Bangalore/ New Delhi: India’s small cities are likely to offer better growth prospects and price stability for real estate developers and buyers than large markets such as Mumbai that are showing signs of slowing sales and rising prices, says a new report by Crisil Research.
Sale of new residential apartments in 10 small property markets identified for the study is estimated to touch Rs18,000 crore in 2011-12, from Rs17,500 crore in the previous year, according to the report titled Real(i)ty Next: Beyond the Top 10 Cities of India.
Bhopal, Bhubaneswar, Coimbatore, Indore, Jaipur, Lucknow, Nagpur, Surat, Vadodara and Visakhapatnam were identified as the country’s top 10 small property markets for the study, based on parameters such as population, presence of large retailers and the quality of infrastructure.
The report details the planned supply, expected demand and pricing outlook in 65 sub-markets in these 10 cities.
Nearly 250 people in the sector were interviewed and projects undertaken by some 500 developers were reviewed for the study, conducted between March and May.
In property markets that are still emerging, a robust pipeline of 354 million sq. ft of supply is planned for the next three years, found Crisil Research, an independent arm of credit ratings agency Crisil Ltd.
Prasad Koparkar, head, industry and customised research, Crisil Research, said an improvement in the availability of home loans in these small markets will boost demand. “Moreover, a shift in preference from independent houses to apartments will also support volumes,” he said.
Affordable pricing is one of the biggest advantages of housing development in tier II and III cities and towns.
The average property price in the 10 small cities taken for the study is pegged at Rs2,200-2,500 per sq. ft. This is comparable with Pune among the large markets, which has property prices in the range of Rs3,000-3,500 per sq. ft.
Among the small cities, Crisil Research predicts the highest price appreciation in Lucknow and Indore because of a combination of limited new supply and high demand from neighbouring regions. Prices are expected to be stable in the other small cities.
Among the larger markets, property prices are expected to increase in at least four cities.
Ahmedabad, Bangalore, Chandigarh, Chennai, Hyderabad, Kochi, Kolkata, Mumbai, Pune and the National Capital Region (NCR) are counted among India’s top 10 property markets for the study.
Even when prices rose by 25-30% in the large cities in fiscal years 2010 and 2011, the small cities saw increases of only 10-12%, the report said.
Surat saw the highest price hike among the small cities in fiscal 2011. Jaipur had the largest number of home sales.
There are many reasons why large developers are eyeing the small markets and diversifying from their staple metro markets.
Koparkar, in a conference call on Wednesday, said DLF Ltd, Unitech Ltd, Indiabulls Real Estate Ltd and Ackruti City Ltd are among the large developers that are keen on the small markets.
“The most prominent factor is the cost of land, which is reasonably priced,” said Rohtas Goel, chairman and managing director, Omaxe Ltd, a large developer that has an eye on the small markets. “It makes sense to buy land today at lower prices and develop a portion and sell, and some part of the land bank can be held back for future projects.”
Omaxe has recently launched projects in Lucknow, Chandigarh, Indore, and Allahabad. In financial year 2011, it sold nearly 10 million sq. ft of space, including 8.5 million sq. ft of land and apartments in small cities.
The small property markets pose their own share of challenges. Infrastructure is a concern, including water supply and road networks that are required to support real estate growth.
Another challenge is “finding a large buyer base; considering local buying power is restricted and investors also need to be brought in”, said Ashutosh Limaye, local director-strategic consulting, Jones Lang LaSalle Inc., a property advisory.