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Tier-I cities — Delhi, Mumbai, Chennai and Kolkata — have been the centre of real estate growth for almost a decade now. Economic growth in these urban centres has fuelled the demand for real estate in the commercial as well as residential segments. Bangalore, once considered a Tier-II city, has graduated to Tier-I by virtue of its rapid economic growth and resultant in-bound migration. But the pace of growth in these urban centres has outpaced the creation of real estate which is constrained by the availability of land. This has resulted in demand for real estate spilling over to Tier-II and emerging Tier-III cities.
On an average, Tier-I cities have witnessed the maximum capital appreciation in the “new launch” segment over the last five years, which is in the range of 35 per cent to 38 per cent. Mumbai saw a phenomenal increase of about 68 per cent in capital values for residential new launches. This can be attributed to increasing demand for housing and limitations in the availability of new developable land parcels in the city.
During the same period, the new launch capital values for Tier-II cities such as Gurgaon, Pune, Ahmedabad, Indore, Vishakapatnam and Kochi increased on an average by around 33 per cent. Gurgaon, developed as a satellite town to Delhi, has seen the highest new launch capital value appreciation of more than 50 per cent in the last five years, followed by Indore (around 33 per cent). Cities such as Kochi, Pune and Ahmedabad have seen an appreciation of 15-25 per cent. (Click here for table)
In case of Tier-III cities such as Mangalore, Coimbatore, Lucknow, Nagpur, Sonepat and Bhiwadi, new launch capital value appreciation has been around 26 per cent. Mangalore and Nagpur have seen the highest appreciation — 42-46 per cent.
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Tier-I cities have seen around 48 per cent increase in capital values in the last three years. The higher increase can be attributed to the rationalisation in capital values after the 2008-09 financial meltdown. After the correction in prices, 2010 and 2011 saw a revival in the residential real estate market resulting in an increase in capital values. During this period, the southern markets emerged stronger. Chennai, during 2009-2012, saw the highest growth of 68 per cent among the metros, followed by Bangalore (55 per cent). Mumbai saw an increase of 42 per cent, which was lower than Kolkata (48 per cent) but higher than Delhi (41 per cent).
Once the economy had recovered, cities that had land for real estate development saw higher appreciation. The residential capital values for Tier-II increased by around 40 per cent, which was higher than the five-year average. Gurgaon saw increase in residential new launch capital values of around 129 per cent. Ahmedabad, Pune and Kochi also witnessed an increase of 25 to 35 per cent in new launch capital values.
Across Tier-III cities, the overall residential capital values increased by around 33 per cent. But the growth story was limited to a few cities. Bhiwadi, being promoted as the industrial hub close to Gurgaon, saw the highest increase of about 70 per cent. What is driving the demand in Bhiwadi is the negligible availability of houses priced below Rs 40 lakh in Gurgaon — the so-called budget segment.
Over the last one year, Tier -II and III cities have seen the highest growth in new launch capital values —15 to 17 per cent. This can be attributed to the easy availability of budget houses that cost less than Rs 40 lakh there. That’s perhaps why Nagpur and Bhiwadi have seen the highest increase of 22 to 29 per cent in the last year. In Tier-II cities, the focus on employment creation, which has increased the demand for houses, coupled with the development of infrastructure, has resulted in an increase in capital values.
The new launch capital values in Tier-I cities have risen by around 12 per cent. The average new launch capital for Mumbai and Delhi are in excess of Rs 10,000/sq ft, resulting in premium and luxury segment offerings only. For Bangalore, Chennai and Kolkata, the average new launch capital value has been around Rs 3,500-Rs 4,000/sqft. But the large increase in new supply has acted as a check on the rise in capital values.
Clearly, Mumbai offers the best returns over the past five years, followed by Gurgaon and Mangalore. As for returns in the last three years, Gurgaon leads by miles, followed by Bangalore, Chennai and Bhiwadi. The last year has seen a slowdown in demand, yet residential capital values in Gurgaon have appreciated in excess of 30 per cent, followed by Bhiwadi and Nagpur.
