Over the next few weeks I will write about residential RE investment opportunities in the NCR. I will begin this week by analysing opportunities in Gurgaon.
Let's begin by taking a high level view of how the Gurgaon landscape has evolved over the last few years and how it is expected to further evolve over the next few. If you look at new Gurgaon, it started with developments around MG Road. Today prices on MG Road are anywhere between Rs.5500-Rs.6500 psf for comparable properties. I would like to refer to MG Road as the downtown of Gurgaon as also the fulcrum basis which all other price movement in Gurgaon will be compared. I refer to MG Road as the developments around Sector 25 and Sector 28. I am of the opinion that over the next 5 years (ie.end 2012), all residential/group housing developments between Sector 1-74 would be priced between 0.75-0.8 times the price of downtown Gurgaon. Let's translate that into numbers as I see it in 2012. I expect prices on MG Road to continue their upward trend at 11% p.a. -let's assume the current average price on MG Road of Rs.6000 psf. Therefore, in 2012 I expect the average price on MG Road to be Rs.10,110 psf (compounded growth rate of 11% p.a.). At the same time, I expect prices of all comparable developments between Sectors 1-74 to be between Rs.7582-Rs.8100 psf (0.75-0.8 of Rs.10,110).
If the above is my hypothesis, let's see where the investment opportunity is:
1. Invest on MG Road-11% compounded growth over a 5 year period is a great investment opportunity by any measure. In addition, MG Road offers ready to move in property options and therefore can either be bought for self use or rented. If you rent, you can expect approx. 4.5% return on investment which will be in addition to the 11% compounded return. Sure beats the bank deposit and compares very favorably with equity returns minus the heartburn that comes with frequent stock market gyrations!
2. Invest in upcoming sectors- what would be the definition of upcoming sectors? I'll try and be as precise as possible in my coverage of these sectors. This would include upcoming developments particularly in sectors 47 through to sector 57. Currently, you can get investment opportunities in these sectors in a price range of Rs.2800-Rs.3500 psf (under construction). If as per my earlier hypothesis the price in these sectors would be between Rs. 7600-Rs.8100 in 2012-the upside potential is incredible. Such an upside translates to a compounded growth of 130% - 170% over the next 5 years! Ofcourse, you must remember that all of these properties will be ready for possession over the next 9-24 months. Therefore, there will be no additional rental income over this period atleast till June,2010.
3. Beyond Sector 74- I expect prices in sectors 75-95 to be 0.7 times of prices between sectors 47-57. In 2012, I am predicting a price of Rs.7600-Rs.8100 in Sectors 47-57- therefore, the price in developments in sectors 75-95 should be between Rs.5320-Rs.5670 psf. Currently, the offer price in these sectors is between Rs.2250-Rs.2500. In addition, the apartments in these sectors are generally smaller in size (therefore a smaller capital outlay). Such a price in 2012 translates to a compounded average growth rate of 127-136% over the 5 year period. This compares favorably with the investment opportunities in sectors 47-57. However, I would personally prefer an investment in sectors 47-57 since that development would occur sooner, rentals could begin by mid 2010 and metro connectvity will occur before by end 2012.
OTHER FACTORS INFLUENCING PRICE:
1. Apartment size-Between 2003-2006, there was a tremendous demand for large apartments in Gurgaon. I believe there was a latent unmet demand created for such apartments due to insufficient alternatives in the capital city. However, most new projects announced between 2003-2006 had more than a sufficient mix of large apartments on offer in their overall development plans. In the short to medium term, I think, this demand will be met with the existing supply and the expected new supply coming into the market over the next 24 months. As a thumb rule (it's my own thumb rule!), for every 100 average sized apartment there should be a demand for 10 large apartments. The current and expected supply in Gurgaon far exceeds this ratio.
Definition of large v/s average v/s small v/s trophy property-
Average (all sizes are super area with an efficiency assumption of 85%):
1. 2BR+2Bath : 1100 sq ft-1300 sq ft
2. 3BR+3Bath: 1725 sq ft -1900 sq ft
3. 4BR+4Bath: 2500 sq ft -2750 sq ft
Large
1. 2BR+2Bath: >1400 sq ft
2. 3BR+3Bath: >2000 sq ft
3. 4BR+4Bath: >2900 sq ft
Small
1. 2BR+2Bath: <1100 sq ft
2. 3BR+3Bath: <1700 sq ft
3. 4BR+4Bath: <2500 sq ft
Trophy
1. 4BR+4Bath and above: Properties with an extraordinary location/view, size greater than 50% of average sized apartment,limited supply,celebrity connection,etc.
Impact on price due to deviation from average size-Due to an under developed market and due to a significant demand for larger apartments till 2007, there has been no "per square foot" price differential between large and average sized apartments. However, going forward, I expect a 5% lower price for an apartment which deviates in size (by 10%) from an average apartment size. For ease of understanding, let's take an example-An average sized 3BR should not be more than 1900 sq ft. However, the market will absorb 3BR's upto 2000 sq ft without a discount. However, when the size exceeds 2000 sq ft by more than 10% ie.an apartment of 2200 sq ft I expect the price psf to be lower than the previailing price by atleast 5% .
Trophy properties- Sometimes apartments may be much larger than the average sized apartment but still command a premium. The psf price of these apartments may be influenced by factors other than discussed above such as celebrity value (previously owned by celebrity), status symbol, limited supply, etc. Such apartments can be 5000 sq ft or above and may command a premium in terms of "psf" rate in comparison to similar properties of average size.
I will continue with more in my next post....................
later,
Ashish
2. 3BR+3Bath: <1700 sq ft
3. 4BR+4Bath: <2500 sq ft
Trophy
1. 4BR+4Bath and above: Properties with an extraordinary location/view, size greater than 50% of average sized apartment,limited supply,celebrity connection,etc.
Impact on price due to deviation from average size-Due to an under developed market and due to a significant demand for larger apartments till 2007, there has been no "per square foot" price differential between large and average sized apartments. However, going forward, I expect a 5% lower price for an apartment which deviates in size (by 10%) from an average apartment size. For ease of understanding, let's take an example-An average sized 3BR should not be more than 1900 sq ft. However, the market will absorb 3BR's upto 2000 sq ft without a discount. However, when the size exceeds 2000 sq ft by more than 10% ie.an apartment of 2200 sq ft I expect the price psf to be lower than the previailing price by atleast 5% .
Trophy properties- Sometimes apartments may be much larger than the average sized apartment but still command a premium. The psf price of these apartments may be influenced by factors other than discussed above such as celebrity value (previously owned by celebrity), status symbol, limited supply, etc. Such apartments can be 5000 sq ft or above and may command a premium in terms of "psf" rate in comparison to similar properties of average size.
I will continue with more in my next post....................
later,
Ashish
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