With over 70% of investors expecting improvement in sales over the next 12 months, the Indian realty market may be heading towards a revival in 2016, a research report by property consultant JLL India and Royal Institute of Chartered Surveyors (RICS) says. And surprisingly, Bengaluru has pipped the Natonal Capital Region to become the second preferred investment destination for the investors after Mumbai. But the positive sentiment is driven by rising demand for commercial realty, not for residential areas.
The average price growth in Bengaluru's residential areas over the last three years have been 23%, which is higher than the average price growth in all other major destinations -Delhi-NCR (18%), Mumbai (22%) and Pune (17%). Areas like Hebbal has seen a 67% growth with average price rising from Rs 4,250 per sq ft in 2012 to Rs 7,100 per sq ft in 2015.However, going forward, experts expect the price growth in residential properties to be muted compared to the previous years.
Alternative: Commercial Properties
Office space is where the new demand and price escalation is expected. To boot, low vacancy levels and availability of good-quality Grade A spaces for end users combined with stabilised rental agreements, top quality asset management and steady rent escalations is what makes Bengaluru a top choice for private equity nevstors in realty.
"PE investors are attracted to Bengaluru as it is a highly corporatised market with good quality tenancies. The IT firms pay decent rents, the lease terms are good and it's a stabilised market where demand and supply has always been kept neck-toneck," says Juggy Marwaha, who heads real estate consultant JLL's South India operations.
Interest from high networth individual is also high in the office space segment as they too want safe rental yielding assets. "The rentals in the residential market is sub-3%. While equity and gold are fluctuating, they are getting stable 8-12% returns from commercial property in Bengaluru," says Marwaha.
Although there is interest from retail investors to buy office space as well, the opportunities may be less.This is because of office space is institutionalised and developers are consolidating their portfolios for REITs.Hence, offloading square footage to retail investors by the Grade-A player's is very limited right now.
"Developers want to hold on to all the investments as they want rentyielding assets in their books. They want to hold on till the REITs come in and encash them only via that route," says Marwaha.
So, in case you want to invest in a good-quality commercial property in Bengaluru, you may have to wait for the REITs to come in, which is not going to happen in 2016. The JLL-RICS survey says most PE investors (66.7%) say the first REIT listings will not be witnessed this year due to issues related to taxation and other concerns.
But you will still find quite a few affordable and smaller parcels in North Bengaluru which may be good investments especially for retail investors, backed by demand from ecommerce and startups in the the area.
Whitefield, mainly because of its infrastructural issues, is not a favourite any more and there is hardly any space left in Sarjapur-Outer-Ring Road stretch. North Bengaluru -from Manyata Tech Park to Hebbal and Yelahanka is the upcoming destination where the investment opportunities are. " North bengaluru (Thanisandra & Hebbal) has better prospects than East Bangalore (Whitefield & Brookfield) owing to better infrastructure and metro connectivity ," says Satish BN, executive director, South India, Knight Frank.
Mid-Segment Residential Growth
The uniqueness about Bengaluru's residential market is that it is a purely end-user driven market where, unlike in Mumbai and NCR, people buy to live. So, investor interest in the market has always been low. "There are no speculative investments in residential properties and the category has to compete with other investment avenues, such as equities, commercial office space and commodities," says Satish B N.
However, mid-range residential projects are a sweet spot. "Owing to the new set of people joining the city's IT brigade, the mid-range segment is doing better than other project and investors can also looking at renting out the properties after purchase," says Marwaha of JLL India.
The price appreciation in midrange segment is high because of the demand and availability of customers in the market. Thanisandra and Yelahanka are the upcoming areas in this region.
"You can expect up to 35% price escalation in Thanisandra and up to 30% in Yelahanka if you buy now and can hold on for next 4-5 years," says Marwaha. Other areas in the North of the city such as Nagawara, Hoskote and Kanakpura are also good areas to invest in, if you are looking at the affordable segment.