Bangalore realty resilience is more about land than pricing

Led by Bangalore and Chennai, the real estate market in South India may be relatively slow compared with Delhi and Mumbai, but at least it is stable and somewhat resilient to the overall slowdown in the economy.

The reason for this is not that demand is higher in these markets or that builders are careful in pricing. It is availability of cheaper land that makes all the difference.

"Unlike in Mumbai, where scarcity of land makes it extremely expensive, in Bangalore the land developer and the builder get into a JV, where the developer is given an equity stake by land owners rather than purchasing the land himself or using PE players to do the same," said Pankaj Kapoor, MD at property research firm Liasas Foras.

And it is this very model that has permitted developers to still value apartments at least 30-35 percent cheaper than Mumbai as the land developer also gets his revenue share as when the flats are sold.

Small regional players such as Sobha Developers and Prestige have better balance sheets than larger peers

Even Bank Of America Merill Lynch expects Bangalore real estate sector growth to remain slow but steady over the next 12 months"with flat residential volume for the second year in a row, while favorable office demand-supply fundamentals will likely lead to a further fall in vacancy levels."

Another important point to note is that during 2007 through until the end of the first quarter of financial year 2010, the Bangalore property market had collapsed in line with the global economic/real estate slowdown.

While NCR and Mumbai managed to recover quickly because of the huge investor demand, the Bangalore market as a whole dropped by more than 30% during this time, which is why prices are still relatively cheaper here as against the other two cities.

And the sudden surge in Bangalore properties only occurred in the last quarter of FY11-12 due to launches in the mid-income segment by large realty companies such as Sobha Developers and Prestige Estates Projects, said Kapoor.

According to a report by ICICI Securities, sales momentum for Prestige remains strong because it has already booked sales worth Rs 500 crore in the first two months of the current quarter.

Small regional players such as Sobha Developers and Prestige have better balance sheets than larger peers. Their stocks have also fared better because they concentrate on certain areas, unlike players like DLF which tried to exapand in non-core markets and ultimately failed.

The Mumbai and Delhi realty market, where 70 percent of the buyers are speculators, can easily be termed a bubble waiting to pop. Bangalore, however, is relatively (not entirely) safe from speculators where sales are largely driven by IT firms providing sturdy employment and stable incomes to qualified professionals.

But when the demand is genuine, speculators can't keep off. This is the precise reason why private equity investments of at least Rs 400 crore flowed into Bangalore-based developers in the last two months. This investor demand has also lead to appreciation in capital values on the periphery of the metro as the total required size of investment is much lower in the suburbs than for the Central Business District areas.

Sarjapur, Hoskote, Bidadi, Devanahalli and the new international airport areas are considered Bangalore outskirts.

"Soft launch of the Fern Residency at Sarjapur Road for Prestige has received strong response with the company selling 450 apartments at Rs 5,000/sqft (total of 1,300 apartments are to be sold). Another launch at Hebbal (Prestige Misty Waters) of 1mn sqft at Rs5,500/sqft is attracting good enquiries," ICICI Securities mentioned in its report.

What it failed to acknowledge was the rising investor interest in the outskirts of Bangalore, including areas like Hebbal and Sarjapur. According to Dr Roy CJ, Chairman and Managing Director, Confident Group, "In 2003 plots in BMRDA-approved townships were around Rs 200 per sqft. In the year 2012, they are Rs 2,800 per sqft, which means you would have received a ROI of 1,300 percent." And it is this rate of return that has driven investors to these markets.