Mangalore is suddenly hot property.
Godrej Properties Ltd launched a luxury residential project in the city in August, each of its 245 apartments priced at Rs 80 lakh to Rs 1 crore. Raheja Universal Ltd is building a sea-front property in Mangalore in a similar price bracket.
And Godrej Avalon and Raheja Waterfront are among half a dozen luxury housing projects coming up in the coastal city.
Also See Luxury Boom in India’s Small Cities (PDF)
“We are introducing the high-end, gated community concept in Mangalore and it’s a way to test the market and then shape up projects in other cities,” said an executive at Raheja Universal who asked not to be identified.
“These aren’t very large projects, have a shorter gestation period of three to five years, and hence, are less risky.”
Developers are testing luxury housing projects in small cities and towns as sales of high-end homes in large cities such as New Delhi and Mumbai have hit a low this year, largely owing to a steep rise in prices and low appetite.
Luxury home sales in Delhi and Mumbai have declined since March as prices shot up by 30-40% in these markets following the rebound in the realty sector, say analysts.
Pankaj Kapoor, chief executive of Liases Foras, a real estate research firm, said the average cost per apartment in Mumbai and Greater Mumbai is Rs 2 crore, and about Rs 1.97 crore in Gurgaon, a prime Delhi suburb.
At least 10 developers including DLF Ltd, Tata Housing Development Co. Ltd, Omaxe Ltd and Orbit Corp. Ltd are looking to launch residences priced at Rs 1-5 crore in small cities traditionally known for budget homes or customized villas.
“Having milked the luxury segment in tier I cities such as Mumbai and Delhi, developers are experimenting with smaller cities, where premium housing is still a new concept,” said Gulam Zia, national director, research and advisory services, Knight Frank India Pvt. Ltd.
According to Knight Frank’s Zia, the homebuyer in smaller cities is more discerning and developers need to offer interesting value propositions to sell apartments at a premium.
Aurangabad, for example, which in April saw at least 100 Mercedes-Benz cars being sold in a single day, will soon have a golf city—essentially houses along a golf course. Aurangabad is some 350km from Mumbai in Maharashtra.
Some developers say sales in small cities are being driven by actual homebuyers and not so much by investors.
“The demand is genuine. We are sure the Mangalore project will do well for the good location, right project size and also because supply is thin,” said Pirojsha Godrej, executive director, Godrej Properties.
But developers such as Omaxe believe a chunk of the potential in small property markets comes from investors in the form of non-resident Indians.
Omaxe has projects coming up in Rohtak, Baddi, Indore, Derabssi, Mullanpur and Rudrapur—all smaller cities.
Shirin Bagga, an economist with research firm Boston Analytics, cautions that while small cities and towns may offer attractive opportunities for luxury projects, developers have a herd mentality and tend to rush into these markets without much thought.
“Real estate firms need to go into this more slowly with the right product mix,” she said.