The real deal

MONEY MAKERS 2006: REAL ESTATE

While 2005 saw a big appreciation in real estate prices, the boom is unlikely to slow down in the near future.

Home, sweet home. While familial bliss is what most of us crave for, today's residential buyers also have another thing going for them. Real estate today is among the best asset classes going around.

So, even though many of us spend more time in office and in commuting, than at home, the demand for houses is going through the roof. From Mumbai to Kolkata and from Chandigadh to Kochi, the buoyant real estate market is emerging as an attractive investment option.

What was witnessed in 2005 is expected to continue in 2006, with the demand-supply dynamics expected to remain the same. This will send the real estate prices several floors up the elevator.

Easy and cheaper housing finance, growing incomes at younger age and tax sops continue to cement the growth. The real estate sector is expected to record an average growth of 10-15 per cent in 2006. Some industry observers peg the growth at 20 per cent over inflation in the next two years.

Growing skywards

The year saw strong appreciation in real estate. Property analysts peg the average growth at about 20 per cent, while it was as high as 50 per cent in some cases.

Niranjan Hiranandani, managing director of Mumbai's Hiranandani Constructions says, "Year 2005 was extremely good for the real estate sector. Growth was driven by positive factors like greater incomes (especially at a younger age) and easier availability of housing finance. Going forward, one can safely expect a 10-15 per cent return on real estate in the short-term and it would be much higher in the long-term. However, at least a 2-3 year time horizon is required for an investor to achieve good growth."

Pranay Vakil, chairman, Knight Frank has a rosier picture. He says that there has been an appreciation in the wide range of 20-300 per cent in real estate, across India in 2005. Real estate in central suburbs of Mumbai appreciated by 20 per cent, while western suburbs and south Mumbai posted growth of around 30-40 per cent.

According to analysts, some properties in the Bandra Kurla Complex (BKC) appreciated by 100 per cent in 2005. This phenomenon was not limited to Mumbai alone. In certain pockets of Noida land prices have appreciated by 125 per cent while in Jaipur they have gone up by as high as 300 per cent.

The growth drivers

One good reason for real estate investment picking up has been the lower interest rates. Analysts point out that rates on housing loans have come down from about 17 per cent to 7-8 per cent in the past few years.

Moreover, previously the deduction in tax on account of housing loan was Rs 10,000 per annum, which has increased to Rs 1,50,000 at present. About Rs 1.3 lakh crore was doled out as housing loans in 2005 as compared to just about Rs 13,000 crore, around six years ago. Stamp duty has also come down from 10 per cent to five per cent or less in the past few years for residential property in Maharashtra. On commercial property it is a flat five per cent.

There has been improvement across all aspects of the real estate segment. Transparency has improved as 100 per cent cheque payment facility is available now.

Hiranandani adds, "The amenities provided by housing majors to customers have also increased significantly in recent years. This includes landscaped gardens, concrete roads and entertainment facilities like go-carting as in the case of our project in Powai. All this gives value for money."

The good sentiment among investors, double incomes of families, better job security as compared to 4-5 years ago in sectors like IT, good performance by stock and commodity markets have also fuelled the boom. The average age of a person availing of a housing loan has also come down in the recent past. While around six years ago the average age was 42, it is 31 at present.

Policy matters

Companies across sectors are encouraging FDI and FII, which in turn is driving the demand for real estate. Vakil points out that foreign entities are showing huge interest in all types of real estate in India.

The peripheries of the big cities in the country are currently under the scanner of such developers, where they can develop the mandated minimum area of 25 acres or construction of 50,000 square metres.

According to a report from Knight Frank, real estate would capture about 18-20 per cent of the total FDI coming to India in FY06. Hiranandani adds that if the National Housing & Habitat Policy 2005 is implemented, it will fuel another boom, as housing for the upper poor (staying in slums) could become a reality.

In upmarket areas like south Mumbai, no new stock of land is available at present, except the mill lands and demand clearly outstrips supply. Observers point out that the reservations that exist while developing mill land at present, may be required to go in future with pressure from the industry.

Development of malls and multiplexes also triggers residential real estate in a way that people want to stay near these places. Hiranandani opines that the government should expand the investment scope in real estate by allowing mutual funds to invest in real estate and by allowing real estate investment trusts (REITs).

Real deals

Mumbai continues to be the darling for developers and investors both. Within Maharashtra, Nashik, Nagpur and certain locations near Pune's city centre are seeing higher prices.

In the north, Noida, Mehrauli, Jaipur and Mohali are likely to witness better appreciation in real estate prices. Kolkata is again picking up on the eastern front, while in the south, Bangalore, Mysore, Chennai and Kochi will see growth in prices.

According to a Knight Frank report, Mumbai has seen an increase in demand as well as supply. Areas like Lower Parel and Andheri Kurla road have seen consistent appreciation over the past five years.

According to Vithal Suryavanshi, senior manager-sales & marketing of K Raheja Corp, Mumbai's residential property saw an average 20 per cent appreciation in 2005, while on the higher side it was 30-40 per cent.

For instance, a flat in Powai in Mumbai costing Rs 4,000 per sq feet at present, is expected to appreciate by 15-20 per cent and would generate about six per cent per annum returns if leased out. For a Rs 50 lakh flat plus another 10 per cent (including stamp duty, society deposit, etc), EMI on loan would come to about Rs 45,000 per month.

Going forward, Suryavanshi sees the tier-2 cities like Pune, Nagpur, Hyderabad and Mangalore growing at a faster pace. In Pune, areas like Kalyani Nagar, Aundh and Bund Garden Road have seen good appreciation and the demand for residential space is being indirectly fuelled by growth of the IT, ITES, biotech and banking sectors, according to the report. Investors are increasingly investing at the planning and development stage itself, in order to get higher returns.

Real estate growth in Bangalore continues to be driven by the IT and ITES sectors. Although the yields in the city's real estate have reduced over the past two years, buoyancy in the market lends optimism.

In the national capital region of Delhi, it is again IT and ITES that is driving growth. In Gurgaon, Okhla industrial phase etc., new supply would exert pressure on prices, while lack of fresh supply in CBD and demand from financial sector in Connaught Place, would firm up prices there.

Even as there exist negatives like the huge investment involved, no tax benefit on interest of home loan if not self occupied, lesser liquidity not to speak of the legal hurdles and government's slow pace of reforms, the boom in real estate is here to stay with the burgeoning demand exceeding the supply.

BEST CITIES

Mumbai
Growth continues to be driven by increasing activity in suburbs and the former mill lands in central Mumbai. Experts also see scope for developing land belonging to port trust, railways and salt pans.

Pune
The city's proximity and connectivity to Mumbai, availability of skilled human resource, good weather and infrastructure is fuelling growth, especially in areas closer to the city centre.

Bangalore
The growth in the city continues to be driven by the IT & ITES sectors, even as the yields have reduced over the past two years. But the international airport project is fuelling growth in adjoining locations like Yelahanka and Devanhalli.

Delhi
The growth in Delhi is being driven by the upward movement in prices in areas like the central business district (CBD), Connaught Place and Nehru Place. This is primarily due to lack of fresh supply in some cases and demand from financial sector in others.

Chennai
The metro is seeing growth on back of the software sector and back offices of several companies. Areas close to these work centres are witnessing growth.

Hyderabad
Improving infrastructure and proactive policies are driving growth in this city. Moreover, the IT industry is another reason, just like so many other emerging secondary towns.

Nagpur
The city is seeing growth after years of stagnation on back of improved infrastructure and potential for good human resource.

Mohali
This town near Chandigarh has seen growth in BPO and the local authorities are also considered proactive for development.

Kolkata
In this eastern metro, the recent growth in the IT sector is attracting attention of real estate developers once again.

Jaipur
The pink city is also characterised by the local government that is bullish and proactive about growth.