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Homing in on tier-II cities

If you are looking to invest in a house, there is opportunity in tier-II cities, especially those surrounding the metros. Prices are stabilising, according to research firms, and developers are sitting on huge inventory, with residential and commercial units available with real estate companies.

india Updated: Sep 03, 2011 01:58 IST
Devesh Chandra Srivastava

If you are looking to invest in a house, there is opportunity in tier-II cities, especially those surrounding the metros. Prices are stabilising, according to research firms, and developers are sitting on huge inventory, with residential and commercial units available with real estate companies. This would give you a bargaining edge over the builder when striking a deal. Here is why you can consider investing in smaller cities:

Stabilising rates
Prices that were on the rise since last year are now stabilising in the suburbs of large metros and tier-I cities, according to data provided by Gurgaon-based property research firm PropEquity Analytics.

For the last six months, builder rates of apartments have remained in the range of Rs 1,500-4,500 per sq ft in Gurgaon, Noida, Navi Mumbai, Thane, Mangalore, Pune, Indore and other cities. And it is expected to remain so. "Prices in smaller cities will remain stable in the coming months," said Samir Jasuja, founder and CEO, PropEquity. "I do not see any further rise in property rates in tier-II cities because of factors such as rising policy rates and significant drop in absorption (sale)."

Supply exceeding demand
One of the reasons behind stabilising of prices is the piling of inventory. Rapid urbanisation in these cities is bringing in more and more developers in these cities, which have seen many launches in the recent past. For example, from the second quarter of 2010 till June 30 this year, Gurgaon and Navi Mumbai have seen the launch of 34,452 units and 31,568 units, respectively (see table).

Discount on new launches
In the last year, there were many new launches in tier-II cities, but the trend is set to halt in the coming months. According to a study by property consultants Jones Lang LaSalle India (JLL), high interest rates, increase in vacancy and a demand slowdown will impact the earnings of developers. A natural consequence will be slowdown in construction activity, leading to fewer new launches.

Already, the activity has diminished. The few new launches that are in the pipeline are offering pre-launch discount of 10-15% over the pricing of other projects in the same area, the JLL study has found. For instance, the recently announced pre-launch rate of Delhi-based real estate firm Chintels India’s project in Gurgaon was Rs 3,950 per sq ft, when the prevailing market rates in the area are in the range of R4,200-4,400 per sq ft.

Therefore, look out for new launches and inaugural discounts. The builder may give a bigger discount over and above this announced rate if you bargain properly.

However, a slowdown in construction may also mean a delay in delivery. So, existing homebuyers may want to check out with builders. Further, as the inventory increases, funding shortage may also affect delivery time lines.

"Rising cost of labour and construction is a major challenge for most developers already battling issues such as high debt and liquidity crunch," said Ajay Puri, director, Puri Construction.

What should you do?
"The period of high property rates is followed by stable rates," said Puri.

Invest now to gain from the capital appreciation in future.

With demand slowing and inventory piling up, look forward to discounts and a bargaining edge over the builder in cities around metros.

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