Hyderabad Real Estate – Present And Future

Om AhujaOm Ahuja, CEO – Residential Services, JLL India

A few years back, Hyderabad was offering the likes of Bangalore stiff competition for attracting office space investments. Today, the formation of a new state, a new government and a stabilized political environment are yet to instill the confidence that is needed to revive Hyderabad’s real estate fortunes. With the Telengana movement picking up pace, other cities emerged as destinations for IT and ITES players and Hyderabad lagged behind in the race.

Hyderabad’s superior infrastructure, affordability and cosmopolitan ethos could have helped it score over many other cities which lack these attributes. However, the city is still caught in a slump caused by the partition of two states, and accompanying bifurcation of resources. The bureaucratic machinery is still trying to sort out domicile issues, roles and postings of the involved IAS/IPS officers, and proactive decision-making is visibly lacking.

The Political Effect

Basis the prolonged uncertainty over the last few years, it was expected that the creation of Telengana would usher a stable policy regime into Hyderabad. However, it is evident that the kind of clarity that is needed to fully revive sentiments is still to come. However, it is not practical to expect overnight results – the successful creation of a new state and the revision of administrative machinery takes time. It makes no sense to harbor unrealistic expectations and come to any premature conclusions at this point.

On the plus side, the new state has a new party with a dynamic chief minister who is very conversant and involved with the ground realities. Both the party and the government are determined to make Hyderabad a crown jewel for Telengana in terms of new initiatives and developments. This involves building confidence, providing stability – and, obviously, attracting investments. If this determination is followed through upon, it is not unlikely that Hyderabad will once again offer direct competition to other key IT/ITeS destinations in early 2015.

The Telangana government’s budget is expected to provide more clarity on new initiatives and the status of many infrastructure related developments. Corporates currently invested in Hyderabad are looking forward to this clarity, which will help them take decisions on their expansion plans and investments into the city over the coming months.

Commercial Real Estate – Positive Prospects

On analyzing commercial leasing and absorption in Hyderabad over the last few years, it emerges that Grade A commercial leasing picked up from 6.8% in 2011 to 8.6% in 2014. In spite of the uncertain political environment, Hyderabad still held a 9% share of total Indian office leasing. It is quite possible that Hyderabad’s share could move into double digits over the next few months.

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Factoring in that Hyderabad will see approximately 2.4 million square feet of Grade A office space leasing in 2014, and using the rule of thumb that every 100 square feet generates one job, Hyderabad will be generating 24,000 jobs or more in 2014. This is not a bad run-rate by any yardstick. There are firm indications that this trend will increase in the near future, leading to faster and sustained job creation in Hyderabad to boost demand for housing.

Residential Supply

When compared to other Indian cities, Hyderabad is the only city which has displayed a less-than-robust trend in terms of new residential launches over the past few years. In light of the anticipated pick-up in office absorption and job creation, this effectively means that the supply of quality residential projects will become a challenge in the coming months.

Also, unlike other cities, Hyderabad’s residential capital values have not yet breached the 2008-2009 levels. In other words, price appreciation has at best been moderate in Hyderabad. However, the prospects of an improving market environment make Hyderabad an excellent mid-to-long term property investment destination, especially factoring in the relatively low entry points prevailing now.

Residential Zones – End-Users And Investors

Hyderabad can be divided into five broad zones for evaluating residential real estate investments:

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  1. Hitech City–Gachibowli: The most lucrative and well-established zone. With maximum office supply absorption in this zone, it has the maximum potential for capital appreciation and growth for investors with a 5-7 years investment horizon.
  2. Uppal-Pocharam: The execution of the Hyderabad Metro will bring Uppal, the Infosys campus and the Raheja IT campus in Pocharam closer to the city, and therefore attract more home buyers. Capital values are currently as low as Rs. 2500/sq.ft., and the prospects of substantial capital appreciation over a 8-10 year horizon are considerable.
  3. Miyapur-Chandanaga: Being closest to Hitech City and just 8 km away from the well-established zone, this corridor attracts budget segment home buyers who cannot afford the rates in the Hitech City-Gachibowli belt. An emerging location with good roads and social infrastructure, it has potential to grow with well-established gated communities in a specific budget range.
  4. North-West Corridor – The Pharma industry is doing well in East Hyderabad, and this will fuel growth of investments into villa projects on Outer Ring Road. Capital values for such units currently range in between Rs. 1.50-2. 5 crore; again, there is attractive growth potential.
  5. Jubilee Hills-Banjara Hills: Residential prices in these areas, which are Hyderabad’s most premium locations, are still significantly lower than those being quoted in the suburbs of Mumbai and Delhi. Here are some of the existing projects where high-profile residents currently or aspire to live in these locations, which also see the highest demand from expatriate HNIs. In terms of affordability, the price range for most of these projects is very attractive.

Top Identified Established & Emerging Projects

Like every other Indian city, Hyderabad has multiple projects which people aspire to buy into and become part of a distinctly upgraded lifestyle. Basis the demand and potential, here are the top six high-profile projects with robust demand from buyers looking for the ideal address and a property that has notable grow potential in terms of capital appreciation:

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South India’s Real Estate Hotspots

Juggy MarwahaJuggy Marwaha, Managing Director – South, JLL India

Until only recently, the South Indian real estate market was known as highly price sensitive, with buyers primarily focused on the affordability quotient. Developers had to adopt a strategy to entice potential end-users and investors by offering their products in the right price band. However, with more and more foreign companies establishing their back offices in prime locations of South Indian cities and offering power jobs to the local populations, the South Indian economy has witnessed rapid growth over the last few years. This has visibly reflected on their real estate markets, as well.

Of late, the most important South Indian real estate markets – Bangalore, Chennai, Hyderabad and Kochi, have been faring very well. This dynamic was evident even when the nation was going through a phase of low sentiments. While the burgeoning IT sector in these cities is the main reason behind the real estate boom in these cities, some of them also have a rapidly strengthening industrial base which is further augmenting real estate demand.

Bangalore

The commercial office leasing trends in Bangalore clearly reflect that the city is topping all others in terms of space and job creation. IT, ITeS and retail are driving employment creation in the city. Bangalore is expanding in all directions, and with most phases of the Metro on track in terms of deployment, Bangalore has emerged as one of the best investment destinations for affordable, affordable luxury and luxury segment housing.

North Bangalore has seen residential prices doubling in the last 4-6 years, and many other pockets have witnessed good appreciation as well. Brigade Gateway, one of the best integrated townships in Bangalore featuring the World Trade Centre, a mall and a 5 Star hotel, was launched at a price of Rs.5,000/sq. ft. about 4-5 years back and is now transacting at above Rs. 10,000/ sq.ft.

There are numerous such examples wherein reputed developers and landmark developments have been instrumental in prices doubling and going even higher in the last 4-6 years. The finest developments in Whitefield by Sobha, Brigade, Prestige, Total Environment and Chaitanaya have practically doubled in terms of capital values in the last 5 years.

Chennai

Residential property prices in Chennai have escalated the fastest among the cities in India, witnessing an appreciation of almost three times of what they were in 2007. However, Chennai still faces supply constraints in its prime locations in terms of new and organised development.

Traditionally, buyers in Chennai were hesitant to move to the suburbs, as the options available in the key pockets were highly priced. Very similar to the cities like South Mumbai, Delhi and Kolkata, buyers in Chennai are very particular about address and pin code value. As the city is in expansion mode with the rapid development in Chennai’s social and physical infrastructure, the suburbs and extended suburbs such as Velacherry, Peringudi and OMR belt are witnessing an upsurge in its property prices with corresponding demand.

Areas like Ayanavaram, Virugambakkam, Nungambakkam and Ashok Nagar have recorded the maximum appreciation. With limited supply and few organized developers in Annanagar and Kilpauk, end-users and investors are finding prices attractive in these neighbouring areas. With noted developers such as Chaitanaya, Vijayshanti and Arihant-Unitech active in these areas, there is a steady increase in demand.

The Central business district of Chennai, Nungambakkam, has managed to maintain the highest appreciation values with only few organized developers active in the area. However, with the Metro rail route passing through Ashok Nagar and with host of reputed and local developers’ active along the belt, a considerable amount of demand has shifted to this micro-market because of the presence of large commercial and entertainment-shopping establishments such as Phoenix and Forum and the availability of adequate social and physical infrastructure such as quality educational institutions and hospitals have proven beneficial in garnering demand from end-users and investors.

The three key growth drivers of IT / ITES, automobile manufacturing and education sector are instrumental in driving the job creation in Chennai. The price appreciation in specific pockets forecasts to be extremely good over the next 12-18 months. Some of the projects which are garnering attention from end-users and investors are Falling Waters in Peringudi, Oceanique on ECR Road, Embassy Residency and Pristine Acres in OMR.

Hyderabad 

Taking in consideration the current prevailing prices, developers have very little room for profit. Properties here are value buys in all respects, and one cannot go wrong with buying into quality projects at the current price levels with an investment horizon of 3-5 year. The Telangana agitation was the primary reason for the stagnation of prices in Hyderabad.

While Hyderabad’s average prices may reflect stagnation, there are multiple exemptions to this rule. A few such instances are Jayabheri’s Orange County, which has seen 33% absolute appreciation within a horizon span of 3-4 years and Jayabheri’s Silicon County, which has almost doubled in the last four years. Aparna’s Sarovar Grande has seen about 43% absolute appreciations in the last 12-15 months.

Good projects by reputed developers have shown very robust capital appreciation in the city. Though Bangalore and Chennai has clocked better appreciation values, Hyderabad by no means has lacked appreciation growth – it has merely been selective.

The socio-political and economic scenario is now far more favourable for the real estate sector. Hyderabad’s real estate market is likely to grow at a relatively faster pace to give renewed competition to cities like Bangalore, Chennai and Kochi. In the mid-to-long term, investor confidence in Hyderabad real estate will emerge in force once more. Companies like Facebook, Google and Apple have long-standing plans to expand their bases in Hyderabad – a factor which will work in favour of faster appreciation.

One of the hottest emerging locations is Vijaywada, where land prices have increased by almost 300% because of speculation. This renders Vijaywada unviable for residential projects over the short term, but a price correction from the speculative levels in anticipated over the next one-and-a-half years. After that, many more corporates will move into Vijaywada, thereby boosting residential demand as well.

Kochi

Kochi is an emerging metropolis where modern urban lifestyles are merging with the city’s traditional framework. During its initial realty boom, Kochi grew exponentially, with more people migrating to the city and consuming even the outlying catchments of Kakkanad, Palarivattom, Vytilla, Edappally and Kadavanthra.

Development of IT/ITES projects such as the Kochi Smart City and initiatives to channelize traffic and improve connectivity – such as the Mobility Hub at Vytilla – have fuelled the current real estate boom, with more and more developers cashing in.

The days when builders in Kochi focused only on affluent buyers are over. The Kochi residential real estate market is now replete with affordable housing projects, which account for about 60% of the total housing development in the city. The soaring land prices have made it difficult to own or build independent houses, which were once the most popular configuration in Kochi. There is an increased demand from the emerging mid-income segment that wants homes packed with amenities at affordable prices.

The demand for budget housing is so strong that supply has penetrated even the poshest areas. The prime localities that offer luxury multi-storey apartments, such as Marine Drive, are seeing the arrival of affordable and mid-income housing projects in the vicinity to the more expensive waterfront apartments and villas.

While the global recession in 2009-’10 impacted all markets across the country, there was no decrease in Kochi residential real estate between 2012-13. Kochi is an investor market with many investments coming in from the Gulf via NRIs. In most cases, flats in new projects are sold out to the tune of 80% very quickly, but less than 20% would be actually occupied.

Luxury apartments on Marine Drive were quoted at Rs. 3800-4000/sq.ft in 2008-’09. Now, the rates for premium apartments in this area have almost doubled. Mid-range apartments by local developers are usually sold out by upto 90% of the inventory over a period of 1.5-2 years. The apartments in non-prime areas need to sell at price tags of upto Rs. 70 lakh.

 

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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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