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Changing dynamics of realty investment

A fundamental real estate investment mantra is that emerging localities are preferred to established and often saturated ones, writes Anuj Puri.

india Updated: Dec 09, 2007 23:03 IST
Real asset | Anuj Puri

In Indian real estate today, the only constant is change. Hot destinations of the last year are not assuredly the best options this year, and the next year brings its unique set of emerging investment destinations with it.

The reason for this state of flux is that the real estate boom is causing many of our metros and even some of the previously popular Tier II towns to saturate at an incredible pace. Property prices there skyrocketed beyond the reach of middle-income homebuyers, causing them to look a little further afield each year. Investors observe these migration trends, analyze the magnitude and scope of activity, and identify one or the other new town as the next big thing.

Information technology companies, who are now the primary drivers in the Indian real estate market, are not dependent on central business locations. The crux of the whole outsourcing boom is that it makes more sense for Western companies to offload back-office functions and even serious research processes to India than to undertake these in their home bases. However, what would necessarily be a CBD (central business district)-based business function in, say, the United States, can be a non-CBD dependent function in India. After all, both the sellers and final buyers of IT-based products and services are based abroad anyway. This means that IT / ITeS companies can operate from anywhere in India, as long as there is access to skilled manpower and necessary resources.

The fact that such companies can benefit from the advantage of cheaper real estate prices in smaller towns has led to the Tier II/III city boom. IT /ITeS companies catalyze every other sector of real estate wherever they go. So, the retail, residential and infrastructure sectors soon start perking up in those localities.

A fundamental real estate investment mantra is that emerging localities are preferred to established and often saturated ones. Established areas eventually reach a peak in terms of appreciation potential, after which the growth rate either slows down or stagnates. Moreover, there is little scope for new market drivers such as malls to find a place in saturated localities – meanwhile, prices remain high.

This is not the best of scenarios from an investment point of view, since optimal investment requires low entry levels and appreciable growth within a realistic timeframe. Therefore, as one or the other destination reaches its peak potential on all these counts, new ones come into the limelight.

Chairman & Country Head, Jones Lang Lasalle Meghraj