Emerging trends in Indian Real Estate and how you can benefit

Smaller apartments-don’t confuse lower TCO with lower prices

Better late than never! That’s how I would like to sum up this all important trend that finally appears to be taking root in Indian RE. Over the last few years (2003-2007), there has been significant supply of larger than average (>2000 sq ft) apartments across all the major metros and the adjoining suburbs. Whilst this supply was quickly lapped up over the first few years, there appears to be a supply overhang of large apartments because of an unaffordable Total Cost of Ownership (TCO). TCO for an apartment may be arrived at by multiplying size of apartment with price psf of apartment. The TCO needs to come down if developers want to address the needs of a larger section of the market.

TCO can be reduced either by reducing the psf rates or by reducing size of apartments. In the next few years, I feel, TCO will come down primarily due to reduction in size of apartments. In addition, I feel, psf rates of some projects will either come down or remain stagnant for a period of time (I have pointed out specific projects in my post of June 9, 2008). There is already enough evidence of this emerging trend in newer developments in Gurgaon and Faridabad. In Gurgaon, these newer developments are spread across sectors 81, 82, 83, 85, 91, 92, etc. Apartments in these new developments in Gurgaon are available in a TCO range of Rs.30lacs –Rs.40 lacs. In Faridabad, new developments in the “Neharpaar” region are available in TCO range of Rs.25 lacs –Rs.35 lacs! This segment is popularly also referred to as the affordable housing segment. Some people might be quick to point out the vindication of their point of view- I told you prices would fall! However, drawing such a conclusion may be incorrect for the following reasons:

(a)These projects are coming up in newer areas which are currently not inhabited and prices are therefore bound to be lower than inhabited areas.
(b)The TCO in these new developments is significantly lower since the apartment sizes are much smaller- 1150 sq ft (2BR’s) – 1500 sq ft (3BR’s).
(c)The specifications (internal fittings, flooring, etc) in the newer developments may not be of the same quality as in some earlier developments. This is not necessarily true for all developments and I advise a close comparison before making a buy decision.

Investment idea: With increased demand from the affordable housing segment over the next several years, I feel, investments in this segment will be attractively compensated. Please also read my earlier posts dated May 4th, 2008 and May 19th, 2008 for a more detailed analysis of specific prices and developer recommendations.

Fewer bells & whistles
Another factor that will contribute to lowering TCO in some of the newer projects will be developments with fewer frills and amenities. Developers may compromise on amenities such as gymnasium (it may still be there but be under equipped), may insist on one compulsory car park instead of two compulsory car parks, may provide lesser open space in the complex (this gives the developer more area to build and sell) and may build community centers or common areas with fewer bells & whistles.

This is not to say that developments with luxurious and sometimes extravagant amenities will stop being constructed. On the contrary, there is an opposing but parallel trend towards super luxury developments. Some examples that come to mind are Aralias and Magnolias by DLF in Gurgaon (apartments situated on the golf course), Unitech Grande in Noida, Shree Ram Urban Infrastructure’s 50 storeys building in Worli equipped with a 10,000 sq ft luxury spa, etc. As in any market the world over, there is always room for the super luxury apartments. However, the bulk of the demand in the coming years is bound to come from the segment popularly called affordable housing or as I have described it as lower TCO apartments.

Pied-a’-terre
A pied-a'-terre may be defined as a small living unit in a large city or a second home in another city. With rising middle class wealth, more and more people in India are traveling domestically as well as overseas. A few amongst them are able to afford a second home. The need or motivator for a second home varies from person to person. Generally, people buy a second home for one of the following reasons:

(a)Buying a second home as an investment. Money invested wisely in RE can earn good capital appreciation as well as provide rental income.
(b)Buying a second home as a leisure destination. Examples of places where people may buy a second home include hill stations, locations close to a beach or big fun cities such as Mumbai or Delhi.
(c)Buying a second home for a child or loved one. People may buy second homes as a temporary place to stay for their children while they are studying or working in a city. Cities which typically fit this bill are large cities/metros.
(d)Non resident Indians buying a home in India primarily to fulfill the need for short term stays.

The one thing common to all four categories of buyers described above is the need for an affordable, functional, well located pied-a’-terre. Mumbai has historically had a good supply of small apartments (mostly due to a vast population and expensive housing). In the very recent past, a few developers have started developing smaller apartments in the suburbs of Delhi-namely in Gurgaon, Faridabad and Noida. A similar trend appears to be emerging in other metro suburbs of Chennai, Bangalore, etc. However, what is still absent is new supply of small apartments –studios, 1BR’s and 2BR’s in city centre locations and high street addresses. Since the pied-a’-terre segment by definition is a second home, it is unlikely buyers in this segment will have interest in very large (read expensive) apartments. Moreover, city centre locations are always more convenient from a short stay or investment perspective.

In the years to come, the pied-a’-terre segment can be a significant source of new business for developers. However, developers need to better understand the requirements of this segment so they are able to create the appropriate product.

Investment idea: Scout for apartments having a carpet area of 600-1200 sq ft. in city centre locations across metros. As an example, in Delhi, you could find these apartments in locations such as Greater Kailash, Chittaranjan Park, East of Kailash, Malviya Nagar, etc. DDA apartments, though dilapidated, could be very good bargains. If you have a little time and creativity, you can renovate and refurbish some of the DDA apartments in excellent locations such as Yusuf Sarai, Sheikh Sarai, Sarita Vihar, etc. Hire the services of a professional architect or interior designer to spruce up an older property and you should be able to make very good money in a relatively short period of time (incase you wish to resell and not rent it).

Carpet area v/s super built up area
This is a raging debate with policy makers and developers in the country today. I have written about this subject in a detailed post dated May 28, 2008. Suffice to say, developers will soon have to quote rates in terms of carpet area rather than super built up area. This will be a significant step ensuring buyer protection.

Is access the new location?
Anyone with even an elementary knowledge of real estate investing will be quick to extol the virtues of location when selecting a property. However, the difficult question is defining location itself! How does one location become superior to another and command a price premium? This is a debate which is probably as old as the business itself. I do not wish to open up that discussion for debate for the purposes of this post. Suffice to say that the public transportation system in big cities will transform the way we have historically viewed location. How easily one can get in and out of a place will dictate real estate prices in the region. There will be emergence of distributed business districts in big cities (and along with that will come residential development). That is to say, no one business center will hold complete sway over a city’s business and commerce. There will be continued development of competing business centers across the length and breadth of cities. This will expand the geographical landscape of cities into newer areas- eg. Faridabad, Noida and Gurgaon in the NCR. Over the last decade, these three centers have emerged as challengers to the pre eminence of existing business districts such as Connaught Place, Nehru Place and Bhikaji Cama Place . These new centers will further get a fillip over the next decade as access to these locations becomes easier through better roads and public transportation. Access therefore will be a significant driver of real estate prices in India over the next decade. Please also read my post dated 6th May, 2008.

Investment idea: Whoever said, to make money you have to think out of the box. In real estate investing, you need to identify the next big story and be there before it becomes one! Start your research by studying the government’s plans for connecting different parts of the city through public transportation. In summary, where goes the metro there will flow the money!

Gentrification
Gentrification (as defined by Wikipedia), or (urban gentrification), is change in an urban area associated with the influx of an income class above existing residents. Gentrification is characterized by several processes. The area experiences a demographic shift to an increase in median income, and often reduction in household size. More households with higher incomes result in real estate being perceived to be more valuable with increased rent and home prices. Industrial land use declines and is redeveloped into food, retail, office, and high-end residential housing. Lastly, the culture and character of a neighborhood changes. Gentrification can result from urban reinvestment efforts by local governments or developers, which direct money to invest in deteriorating city infrastructure, offer incentives for redevelopment. These efforts have been linked to reductions in local property crime rates, increased property prices and increased revenue to local governments from property taxes.

Investment idea: Taking South Delhi as an example, I anticipate gentrification to occur in the following neighborhoods over the next 5-7 years, namely, Okhla (Indiabulls has already launched residential apartments under the name Castlewood), parts of Kalkaji, Malviya Nagar, Yusuf Sarai, Sheikh Sarai,Pushp Vihar (already happening adjacent to Pushp Vihar with development of new malls) and Sarojini Nagar. Buying competitively priced property in these areas could provide tremendous upside potential as the process of gentrification takes root in these neighborhoods.

Please remember that smart investing is never about timing. I feel, it is about anticipating the undercurrents of change before others and about having conviction in your ideas.

More later,
Ashish