City just seen massive property boom

Selected locations and properties still command a premium

Over the last seven to eight months, Bangalore's real estate market has seen a big boom. This has been true of both commercial space and housing. While property prices have gone up by 25-35 per cent in peripheral areas, inner city registered a more modest rise of 15-20 per cent.

However, this boom is mostly over and in the next 12 months the price rise will be much slower. Property developers feel that the home market has largely stabilised and expect the office space market to also stabilise in another year.

This has been the biggest rise in property prices since 1999 when the dotcom boom saw huge appreciation in both home and commercial property values. But the difference is that there will be no bust following the just concluded boom, as there was after the dotcom boom.

"This time the boom is sustainable," says Farook Mahmood, president, Bangalore Realtors Association of India (BRAI).

"The demand in commercial space is mostly from the IT and ITeS sectors which are booming in the city," said H S Bedi, managing director, Ideb Construction Projects, and "the demand today is mostly for large office spaces and the price offered is need-based."

"While the 1999 and earlier booms were driven more by speculative demand and were not backed by real demand, the price boom this time around is backed by real demand," said Mahesh Laxman, Bangalore head, Chesterton Meghraj, an international property consultant.

Concurs Mahmood, "Now speculative buyers are very few in the market. Most of the demand for commercial space is IT-related."

"The rise or fall in prices will now be in response to actual demand and supply," said Laxman. Bedi feels the price levels this time around are sustainable. However, "the retail market has more or less saturated" and it is only commercial space that has scope for growth.

A huge amount of new office space is coming into the market and this is expected to largely take care of the continuing demand for space from fresh business which is coming the way of IT and ITeS.

However the market for premium office space, for buildings which are "hot spots" (wi-fi enabled), is still strong and will continue to fetch a premium, largely accounting for the slight overall rise in prices expected in the next 12 months.

The current demand is mostly for leased spaces.

These companies want to travel light, incur mostly revenue expenses according to their means, even have the option of getting rid of excess space if expected orders do not materialise, and not be landed with the heavy baggage of sunk investment in real estate.

The home demand market is stabilising today but after a period of frenetic growth. Take the real life example of Shankar (name changed) who began scouting for a buyer for his house in late 2003. He was demanding Rs 24 lakh then but no one was ready to pay more than Rs 14-16 lakh. Fast-forward to September 2004 and the same house is being quoted at Rs 30 lakh and there are any number of people coming to check out the property.

The home demand is also need based. There is no large NRI contingent looking for simply investment opportunities as was the case in 1999. The needs are those of the endless stream of new knowledge workers coming in from all over the country to fill the jobs being created. And home buyers have got younger as declining interest rates make mortgage payments affordable.

But interest rates have stopped falling and commercial banks which went all out to build their home loan portfolios have become a little more cautious after their head offices have warned them about the menace of forged documents which has surfaced in Mumbai and elsewhere.

With funds still being available, the demand continues to be there, says Bedi. But its rate of growth is steadier and what is more, as in the case of office space, builders are able to see ahead a slight rise in prices only for premium property and that too in select locations from where IT people can easily travel to the two magnets at Whitefield and Electronics City.