Chennai’s realty focus is shifting to the suburbs

Chennai’s economy may have a diversified base but it is primarily information technology, allied services and financial services that drive the real estate market and dictate the areas of residential development, says Badal Yagnik, Managing Director – Chennai and Coimbatore, Jones Lang LaSalle.

But lack of social infrastructure in suburbs continues to keep city-based properties attractive. In the coming months the trend will change with increased move to suburbs as land prices in the city spiral.

Yagnik points out in a report, that apart from IT/ITeS and financial services, Chennai’s economy is driven by the automotive, manufacturing, telecom and semi-conductor sectors.

However, the residential property market is primarily driven by IT / ITeS, which is concentrated in the South and West suburbs resulting in focussed demand and supply. More than 70 per cent of the real estate supply is in these locations.

Unfortunately, these suburbs still lack social infrastructure and land availability is limited, resulting in inadequacy of social facilities like schools, malls, multiplexes, restaurants and supermarkets.

The demand for homes in Chennai is still for city-based properties. But due to limited availability of suitable plots, land prices have increased manifold in the city, where demand for residential units has always far exceeded supply. This has made city-based properties expensive for new buyers. By the same coin, investments made into this asset class have yielded rather attractive returns in terms of capital value and rental income.

That said, the Chennai real estate market is currently at an inflection point, and the next 6-12 months will see large-scale migration to suburban locations. This will result in a lot of project completions in the suburbs, and therefore the promise of a better lifestyle for home buyers in these locations. Suburban locations will start seeing investment appreciation while city-based properties will begin to stabilise.

As compared with Bangalore, according to Yagnik, Chennai is a relatively nascent market and not as mature.

In the recent past, the growth of the real estate sector in both Bangalore and Chennai has been exponential. Of the two, Bangalore has gradually evolved into a more matured real estate market, since the market growth there preceded that of Chennai.

Residential property sales in Chennai and Bangalore have been more or less stable of late, with the Chennai market displaying marginally greater buoyancy than Bangalore. The absorption of residential property units in Chennai this year has been almost equal to that seen in 2011.

In Bangalore, this year’s absorption has been lower.

Capital and rental values in city-centric locations are on the higher side in Chennai when compared to those of Bangalore. This is primarily because of the limited supply of city-based residential properties and lack of social infrastructure in Chennai’s suburbs. This has caused an escalation in demand for purchase and rental apartments in the city-centric locations.

Residential property capital values as well as rentals in Chennai are driven by location – the specifications and amenities provided in projects do not figure significantly in the decision matrix of customers. Conversely, capital values and rentals in Bangalore are driven primarily by specifications and amenities.

In Bangalore, the residential supply is well-distributed – Bellary Road, Hosur Road and Whitefield account for over 68 per cent of the supply for this year. Unlike Chennai, each micro-market within Bangalore competes with others. This has resulted in residential real estate development that is typified by more innovative products and has kept competition intense.

Community living as a concept has also seen greater acceptance and adoption in Bangalore than in Chennai. This is owing to the fact that Bangalore has a number of locations which are supported with good social infrastructure – an aspect wherein Chennai falls shorter.

This is one of the most important reasons why Bangalore has already seen a number of well-executed township projects with superior amenities. In contrast, Chennai has yet to see a large, fully-executed township project.

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