Feb 04 2009, 0530 hrs IST

New boom towns
Tags: Jones Lang LaSalle, Real estate consultants, Real Estate

By Supriya Unni: SAs the bigger metros in India are still struggling to come to terms with corrections in the real estate sector and the consequent shakeout, smaller cities in the country are learning the all-essential survival techniques. Buoyed by the opportunities that these cities offer, risk-averse foreign investors are expected to focus on the perceived safety that these cities offer, a trend that is being reinforced by global economic and financial uncertainties.

Real estate consultants Jones Lang LaSalle has identified 10 tier III cities, in its latest report — India 30: Real Estate Opportunities in Tier III Cities — that offer the strongest real estate potential combined with the lowest market risk.

Among these, Ahmedabad, Chandigarh, Kochi, Jaipur and Nagpur have the biggest potential because of their size, connectivity and market reach. Coimbatore, Mangalore, Thiruvananthapuram, Visakhapatnam and Goa come next in the group.

“Three key factors would affect the long-term economic success of tier III cities — infrastructure, human capital and governance. Any of these cities that invests in infrastructure and education, will be best positioned to succeed. While affordability is at present driving the move into tier III cities, continuing to rely solely on cost saving, relative to India’s major metros will not be sufficient to ensure future long-term growth,” says Anuj Puri, chairman & country head, Jones Lang LaSalle Meghraj.

Chandigarh, Kochi and Nagpur have real estate transparencies similar to tier I and II cities.
“One thing that has helped these tier III cities is the fact that the cost of living is less, so prices are lower — and your rupee goes a longer way,” explains independent real estate consultant Anjum Khoya.

The growth of the office markets across tier III cities is being driven by cost advantages in real estate and labour. While these cities may have robust and diverse economies, the charge in the commercial real estate markets is often led by IT & ITeS companies that have already moved en masse to cities such as Ahemedabad, Kochi, Jaipur, Chandigargh and Thiruvananthapuram.With affordability and talent pools are on the agenda, southern cities such as Kochi, Thiruvanthapuram, Mysore, Coimbatore, Mangalore are also attracting attention. In the peripheral business districts of the tier III cities, office rentals can be 20 per cent less than those in Mumbai.

According to the study, a lot of domestic retailers and mall developers are also said to be moving into the less saturated tier III cities. A third of the 300 new malls, expected to be developed over the next five years, would be located in tier III cities. Most growing consumer markets point to cities in Gujarat and Kerala along with Lucknow and Chandigargh and Jaipur.

Hospitality activity in these top 10 tier III cities is also expected to give a boost to real estate. Budget hotels, luxury resorts are expected to help boost development activities in these areas, especially in Goa, Jaipur, Kochi, Ahmedabad and Agra. “Sizeable opportunities exist within the tier III cities but prudent investors should focus on particular sectors or development types while venturing into tier III markets,”
says Puri.

But some real estate consultants warn against repeating some mistakes, which were committed in tier I cities before the real estate went on a downslide. Says Pune-based real estate consultant, Vinay C Nair, “Over-valuation and consequently overpricing were the two big issues that hurt the real estate sector. Swarming indiscriminately into nascent pockets of realty development will make these cities overloaded, without the required development of infrastructure.” He warned that in a slowing economy, developers may not rush into these their III cities with the same gusto.

A Bangalore-based developer told Financial Chronicle on conditions of anonymity that plans of expanding into smaller cities have slowed down. “We had plans to branch out into tier III cities this year, but we are going slow because of the present market and economic environment,” he said. Nair advises investors to research specifics in each developer’s projects before parting with their money.