Real estate firms revisit plans for smaller cities4 min read . Updated: 09 Sep 2012, 11:20 PM IST
Real estate firms revisit plans for smaller cities
Bangalore/New Delhi: Realty firms are revisiting and tweaking strategies for development in India’s smaller cities in a re-run of what was seen during the 2008-09 economic slowdown.
While some large developers are sticking to bigger cities and discontinuing project plans in smaller towns, some are switching from premium to affordable homes to push sales and mixing retail and hotels with pure residential projects to boost demand and spread the risk.
Early last year, a Crisil Research report said smaller cities are likely to offer better growth prospects and price stability for developers and buyers than large markets such as Mumbai that are showing signs of slowing sales and rising prices. Property analysts said the real estate story of smaller cities hasn’t really taken off, causing developers to shrink real estate projects there.
“With the way the market is functioning and the balance sheet pressures, projects in smaller cities offer returns over a longer period of time. So our focus will be on Mumbai now," said Hari Prakash Pandey, vice-president, finance and investor relations, HDIL.
Another Mumbai developer that launched a large project in Mangalore last year at a premium price compared with current market prices, is not planning to develop any more projects in other smaller markets.
“The demand waned after selling the first lot of apartments and in retrospect, the pricing seemed to be too high," said a person familiar with the development, who declined to be named.
In most cases, when large, known names in the real estate industry have entered a specific market, they have often launched projects at a superior price, or tried to develop a project unique to that city, to cash in on their brand.
However, subsequent research has compelled them to play to the demands of property buyers in that market, and getting the pricing right has been the key challenge on this front.
In Ahmedabad, around a year and a half ago, Ajmera Realty and Infra India Ltd launched a project at around ₹ 5,000 per sq. ft.
Now when it is planning to launch another residential project, and is deciding on the pricing, it is likely to be around ₹ 2,500-3,000 a sq. ft.
“Customers are price-sensitive and while we see good potential in a market like Ahmedabad, the pricing has to be right for that market," said an official at Ajmera Realty, who didn’t want to be named.
Analysts are not so sure about the future of real estate development in smaller cities, and said that like earlier, local developers in these markets will be dominant.
Though many developers such as DLF Ltd, in the aftermath of the slowdown, said that they will concentrate on their core geographies, many again moved towards smaller cities as larger markets showed sign of slowing.
“Large developers have realized that metros are more experienced and mature markets. I believe most of them would sell land and move away from tier II and III cities," said Anuj Puri, chairman and country head, Jones Lang La Salle, a property advisory.
Mumbai-based Godrej Properties Ltd, which aims to be a national firm with presence in 12 cities, is particularly focussed on building its presence in markets such as Bangalore, Chennai, the National Capital Region and Ahmedabad, said Pirojsha Godrej, managing director and chief executive.
In terms of in real estate development in these markets, Godrej said its “national brand and joint venture business model" would enable it to capture opportunities.
Real estate consultants also say a lack of funding, particularly from private equity (PE) investors and to some extent, non-banking financial companies (NBFCs), has also restrained developers from taking a leap of faith in these markets.
Mahindra Lifespace Developers Ltd, which has projects in Mumbai, Chennai and Pune, launched a premium residential project in Nagpur this February announcing its entry into that city.
Managing director and chief executive Anita Arjundas said the company has selectively, not actively pursued projects in smaller cities.
“Nagpur was more of a test but the response has been encouraging. But it finally it boils down to cost structures to develop in such cities, and we currently don’t have that kind of depth," said Arjundas.
A number of northern India-based developers such as Omaxe Ltd, Ansal API, Assotech Ltd and Amrapali Group have gone to smaller cities with residential projects. While earlier, these projects were completely residential, later they shifted to developing commercial spaces alongside.
Noida-based Assotech tied up with hotel chains and launched hotel projects along with residential projects.
The company owns a hotel in Rudrapur in Uttarakhand state under the Radisson brand.
It also has residential projects under a joint venture with another Noida-based developer, Supertech Group Ltd.
Crisil Research’s 2011 estimate was of a robust pipeline of 354 million sq. ft of supply planned for the next three years in emerging property markets.
Tata Housing Development Co. Ltd, known for spearheading the low-cost housing initiative among private developers, wants to take the brand to smaller cities, but will restrict itself to markets such as Ahmedabad, Pune and Bhubaneswar.
“Real estate competitiveness in these markets is low but we are not looking at even smaller Tier III and IV cities," said Tata Housing managing director and chief executive Brotin Banerjee.