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Property update: Why investing in small cities makes sense

JLL India  

The article has been written by Sanjay Dutt, CEO – Business, Jones Lang LaSalle India.


The demand fundamentals of the India story are now focused around all cities that have sufficient economic activity, be it industrial, service sector-driven or incentive-driven programs by the State Government. In Gujarat, which has seen considerable industrial progress, the key cities of Ahmedabad, Surat and Vadodara come readily to mind. Baddi in Himachal Pradesh and Pantnagar and Rudrapur in Uttaranchal attracted a lot of residential developers that met with success, thanks to proactive government policies.
 
In the South, Coimbatore, Vizag and Kochi emerged, either thanks to a large investor segment or as the outcome of sufficient economic activity. Towards the West, Pune, Nasik and Nagpur are noteworthy in this context. In all cases, developers positioned their development close to industrial hubs, targeting a totally different price segment and making the most of it.
 
What Went Wrong
 
That said, every developer was inspired to create a national footprint six to seven years ago. While this was a worthy ambition, it was poorly conceived as a plan since many of them did not factor in state government-level regulatory challenges such as local municipal laws. They also did not consider that they may not have had the requisite financial resources, organizational depth and knowledge of the local markets to manage and execute projects in Tier II and Tier III cities. Nor had they accurately gauged the demand fundamentals of these locations.
 
Such developers proceeded to enter into land acquisition on their own equity and were caught short-footed, not realizing that the property cycles were then at their peak, and that there was bound to be a correction – if not a fall.
 
The Dawn Of Reason
 
Major players are now going to re-align their positions vis-à-vis unexplored territories. There is now a very clear realization that it is extremely difficult to become a genuine Pan India player in every geography and real estate segment. Moreover, developers today have woken up to the fact that there is only limited capital available to real estate players today – capital that is earmarked for residential projects, construction funding against achieved leases and signed contracts, or for cities displaying sufficient demand even in subdued market conditions.
 
In the current context, it makes sense for developers to re-strategize and focus on their core geographies. For example, if a certain developer is extremely accomplished as a residential player in the South, having high credibility and sufficient brand recall in this region, such a company would ask itself how wise it is to experiment in the North or the West, and whether it would not make more sense to expand in the South.
 
Likewise, developers accomplished in IT projects would now concentrate on geographies that feature a healthy IT component, and avoid branching out into cities that lack a sufficient volume of such activity. Such developers would see the virtue of focusing on IT-centric cities such as Bangalore, Hyderabad, Chennai, Mumbai, Gurgaon and Pune, and re-think on plans to invest in cities that lack Information Technology activity.
 
The Edge Of The Local Developer
 
Tier II and Tier III cities still represent a great story, especially in terms of affordable housing for industrial work-forces. However, this story may no longer be suitable for some of the larger developers. These are locations where the strength of regional players will come into play.
 
There is at least one strong developer in every region. These brands have demonstrated that they understand their geographies better than any players who arrive from the outside to experiment on the Tier II / Tier III story.
 
The success of these local developers will inspire larger developers from beyond a region’s borders after the fundamentals of that area’s demand are captured sufficiently and the markets are sanitized in terms of municipal and financial market stabilization.
 
In the next one to two years, developers will have realigned their business strategies sufficiently to leverage the potential of Tier II / III cities that have sufficient market drivers or are witnessing considerable investor activity (such as Kochi, Surat, Mohali and Chandigarh).
 
The Long-Term View
 
When it comes to long-term property investment, there is definitely no reason to look only at the metros. India has the highest rate urbanization among the BRIC nations. 854 million people will live in Indian cities by 2050 - that is more or less the combined population of present-day USA, Brazil, Russia, Japan and Germany. In the coming decade, India will add 95 million people to its already dense urban fabric, nearly one-fourth of its current urban population.
 
India needs more cities, and the ones which are growing now will grow exponentially in times to come. Among the ones that bear watching by long-term property investors are Ahmedabad, Surat, Vadodara, Kochi, Coimbatore, Tiruvananthapuram, Jaipur, Jodhpur, Vishakapatnam, Vijaywada, Chandigarh and Ludhiana.

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