to ‘live in luxury’, thanks to the phenomenal growth in the affordability level that has triggered a huge demand for luxury housing in the metropolis.

At a time when residential realty market, catering to HIG, MIG and affordable segments, is facing tough challenges across the country, luxury housing has shown resilience to slowdown by clocking more than 10 per cent growth year-on-year across top eight cities, and Chennai, being one of the fastest growing metros, has contributed significantly to this growth factor.

Growth prospect

India’s luxury market is valued at US $ 8 billion and is pegged to grow at 25 per cent from 2013-2015 to cross USD 15 billion, according to industry estimates. The boom in economy since 2005 and spurt in the number of high net worth individuals (HNWIs) have contributed to the growth of luxury realty across the country as developers are cashing on the extended affordable limits being enjoyed by home seekers by offering them world class amenities at a premium cost. 

The number of high net worth households, with a minimum net worth of Rs 25 crore is expected to be at 2.86 lakh in the next five years, according to ASSOCHAM-Yesbank’s study, which further added that, the number of HNWIs would go up to 4 lakh in as many number of years with their collective wealth clocking USD 2645 billion.

Demand drivers

“Several factors are aiding the growth of luxury realty in Chennai. Primarily, the city is under-serviced in terms of luxury housing. Obviously, the demand is high. Secondly, high-salaried individuals drive this segment. Thirdly, the supply is opening up because many developers are shifting to luxury segment to offset the loss incurred by unprecedented rise in input costs. By spending little more and adding world-class amenities they can make it ‘luxury’ and sell them with high premium instead of launching mid-income housing projects, where the profit margin is less,” says Badal Yagnik, Managing Director (Chennai), Jones Lang LaSalle India, a leading real estate research firm.

To tide over the current crisis, even small-time developers are launching luxury housing projects with houses costing upwardly Rs 2 crore. Are they able to meet the aspirations of luxury home seekers and make profit? 

“Luxury housing projects are profitable compared to other residential projects because of high cost per dwelling unit and high margins available in these products. However, there are limitations in the availability of large land parcels resulting in low-density big-ticket products, which may not provide scalability and visibility to the developers as available in large-scale cluster housing developments,” says N Nandakumar, Managing Director, Devinarayan Housing and Property Developments, who has completed several luxury housing projects in key areas of Chennai and Bangalore.

Pros and Cons of buying bank owned properties

Chennai: We have seen banks/financial institutions advertise auctions to sell hypothecated properties after the borrower defaulted the loan payment. Does it safe to buy bank owned properties? What are the legal implications and safety measures attached with such buyouts?

Banks generally take the possession of the property it had lent to the borrower once the later failed to honour the loan agreement. Banks give enough time to the borrowers to pay back the standing loan amount but if they by any reason announce bankruptcy, the financial institutions issue notice to the loan takers informing them of the impending auction of their premises and give enough time to vacate the houses to facilitate selling of the property to realise the unpaid loan amount.

There are advantages and disadvantages in buying bank owned properties. If we see the advantage part, the first one is about the possibility of getting the ready to move in house for the buyer. He can get the house by paying the amount to the bank and take possession of the keys within say, one month.

Secondly, banks want to realise the amount it had loaned to the borrower. Generally, the amount would be much less than the full market value of the property. More so, since a few years had elapsed, the value of the property would have gone up. But still, the buyer can make a good deal by doing hard bargaining to get the house at a price much less than the prevailing market value. Thirdly, the buyer can choose the house at a good location from the list of properties available under banks’ auction. The area would have been well developed with all basic amenities.

Lastly, buyers need not have to worry about the genuiness of the property, as the banks would have checked all papers of the home thoroughly by their own lawyers. Hence, the properties under banks’ auction will have less chance of having legal problems or any sort of encumbrances.

One of the major disadvantages in the bank owned properties, however, is that buyers will have no authentic information about the quality of construction of the property gone under the hammer. The buyer will not have much time to check the quality of the building. Even the building was constructed by a well-known builder, no guarantee would be given about the quality of the building at the time of auction.

Also, the buyers will not have the privilege to have the home of his choice. He has to spend a lot to alter the home according to his taste and design specification. By doing so, there is a possibility that the construction may go week.  There may also some permanent damage incurred by the outgoing owner, which the present owner would only come to know after purchasing the property.

The purchaser has to buy the property by paying the amount the defaulter is owing to the bank in cash. Since the amount is quite significant, the purchaser has to make arrangement to pay the amount in cash at a stipulated time.

But if one sees the pros and cons of buying the bank owned the property, it is prudent to analise both sides before deciding to sign the purchase agreement.

Afghan builders keen on joint ventures with Indian firms

NEW DELHI: To further deepen the economic engagement between India and Afghanistan, FICCI in collaboration with the Financial Access for Investing in the Development of Afghanistan (FAIDA) Department of U.S. Agency for International Aid (USAID) and Indian Embassy, Kabul, has organised interactive business meetings with Afghanistan Builders Delegation here recently.
 

‘Afghanistan-India Construction Sector’, a Business-to-Business (B2B) Matchmaking Event, which was organised under the aegis of the Trade Commerce and Investment Opportunities Confidence Building Measure (TCI CBM) envisaged under the Heart of Asia Process for Afghanistan.
 

A 35-member Afghan delegation was led by Afghanistan Builders Association (ABA), one of the largest construction associations in Afghanistan with offices in Kabul, Jalalabad, Kandahar, Mazar-e-Sharif, Herat and Gardez, with over 500 members from engineering construction companies.
 

Naeem Yassin, President, ABA, said that the delegation’s aim was to connect Afghan and Indian construction firms doing business in Afghanistan, facilitate joint venture opportunities in Afghanistan construction projects, share opportunities in construction material manufacturing in Afghanistan and import from India, investment opportunities in construction sector of Afghanistan and urban housing development opportunities in Afghanistan.

He said that ABA facilitates international investors and companies to work in Afghanistan in different construction fields. However, it also connects and provides J/V opportunities with qualified Afghan companies.

Pankaj Tandon, Vice President- SAARC & Myanmar, KEC, highlighted some of the challenges Afghanistan faces such as it is a landlocked country and difficult logistics across borders, perceptual security threat leading to difficulty in attracting talent, evolving institutions need to be aligned to global business needs and high cultural sensitivity.

Builders from Afghanistan have evinced keen interest in collaborating and forging joint ventures with Indian companies for executing projects in Afghanistan in housing, road construction, schools and hospitals.
 

They have shown interest to source all kinds of building materials and building equipments/machinery. Such collaboration is bound to receive a fillip as India is in the final stages of preparing a draft memorandum of understanding (MoU) under which the government will help Afghanistan develop roads and highways and formulate a road transport policy and share its knowledge in transportation technologies.
 

Indo-Afghan trade has grown to US$ $632.18 million in 2012-13 and the flow of goods has been strengthened by a Preferential Trade Agreement signed in 2003, and further enlarged by the Strategic Partnership Agreement signed in 2011. India has carried out several construction and infrastructure projects in Afghanistan, including building of Afghanistan’s Parliament.

Buyers benefit the most in possession-Linked Plans

The current scenario in Indian real estate market clearly reflects the mood of buyers. Developers are extending many offers to improve the demand, which clearly indicates that buyers are in wait and watch mode

Various media reports have suggested price correction for over last three quarters, but not much major correction in prices (with a few exceptions in some markets) has taken place. 

Developers are proffering bundled offers instead of negotiating prices. One such offer is the possession-linked payment plan, in which the buyer pays 20-25% of the apartment cost in advance and the rest on possession, says Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India.

 The Benefits Of Possession-Linked Plans

A critical point here is delivery risk and exposure of credit to developer. Buyers see immense benefits in paying just 20-25% to the developer while booking and paying the balance amount on possession. This eradicates the risk of developer not completing the project on time, and of the developer going bankrupt and not having to pay for a product that is not yet ready. 

We are seeing buyers favouring this option against the construction-linked plans. In the developed world, builders have to complete the product before they can sell to their buyer. Selling before completion is called ‘off-plan’ and this can be approved by the local regulator, but only on the basis of a special request and the overall credibility of the developer. Such checks are missing in India. With possession-linked plans, the benefit to buyers must always be seen in the light of multiple risks.

Points To Check Before Opting For Such A Plan

Three critical safeguards that buyers must put in place before investing into such offers are:

Ensuring that the developer does not have two different pricing structures : (i.e. one for construction-

linked and another for possession-linked plans).  If there are two such different pricing offers, then the developer has already built in the cost of funding that is applicable for a possession-linked plan. This effectively means that the buyer is indirectly funding the developer, and that is not an attractive scenario.

Establishing that the developer has all necessary approvals in place : Buyers funding the developers without approvals is like any another non-approved deposit collection scheme that can catch the eye of financial regulators like SEBI and RBI. Buyers need to use caution while investing in any project where approvals are yet to come and there is a assured-return type of structure. These are very risky structures and have high chances of default and delay in terms of payments.

Reading the fine print : Laypeople generally do not read those critical few lines at the end of the document before investing, but there is a huge risk of losing money by such oversight. For instance, the connotations of terms such as ‘Act of God’ as well as other obscure verbiage in the terms and conditions present a risk to buyers that do not understand them. Any condition that de-risks or absolves the developer can be perceived as a risk of losing the 20-25% of the initial investment. It is therefore prudent for the buyer to review all points mentioned in such an agreement.

What Happens If The Buyer Defaults On Payments?

The developer will cancel the sale agreement and basis the agreement has the full right to forfeit the initial payment of the buyer. Reputed developers only forfeit part of the initial amount, not the full amount. This is normally captured in the options agreement that the buyer will sign with the developer.

Risks Involved In Possession-Linked Plans

Many times, buyers go for construction-linked plans and developers draw 90% of the amount from the bank providing home loan. Delay by the developer in terms of delivering the finished product can sometimes extend to 2-5 years or more, and for various reasons. Buyers continue to bear the interest cost for the amount that the bank has funded the developer with, but cannot enjoy the finished product.

In a possession-linked plan, the risk involved is limited to the initial capital of 20-25% that a buyer pays to book the apartment. Buyers clearly stand to gain from a possession-linked plan as it reduces their risk and ensures that they do not have to bear the cost of funding the developer with multiple open risks.

 

Because of various potential policy changes after the elections, these plans may not be available very long. It is therefore a very good time for buyers to invest in projects that offer possession-linked plans.  

Pradhikaran, PCMC emerges as Pune realty’s Hottest Growth Corridor

Anil Pharande, Chairman of Pharande Spaces, a leading construction and development firm operating in the PCMC area of Pune, speaks about Pradhikaran, PCMC, as Pune Real estate’s new residential property investment hotspot.

The Pune residential real estate boom, initially kick-started by the IT/ITeS industry, has brought about a lot of unregulated development. While property prices in Pune rose unrealistically, the city’s traditional ease of living and pleasant climate, which were previously its USPs, suffered. 

Hills and trees have been razed to accommodate the rapidly expanding concrete jungle that all but defines central Pune today. The town planning commission found itself impotent in the face of the development mania, which soon transcended all reasonable, sustainable boundaries.

Real Estate Woes In Central Pune

In Pune, infrastructure challenges have been increasing because of the ever-increasing population. This has also put escalating pressure on available land, resulting in the forced extension of the city limits.

The pattern of development has been decidedly mercenary and unplanned, with the only criteria being accessibility to existing and upcoming IT hubs. While the rise of Hinjewadi created increasing demand for homes in its immediate vicinity, places like Aundh soon witnessed a slew of projects by property developers. Similarly, property prices in Baner and Wakad rose so steeply that they finally corrected.

New Focus On Pimpri Chinchwad Municipal Corporation (PCMC)

As things stand now, central Pune no longer has an iota of its previous quality and ambience in residential property offerings. It is therefore not surprising that homebuyers are beginning to focus on the Pimpri-Chinchwad Municipal Corporation. This area has, in fact, emerged as the last outpost Pune’s previous residential property comfort levels.

The Pimpri Chinchwad Municipal Corporation first came into the limelight as an industrial area. However, it also has an advantage that central Pune does not – planned development. The growth of the real estate sector in the Pimpri Chinchwad Municipal Corporation is closely regulated by the PCNTDA, which works together with the PCMC to ensure planned and realistic growth.

Central Pune continues to suffer from pollution, depleting greenery, traffic jams, water and power scarcity, lack of proper infrastructure and unrealistic residential property rates. Meanwhile, Pradhikaran (the location that defines the PCNTDA) has been benefiting from sensible real estate development.

If one studies the demographical development of Pune real estate growth, it is evident that Pradhikaran is precisely where the city’s growth is headed in the North/North-Western direction. This is extremely significant in terms of long-term residential property investment.

The Importance Of Pradhikaran

In years gone by, the PCNTDA began to acquire land in the PCMC area so that planned development could take place in the future. This planning included the allocation of specific areas for industrial activity, residential property development, public parks, unobstructed spaces, shopping centres, office buildings, roads and utilities.

Water supply to all sectors was ensured by the construction of several mammoth water tanks, each with capacities of several million litres, before development was permitted in each sector. Once this was done, the PCNTDA made the developed land parcels available to property developers.

The PCMC master plan also provides for generous road widths, the likes of which are impossible elsewhere in Pune. This goes a long way in preserving one of Pradhikaran’s natural splendour and hygiene.

Because of these factors, and also because of the growth in the PCMC industrial belt, the last two years have witnessed a huge increase in demand for residential property in the Pradhikaran area.

The fact that a number of large international companies are operating in nearby Chakan has, in fact, been a primary criterion for the area’s development profile. These companies regularly deliver thousands of jobs at all levels, which has had a telling effect on Pradhikaran’s general economic status. Specifically, there has been a huge surge in demand for residential property there.

Pradhikaran’s expansion, which has been inspired by the Chandigarh model of controlled development, began with a few hundred acres. Today, the area speaks for about 7000 acres. Pradhikaran is continually seeing infrastructural enhancements on all fronts – including roads, water and electricity supply and digital connectivity.

Pradhikaran now boasts of massive integrated township projects that offer all the hallmarks of ambient, sustainable living. Apart from the high lifestyle quotient, the investment potential of these townships benefits from a magic mix of real estate market drivers. The presence of Tata Motors, Talawade, Hinjewadi, Chakan and the Pimpri-Chinchwad industrial belt add to the value of these townships, while the Mumbai-Pune highway and Expressway make it advantageously accessible to the financial capital of Mumbai.

No wonder that Pradhikaran is now being seen as both, the best option for first home buyers, and as the new residential property investment hotspot in Pune’s real estate market

Buoyancy in Kolkata office realty

The commercial office supply in Kolkata during the second half of 2013 was recorded at one msf, which is in line with what has been witnessed in last five years, except for H2 2009 and H2 2011 when it was around 2 msf.

The net absorption during Q2 2013 was higher by around 82% on q-o-q basis as majority of the space was pre-committed by IT companies in IT Special Economic Zone developments in the peripheral location of Rajarhat. However, the H1 2013 absorption was still down by about 51% compared to corresponding period last year owing to the domestic and global slowdown that has resulted in occupiers adopting a cautious approach with regard to their expansion plans, says Cushman & Wakefield.

Consequently, though the number of enquiries has remained stable, the deal sizes have shrunk to an average range of 2,000-7,000 sf from 10,000-15,000 sf witnessed in the previous couple of years. 

Around 27% of the total net absorption during H1 2013 was recorded in Rajarhat, which was mainly pre-committed to in past couple of years in IT SEZ developments. During H1 2013, majority of the demand was seen emanating from IT/ITeS and BFSI sectors. However, the share of IT/ITeS sector has dropped substantially to 35% from an average of 90% witnessed in corresponding periods of past two years.

This could be largely attributed to the slowdown in global IT demand and lack of pro-SEZ policies from the state government. Due to this several IT majors have even got their SEZs denotified. Meanwhile, there is an increase in demand BFSI and Telecom sectors as their share in the total net absorption during the H1 2013 have increased to 23% and 16% respectively from almost negligible share that was witnessed during the corresponding periods of past two years.

Weighted average rentals have dropped between 0.2-3% on q-o-q basis across sub-markets. However, weighted average rentals in markets such as the CBD, Park Circus Connector and Rashbehari Connector are up by 1-9% in on y-o-y basis.

Going forward, given the prevailing subdued economic conditions, the net absorption during H2 2013 is expected to remain range bound to around 500,000 sf as was witnessed during H1 2013, taking the total net absorption for the year to about 1.0 msf, slightly lower than the 1.2 msf net absorption recorded in 2012. 

However, post the general elections next year and in tune with an improvement in the overall economic scenario, we can expect the demand for office spaces to pick up and the net absorption to gradually climb up.

Huge supply of around 2.5 msf that is anticipated during the second half of 2013 would be largely concentrated in sub-markets of Salt Lake and CBD and is expected to push up the vacancy level in these sub-markets. This could further result in creating a downward pressure on rentals, especially in the Salt Lake micro market as it is already plagued with high vacancy at about 33%, recorded at the end of Q2 2013. 

Around 9.5 to 10.0 msf supply is expected to be infused in next 2-3 years. However, this may spill over to subsequent years as most of the developers have slowed the pace of construction considering the present demand-supply mismatch.

Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, said “Commercial office sector activity in Kolkata is largely concentrated in the peripheral sub-markets of Salt Lake and Rajarhat. 

These two markets have been consistently contributing more than 80-90% in the overall supply and absorption since past couple of years. However, subdued economic conditions at domestic as well as at international level and the lack of pro-industry policies by the state government have contributed to weak demand, leading to a small decline in overall net absorption across sub-markets and increased vacancies across markets.

This could put downward pressure on rentals, which would likely to give more negotiating/bargaining power to the occupiers. However, there are expectations that post the general elections next year, the economy will pick up on the whole and occupiers will become active once again. Many companies are still keen on expanding their operations within the city, given its strategic importance as the Gateway to East India and good human resource base and they are actively engaging with the State Government to convince it to provide a better business environment. ”

“To ensure a healthy growth of the office market in the city, the government and the city municipality should encourage redevelopment along with the plans of new business centres. The governing authorities can also incentivise developers to take up redevelopment projects especially in the areas of CBD and SBD which are still preferred locations for office as well as retail”, added Sanjay Dutt.

Boom time for Pune office real estate in 2014

Pune city is among the top ten largest metropolitan economies in terms of nominal GDP and per capita income in the country. It gained prominence as an industrial destination, when the automobile and pharmaceutical industries made large investments in the city and dominated its economic landscape.

According to Knight Frank, the leading real estate research firm, last decade saw the emergence of the IT/ITeS sector, which practically re-forged the city’s economy, catapulting it in to the forefront of India’s IT/ITeS growth story. Pune today is among the leading software exporting cities in India. The pace at which the IT/ITeS industry has grown, coupled with the growth in the manufacturing sector has sparked off a flurry of construction activity in the grade A office space market over the past decade.

The eastern and northwestern locations where the IT/ITeS sector has proliferated have the largest chunk of office space in Pune.

Currently, the total office space stock in Pune is occupied resulting in a vacancy level of 20 per cent. The vacancy levels have been declining consistently since 2009, when they peaked at 28 per cent due to the huge influx of new supply during 2008 and 2009.

More than 16 mn sq ft of incremental office space entered the market during these two years. However, 2010 onwards the vacancy levels started declining as the quantum of new supply entering the market receded significantly and absorption remained steady. The impact of this was reflected in the rental movement that witnessed steady appreciation in the last three years in most of the business districts.

An uninspiring global economic environment has caused expansion activity to stagnate over the past two calendar years.

The IT/ITeS sector, which is especially sensitive to global economic cues, has been treading cautiously and suspending expansion plans while waiting for the business cycle to turn. However, Q1 FY 2014 has bucked this stagnating trend and seems to have staged a reversal of sorts.

Absorption numbers in Q1 FY 2014 have soared almost 58 per cent from Q1 FY 2013 and more than doubled the volumes achieved during the preceding quarter. Transaction activity is largely cyclical in nature and the initial few months of the financial year experience bulk of the action as location planning and budgeting activities tend to get executed during this period. The fact that FY 2014 has started on a strong note is a powerful indicator of improving market traction.

Traditionally, the IT/ITeS sector that accounts for majority of the space transacted has dominated the Pune commercial office market with the Manufacturing and BFSI sectors vying for second place a long distance behind. Accounting for 66 per cent of the market, the IT/ITeS sector took up 0.59 mn.sq.ft. in Q1 FY 2014 which is a 52 per cent jump compared to the previous reference period.

Almost 60 per cent of the space transacted by the IT/ITeS sector was concentrated in Hinjewadi and Hadapsar. Four of the top six transactions during Q1 FY 2014 were accounted for by this sector and constituted almost 43% of the total absorption during the period.

The BFSI sector share has grown at a healthy pace over the past year. Q1 FY 2014 saw the BFSI sector consume almost 0.23 mn.sq. ft., more than doubling the space taken up during Q1 FY 2013.

Just two leases inked by Barclays and BNY Mellon constituted nearly 75 per cent of the total area transacted by the BFSI sector. Demand from the manufacturing sector has been on the rise providing a fillip to the health of the Pune office market as a whole. It has experienced tremendous growth during the last five years in and around Pune city limits.

Prolific expansion by automotive giants like Volkswagen, Mercedes, Mahindra and Hyundai has resulted in their vendor companies setting up factories in Pune. This has generated huge demand for industrial land in locations like Chakan, Ranjangaon, Talegaon and in new industrial locations like Shirval.

Most of these companies have taken up offices in the CBD and PBD locations for design centres and sales and service offices. However, the upbeat mood of the market did not extend to the manufacturing sector in the current quarter as the sector’s share fell considerably compared to both reference periods.

 

It should be noted that the sector accounted for a massive 40 per cent of the transacted space during Q4 FY 2013 (till March 2013), which speaks for its underlying strength. Knight Frank’s report says that the central government’s focus on increasing the share of the manufacturing sector in India’s GDP will enable this sector’s share to recover and stay buoyant in the coming quarters.