Rise of the tier II

Rise of the tier II

Residential development in metros is likely to continue an upward growth albeit at varying growth rates.

This year the real estate sector is likely to go through a litmus test for its robustness. Given current market trends and dynamics, residential development in metros is likely to continue an upward growth albeit at varying growth rates. Infrastructure upgradation initiatives, particularly transport connectivity between urban centres and suburbs, are likely to contribute to this trend. Some degree of price equalisation is likely to happen in micromarkets within the metros. Tier II and III cities are also likely to observe growth rates, but in varying degrees. Particularly, those in the proximity of major metros and urban centres are likely to benefit from the growth dynamics of these "mother" cities wherein demand is likely to shift towards these settlements when property prices reach high levels within the main cities. Here, property prices are again likely to increase owing to the increasing demand. There is also the likelihood of increase in sale of luxury and upper segment residential dwelling units, but this is most likely to be restricted in major metros and their suburbs.

Demand for quality office space is likely to increase in 2007 as India seeks to capture an increasingly bigger piece of the global demand pie. Retail development, particularly in metros, is likely to observe higher growth rates as disposable incomes increase. With intermittent supply, demand-supply gap is likely to push up prices for organised retail space.

Increasing global demand for commercial sector is likely to enhance household incomes in the coming year. This is likely to translate into higher paying capacities by households, which may seek to invest in residential real estate at higher levels.
Increasing population growth and migration from other settlements is likely to enhance demand this year, as employment opportunities increase.

Improvements in city-level infrastructure are likely to accord locational advantages to various micro-regions.

Holding capacity of investors, who have already invested in residential units. This segment of demand is likely to cause minor fluctuations in the residential real estate pricing. This year will impact this demand. Investors who will be unable to hold on to the next stage of payments will release their holdings at prices competitive with the supply. However, this is likely to be temporary in nature, and is not likely to have a major impact on the pricing of residential real estate.

The overall outlook is that the sector is likely to be positive and encouraging. Property prices in metros may observe an increment ranging between 5% and 15% depending on locations and local market conditions. Prices in Tier II cities, however, are likely to observe an annual increase of 10-20%, with price stability likely to be observed in certain locations that may be subject to a temporal over-supply condition. Pricing increase in Tier III cities is not expected to be high at this stage.

Overall, 2007 looks to be the year of consolidation of gains as the sector gathers stability while positioning itself for moving into higher gears in the coming years.

(By Santhosh Kumar, COO, Trammell Crow Meghraj)