How to invest in Chennai real estate market

Sanjay ChughJones Lang LaSalle India

Chennai witnessed more than 32,800 new residential unit launches, with absorption of approximately 22,700 in 2013. Most of the absorption happened on corridors populated with IT companies. Chennai has been a very robust but a conservative market. Its unique feature is that it’s a market driven by end users. The market has weathered all slowdowns that have previously occurred.

The demand drivers for residential absorption are robust and the IT story has strong growth potential, of late Chennai has seen influx of new large MNC’s who have set up shop for the first time in the city. This further reinforces the focus of IT Companies towards the city. Being a port city and one of the largest manufacturing hubs in South India has propelled the residential demand in Chennai.

Traditionally, Chennai has been the most preferred city in the entire South India and it continues to attract investments as it offers the best of educational, healthcare, infrastructure and good quality of life.

MARKET SCENARIO IN 2013The year 2013 began on an optimistic note, as 2012 had been a successful year for the residential market. The 1st Quarter of 2013 saw significant land transactions within Chennai and on the outskirts of the city. Developers were bullish about the market going forward. In 2012, residential real estate market of Chennai had witnessed significant improvement in terms of buyer interest, which translated into higher volumes of transactions. Since the market was on a high, the first quarter saw a surge towards property development and project launches in the suburban and peripheral areas of Chennai.

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Large land parcels were transacted and purchased by leading developers within the CBD of Chennai for residential developments as there was a huge demand for housing within the city limits. Although there were signs of markets slowing down, Chennai still witnessed a healthy sales volume during the first quarter of 2013.

The second quarter (Q2) saw drop in sales all around the SBD as well as other areas in Chennai.

It was only during the onset of the third quarter (Q3) that sales velocity had dropped significantly as buyers’ decision making time increased. This clubbed with market uncertainty and the cautious sentiment kept the customers away from making an investment decision. There was also a strong conviction that prices would correct in the near future. Other reasons that surfaced were the depreciating Indian Rupee, shaping of the global economies and slowing industrial growth.

During this phase, many developers also deferred their plans to launch new projects and initiated attractive offers and schemes to attract buyers.

The fourth quarter of 2013 (Q4), started on a subdued note through October and November. However, there were signs of renewed customer interest in December as NRI segment started evaluating investment opportunities in Chennai along with local buyers, as prices has remained stable over the last two quarters, there was a sense that the market had bottomed out.

Developers were launching projects keeping in mind specific sizing and pricing of the apartments to attract buyers.

2014 – GOING FORWARDThe beginning of 2014 (Q1) has started with a positive sentiment due to the optimistic outlook by customers.

There are a lot of factors influencing the growth and development of the residential sector in Chennai. These key observations pertaining to the realty market are instrumental for prospective buyers who are keen on making a good investment decision. The developments of IT and ITES companies have brought a huge increase in the market. There was absorption of 4 million sq.ft. of commercial office space, predominantly by IT/ ITES companies, in 2013 alone. With the city’s IT population alone reaching 4.5 lakh, the indication is strongly towards the development of real estate along the outer areas of the city.

With limited land parcels in and around the city the land prices are on an uptrend. The construction and labour costs to the developer have escalated the input costs by about 10-15%. However the developers have still held on to prices and not passed on the additional burden to the customers. With the decision making time reducing and customer coming out in the market, the prices are bound to go up, in the near future.

DEMAND DRIVERS• InfrastructureChennai is constantly growing and emerging into a major IT, automotive and an electronic manufacturing hub. Commercial demand has never seen a negative growth. A lot of new companies are investing and setting base in the city, creating more employment opportunities thereby stimulating the residential demand in and around the city.

Infrastructure is being developed to suit the needs of various industries that are setting foot into the city. Focus is on the Outer Ring Road (ORR) were the Phase I (Vandalur to Nazarthpet – NH 4) has already been completed. ORR Phase II where land acquisition is in advance stages will boost the real estate activity along this corridor.

Chennai and its adjoining cities are among the best for primary and higher education in the country today. Healthcare and medical facilities in the city are also among the best available in the country. Development of new hospitals, schools, malls and multiplexes in the emerging locations are all stimulating growth for the city’s residential real estate industry.

• Public TransportThe Public Transport lines across the city are taking a turn for the better with more bus services and routes announced by the government facilitating faster and better commuting. Along with this, the Chennai Metro Rail project which is expected to be ready by the end-2015, and the Monorail project which has recently gained momentum will drive residential prices along their respective corridors.

To SummariseIn Chennai, unlike in other Indian metropolitan cities, the residential market is driven by end users who constitute 80-90% of the buyers. This buyer base provides a strong foundation to long term investments in the city’s residential market as it reduces market volatility.

It is recommended that buyers make an investment decision keeping in mind the various schemes and offers that are being offered by developers. Also in the current market the buyers have a wide choice of locations, apartment sizes and prices, which going forward may not be available due to the increase in demand in the near future.

Apart from Chennai city, locations close to the IT hubs, specifically on the OMR and ECR will witness a lot of traction and interest from buyers due to factors such as employment opportunities and development of social infrastructure. Chennai is a preferred choice among other metros in terms of residential investment and capital appreciation.

So buyers should be optimistic as the residential market picks up pace this year and make a conscious decision to pre-empt the curve and ride the upswing.

The opportunity is now.