How Infrastructure Projects Influence Real Estate Values

Saugata Maitra_jpg

Saugata Maitra, National Director – Strategic Consulting, JLL India

It is an established fact that scheduled infrastructure projects tend to increase the value of properties in the adjoining areas. This occurs because the infrastructure project becomes a part of USP for the developers or property owners. There have been instances where property prices have increased 50-70% from the announcement of an infrastructure initiative until the operational phase.

For example, residential sale rates in Essel Towers, Gurgaon increased from around INR 5000/- per sq. ft levels in 2006 (which is when the Delhi Metro was announced) to around INR 9000/- per sq. ft range towards the operational phase in 2010. In comparison, other areas displayed a more reticent increase of 40-50%. Likewise, property values increased almost overnight in and around Panvel, Kharghar, Ulwe and most southern parts of Navi Mumbai as well as Mumbai’s eastern corridors which are well linked to the announced international airport.

That said, property price increases may not be a unanimous phenomenon across all property segments. Let us take, for example, the announcement of a new railway station, Metro, bus terminus or even an airport. While the low-to-mid-income property segments would definitely be positively affected, property prices in high-end residential areas would be less likely to experience a steep rise with the announcement of a major infrastructure project. The reason is simple – the high-end segment enhanced public transport facility would not consider improved public transport be of major significance for the former.

With upcoming infrastructure like airport or metro corridors, other factors that may have a negative bearing on the demand for and profitability of high-end residential properties are increased noise and crowding.

On the other hand, infrastructure projects like airports result in increased employment opportunities in the logistics, hospitality and commercial sectors. Naturally, low-to-mid income residential property demand increases because more people employed in these sectors will need to  live in the immediate vicinity.

Therefore, one should take a good look at the property appreciation dynamics involved before investing in a certain property on the heels of a major infrastructure upgrade or project implementation announcement. A proper assessment of the demand drivers around a particular infrastructure project is of the essence to establish the genuine investment potential in the vicinity on a case-to-case basis. Generally, the ‘Real Estate Zone’ is already packaged within large infrastructure projects to increase the viability. Investing in such zones, maybe as a co-developer, is a good idea.

Factors To Consider Before Investing In Property Around An Infrastructure Project:

  • Likely implementation time-frame, including the phasing of significant modules
  • Value drivers in terms of logistic convenience, employment generation, increase in trade and business, etc.
  • The development and land-use plan of the city or region, and how the particular project fits into the larger development plan, earmarked growth zones, etc.
  • Intending property buyers are invariably confronted with a sudden rise in property rates because of the announcement of an infrastructure project. All in all, one should develop a specific projection with regards to demand, supply and financial viability in order to assess whether the premium is justified.

 

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Neemrana’s Burgeoning Real Estate Potential

santhosh kumarSanthosh Kumar, CEO – Operations, JLL India

Neemrana is one of the fastest growing industrial centres in North India. This area is advantageously located on NH-8 in proximity to other industrial sub-markets such as Bhiwadi, Bawal, Khushkhera and Tapukhera. Situated in Rajasthan and part of Delhi NCR, Neemrana has attracted a lot of heavy industrial investments from Japanese manufacturing firms such as Nippon, Daikin, Nissan, NYK Logistics and Mitsui Chemicals.

Neemrana lies along Phase-I of the Delhi-Mumbai Industrial Corridor. The Rajasthan State Industrial Development and Investment Corporation (RIICO) has developed several industrial zones that have led to this sub-market’s emergence as a major industrial hub. The demand for homes from workers employed in these industries is therefore considerable and constantly rising. This provides Neemrana with all the attributes of an ideal real estate investment market, offering low entry points and high appreciation potential.

Developers have already acquired large land parcels in Neemrana, while others are actively seeking such parcels for development. Some residential projects by Anant Raj, Eldeco and Aashiyana have already been launched. This sub-market has especially high potential for integrated township projects and affordable housing undertakings.

Neemrana will continue to attract demand from the large existing workforce as well as additional manpower that will migrate there over the course of the next few years. The government of Rajasthan has already notified the 2031 Master Plan for the Shahjahanpur-Neemrana-Behror Urban Complex.

The planned infrastructural initiatives in this region will further aid the emergence of this town as a major real estate growth node. There are plans to set up a cargo airport, with industrial firms from Korea and Taiwan showing keen interest in establishing their manufacturing facilities in Neemrana.

With industrial growth acting as a pull factor for this sub-market, real estate development across Neemrana’s various segments will find increasing traction going forward. The real estate story has just begun for Neemrana.

Residential prices in this market are still at a nascent stage, averaging at Rs. 2400–2700/sq.ft. and give every indication of healthy rise in the future. This is a market that is especially appealing for large plot investments, and long-term investors who value the success formula of its unique combination of growth drivers.

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Indian REITs – The Retail Opportunity

suvushesh valsanSuvishesh Valsan, Senior Analyst – Research & REIS JLL India

The draft guidelines for trading in REITs in India have been introduced and allowed. For the very first time, there exists a tool to channel small savings into the Indian real estate sector. Not surprisingly, several owners of income-generating properties are now considering setting up REITs.

While commercial real estate projects have been popular assets to securitise worldwide, market dynamics in India currently suggest that the retail sector could be a beneficiary as well. Factors underpinning the potential success of REITs in retail include:

 Low Vacancies In Superior Grade* Malls

Over the past few years, developers slowed down the supply of mall space in India because of rising vacancy rates following the economic slowdown. Prior to that, developers were churning out malls at a breakneck pace in response to a spurt in the organised retail business. Back then, few developers understood what the right ingredients for a successful mall are.

the retail opportunity

The overall vacancy rate today stands high at about 20% in retail malls across major Indian cities, while Superior Grade malls have vacancy rates averaging at only 10%. Given that international retailers will prefer to take up space in these malls, the shortage of quality space is evident and will be felt for some time.

Opportunity For Discounted Asset Purchases

For REITs to provide attractive yields, they have to purchase assets at a reasonable price, which then fetch attractive rents. This is particularly important for retail – an asset type that is perceived as riskier due to the lower predictability of income.

While upcoming Superior Grade malls will offer lucrative investment opportunities, some of the existing stock of lower-grade malls could be up for sale at a discount. For instance, of Mumbai’s 65 existing malls, only 20 are of a size suitable for securitisation in a REIT. Of these, five or six could be considered distressed assets.

These low-grade malls are underperforming due to poor design elements and the financial distress of their developers. Other factors such as location, catchment area and retailers’ interest are favourable in many cases. While REITs will not want to consider malls that are strata sold (another major cause of mall underperformance), malls that have everything other than design and finance going for them will be very attractive acquisitions.

 Strengthening Demand

Recent data made available by hiring firms (recruitments), automobile associations (car sales) and the central bank (home loan disbursals and reducing inflation) suggest that consumer sentiment has been on the rise in the past few months. This is good news for organised retail, and indicates a rise in consumer spending going forward.

Mall Management

When compared to the management of commercial buildings (which share common facilities and have relatively stable tenancy profiles), the management of retail malls is complex. Apart from catering to various brand categories, mall management also involves planning the right tenant mix, space optimisation and zoning, and constant adaptation to consumers’ shopping behaviour.

It is fairly certain that REITs would employ better mall management professionals and practices than the mall’s developer. This will increase the probability of their success.

Given the limited number of existing malls that fit the requirements, REITs that are quick to discern and capitalize on the opportunity will benefit. Those that latch on to the potential later will have to wait until new supply of suitable malls hits the market. Moreover, the rising consumer and retailer sentiment will lure REITs into seeking these low-hanging opportunities.

 * Malls are classified as Superior Grade based on location, developer reputation, occupiers’ profile, business model, mall design and other qualitative features such as mall management, ambiance and experience at the mall.

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West Bangalore – A Real Estate Investment Snapshot

Photo_Srinivasa-ReddySrinivasa Reddy, Associate Director – Research & Real Estate Intelligence Services, JLL India

The West Bangalore sub-market covers the areas and projects around Tumkur Road NH-4 towards the Yeshwanthpur and Malleswaram junction, the Rajajinagar Industrial Area, Yeshwantpur, and Tumkur Road and its surroundings (which has a high-density population and has traditionally been the primary industrial hub of the city).

Industrial And Commercial Profile

  • At present, West Bangalore is surrounded by vacant land parcels and is predominantly an industrial area dominated by warehousing and industrial activities. These industries comprise of large public sector units and various small-scale industries.
  • The area is being promoted as one of the large industrial hubs in the city, especially Peenya Industrial Area (IV Phase III stage) which is home to industries like Parle G, ABB Limited, Bosch, Jindal and Volvo Construction Equipment, to name a few.
  • There are currently no graded major operational commercial/office buildings in the micro-market. The commercial base in West Bangalore has predominantly consisted of government offices, training institutes, small industries and warehouses. Many government offices also have their own residential colonies, for example HMT Colony, Air Force Camp, ITI Training Institute colony, etc.

Residential Profile

  • The key residential projects in West Bangalore currently include Temple Bells, Prestige Wellington Park, Gateway, Kensington Garden, Golden Grand, Garrison Vaishnavi Nakshtra, Prince Town, Sobha Aspire and Shoba Elite.
  •  Capital values for high-end residential projects range from Rs. 3800–6500./sq.ft. Buyers from the affordable housing matrix in West Bangalore are mainly small business owners and employees working in industries and the services sector.
  • The upcoming areas in West Bangalore include Karivobanahalli, Handrahalli, Laggere, Jalahalli, Hasarghatta, HMT Housing Colony, BHEL Colony, Peenya, Chikkasandra, Nagasandra and Dasarhalli.

The many infrastructure projects that are taking place in the direction of West Bangalore will lead to improved connectivity and increase residential values in the future. The upcoming residential projects there will attract buyers from the immediate surroundings due to improvements in the social infrastructure.

Investment Profile

  • As of now, investors and speculators in West Bangalore are still scarce on the ground. This sub-market is growing at a slower pace when compared to other markets of the city, mainly because of its industrial characteristic and also lack of MNC-type commercial activities.
  • There is now a gradual opening up of land for real estate development as small and medium industries that have existed In West Bangalore for a long time are shutting down or relocating.
  • Currently, land values are comparatively low in this part of the city, and this provides a very favourable entry point for long-term investors.

Tips For Property Investors Into West Bangalore

  • This region holds immense potential for further real estate development. Apart from the comparitively competitive land values, many infrastructure projects will benefit this micro-market. These include the Peripheral Ring Road (PRR) which will lead to improved connectivity reduce travel time towards important parts of the city. The commute to Bangalore International Airport (BIAL) from Tumkur Road will be reduced by 50% from current levels once the PRR become operational.
  • There is high possibility of locations between Bangalore West and Tumkur City to be considered for Smart City benefits via the recently proposed 100 Smart Cities programme by the NDA government. Factors that will work in these locations’ favour on this front are availability of land for development and strategic presence between two growing cities.
  • This will lead to short-to-medium for residential assets. Long-term appreciation is assured as West Bangalore strengthens its value proposition as a growth corridors.
  • Investors should look at capitalizing on the West Bangalore housing market for medium-long term gains and maintain a period of 4- 5 years as the minimum investment horizon for affordable to mid-end residential developments.
  • Investments into high-end to luxury residential developments in this micro-market should not be the first option for risk-averse investors at this point of time. This is because the buyers in this sub-market are predominantly employees working industries and the services sector who are looking for affordable to mid-end residential options in the price range of Rs. 3500-4500/sq.ft.
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Getting Wise About Sample Flats

Om Ahuja

Om Ahuja, CEO – Residential Services, JLL India

Sample flats are indicative only – they basically serve the purpose of giving the intending purchaser a sense of space and dimension. The fact that they are furnished allows for an understanding of how the available space could be optimally utilized. Sample flats are effective marketing tools and should be viewed as such. There is no compulsion on the buyer to buy anything but a completely unfurnished flat. While we do see many instances where a luxury apartment buyer is impressed sufficiently to ask for an exact replica of a sample flat, such buyers have the requisite financial capacity to pay for such embellishments.

There is little sense in being either carried away or prejudiced by the appearance of a sample flat. These flats are showcases, meant to incite interest and indicate the ‘lifestyle potential’ of the unit. Once a buyer gets a fair idea of how furnishings and colour schemes have been used, he or she should draw a mental picture of how it could be done differently.

A prospective buyer has – and should exercise – the option of asking for some or all of the showcased features to be included in the flat one wishes to purchase, but these will come at an extra cost. What matters at this stage is not the visual impact of the sample flat, but an understanding of how the available space in an unfurnished flat could be used.

Remember – regardless of the sample flat’s appearance, the developer will quote for the unfurnished flat, which means that the price includes the flooring, balcony area (if any), ceilings and walls. In sample flats of less spectacular mid-budget homes, the basic fittings are usually included in the quoted price. The buyer must specifically request for any additional features shown in a sample flat to be retained in the purchased unit, in which case these will appear in an annexure to the agreement as additional charges to the cost price.

That said, it is certainly true that sample flats can make a difference in a buyer’s purchase decision, and developers of luxury homes are pulling out all the stops to use them to maximum psychological advantage. This is well within the purview of fair market practices.

In some cases, visually appealing sample flats may help to detract from the fact that the project’s location is not exactly cutting-edge. Nevertheless, as in any other highly competitive market where advertising plays a major role, the onus of establishing the difference between real and perceived value always lies on the buyer.

 

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