Friday, January 05, 2007

2006 - Chennai an exciting year for the property market


2006 - an exciting year for the property market

From the Hindu

DWINDLING GREENERY: Chennai has managed to maintain some greenery despite developmental activity.

It was a blinder of a year for Chennai's residential property market in 2006 when, depending on which side of the property divide you stood, you either had reason to rejoice or to regret. Property values appreciated by a whopping 40 per cent in 2006 and considering that it followed the 30 per cent growth seen in 2005, it is stunning indeed. In effect, if you are a property owner, the value of your property should double every two-and-a-half years if the same growth rate continues!

The last calendar year was the best in the last ten years in terms of absorption, which is purchases, and price increase. Most of this increase was seen in the first two quarters of the year after which the prices stabilised during a cool-off period in the third quarter. However prices have started looking up again in the last two months.

One of the key reasons for the spiralling capital values was the high absorption rate driven by the employees from the IT and BPO Sector. High demand was witnessed for residential units in Old Mahabalipuram Road, Tambaram and Velachery due to their proximity to the IT and BPO hubs. Other fast growing areas included suburban localities such as Mogappair, Porur, Virugambakkam and Mount-Poonamallee Road. The growth in the residential property market was aided by the fact that office absorption activity was also the highest in the city at 5.1 million sq. ft. for the year.

The driving demand for residential property are factors such as contraction in the size of households, rise in the urban middle class population, increase in double income households and increasing affordability. The greater acceptability of debt, increasing aspiration to own larger houses and preference for owned houses have also contributed in no small measure to the driving demand.

Speculation high

The last two years since 2005 have also seen speculators and investors entering the market. It was also noticed that many high net worth individuals and double income families have started buying their second and third homes for speculative purposes. There was also a category of buyers who were upgrading from 2-bedroom apartments of 900-1,000 sq. ft. to an average of 1,500 sq. ft 3-bedroom apartments with high quality construction and amenities. Developers claimed to have no problems in selling the residential units, though the absorption in the last two quarters were not as brisk as the first two quarters, during which a number of projects were sold on the launch day.

In spite of home loan interest rates going up, proactive measures from housing finance companies such as introducing innovative new products, unique marketing strategies, competitive pricing and wider distribution led to the housing finance market grow at approximately 35 per cent. The post-tax interest rates are still far lower than five years ago.

The yields from residential property further compressed to 4.25 - 5.25 per cent. Almost 80 per cent of the annual transactions in the Chennai residential market are mortgage financed and it is end-user driven with limited investor activity compared to cities such as Bangalore, Mumbai and Delhi. The typical end-users in Chennai are a 70:30 mix of salaried and business class. The average age of home ownership has also come down from over 40 years to approximately 32 years in the last few years.

How will 2007 be?


The residential market will continue to see considerable activity, both in the sale and leasing segment. In 2007 residential prices in Chennai are expected to grow by a more realistic 10-20 per cent in many parts of the city. However, any changes regarding tax breaks currently available for housing finance, further increase in interest rates and deteriorating infrastructure could have a negative impact on the residential markets.

One thing looks certain for 2007 - the increase in capital values seen in the last two years will not be repeated. Residential yields are further expected to come down to 4 - 5 per cent. The growing trend of short term speculators booking an apartment at pre-launch or launch prices, and selling them a few months later at higher prices which was witnessed in the first two quarters of 2006 is expected to come down in 2007.

The market would witness more entity level and portfolio level transactions and the discerning private equity investors with their hands on approach are expected to play a more active role. The year 2007 will also see a number of large pan-India developers such as DLF, K Raheja Universal, Hiranandani and Unitech announce their residential projects in Chennai.

Investors need to be cautious as they are not only taking enough risk in real estate through their second home but are also buying real estate stocks in their portfolio.

* * *

Luxury homes much sought after

The year also saw the launch of a number of high-end luxury residential projects in the city. Until 2005, the supply of international standard luxury residential accommodation in Chennai, which has a relatively strong demand, was quite limited.

Projects such as Patio, Four Seasons, Club Cabana and Courtyard by Vijay Shanti, Alliance Infrastructure's Bougainvella, Habitat by Akshaya Homes and Vishranthi's project on Kasturi Rangan Road were well received by the market, with some projects even crossing the US$ 1 million mark per unit.

With the entry of large pan-India developers from Mumbai and Delhi such as DLF, Hiranandani, Unitech and K Raheja, the supply in this segment is expected to further go up in 2007.

The demand for luxury projects is typically from senior management of corporates and NRI's. The typical sizes of luxury projects are in the range of 2,500 sq. ft. to 4,000 sq. ft.

Good luxury projects typically provide amenities such as party area, club house, gymnasium, amphitheatre, modular kitchens, air-conditioning, large landscaped areas, garbage disposal facilities, swimming pool, servants rooms, 100 per cent power back up, driver's room, terrace gardens, squash courts, video door phone, jacuzzi, mini business centre, fire fighting facilities, children's play areas, high speed exclusive lifts and so on.

Despite the spiralling prices, the demand for high-end luxury apartments in prime residential areas such as Boat Club, Adyar and Thiruvanmiyur is much more than the current supply due to the limited land availability for development in these areas.

(The author is Local Director with global real estate advisory firm Jones Lang LaSalle. He can be reached at ramesh.nair@ap.jll.com)
He can be reached at ramesh.nair@ap.jll.com

1 comment:

viji said...

Thank you for the info. It sounds pretty user friendly. I guess I’ll pick one up for fun. thank u



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