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RESIDENTIAL RESEARCH RESIDENTIAL TRACTION@GLANCE January 2014

MAIN HIGHLIGHTS OF THE REPORT The Residential Traction@Glance  Chennai suffers the onslaught series analyzes the residential of the current slowdown in the market of a city with regards to real estate sector new supply, absorption, ticket  The city witnessed a drop in size split of launched units, sales volume to the tune of 33% unsold stock, price trend, major in 2013 project launches and future  Sluggish buyer sentiments outlook. resulted in decelerating sales over the last four quarters The Chennai residential market is known for its resilience even in the toughest times and this was proved during the 2008-09 period when it remained relatively stable in terms of sales and price as compared to cities like , NCR, Bengaluru and Hyderabad. With 75%-80% of the total demand coming from end-users, scope for erratic price movement is much less in this market. Additionally, the developer community in the city has historically been cautious in their approach towards buyer's sentiment and has time and again resisted the temptation of increasing prices sharply even during buoyant times. This has resulted in the Chennai market being recognised as one of the most stable residential markets in the country.

Market Overview

The year 2013 has not been very kind to the Chennai market LONG TERM (8 QUARTERS) MOVING AVERAGE and like all the other major cities in the country even Chennai TREND OF LAUNCHES & ABSORPTION has suffered the onslaught of the current slowdown in the real estate sector. Factors such as slowing economic growth, 10,000 rising interest rates by banks, high inflation and the weak 9,000 rupee among others have contributed towards building a 8,000 negative sentiment among home buyers. A large number of 7,000 No. of Units home buyers have delayed their purchasing decision and are 6,000 waiting for some sort of positive signal on these fronts before 5,000 committing their life's saving in buying a house. Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Launches Absorption The poor sentiment among home buyers has resulted in a Source: Knight Frank Research decelerating trend in terms of sales over the last four quarters. Since January 2013, absorption levels have been During 2010-2012, more than 94,000 units were launched in gradually declining with each passing quarter reporting a Chennai on the back of a strong demand scenario. Although lower level than the previous quarter. Sales volume has absorption remained steady during this period, it was still not dipped from 27,000 units in 2012 to 18,200 units in 2013 able to keep pace with the number of new launches. This resulting in a fall of 33%. The latest quarter, that is October – resulted in a gradual build-up in unsold inventory which has December 2013, has been one of the worst quarters in terms reached a historic high with more than 40% of the total under- of sales and has recorded its lowest volume since 2008-09. construction units remaining unsold. This could be better However, developers in Chennai have been smart enough to understood by analysing Chart 2 which depicts the number of take cognizance of such a trend and have cautiously reduced Quarters to Sell Unsold Inventory (QTS) in the Chennai market. the number of new launches in the preceding 12 months. New QTS is the number of quarters required to exhaust the existing launches in Chennai have come down from 30,900 units in unsold inventory in the market. The existing unsold inventory 2012 to 20,100 units in 2013 resulting in a fall of 35%. Drop in is divided by the average sales velocity of the preceding eight new launches, in line with sales volume, has primarily quarters in order to arrive at the QTS number for that happened during the second half of the year. This can be particular quarter. A lower QTS indicates a healthier market. further explained in Chart 1 where a comparison between the moving average of launches and absorption has been drawn. The QTS line in Chart 2 evidently shows how unsold inventory This analysis has been done on a long term (8 quarters) has moved from less than 5 in September 2012 to 7 in moving average basis in order to eliminate any volatility due December 2013. This means that while it would have taken to seasonal factors and study the long term trend in launches only 5 quarters (15 months) for the market to absorb the and absorption. unsold inventory as of September 2012, it will take 7 quarters (21 months) for the same to happen as of December 2013. The lines in Chart 1 clearly indicate that the gap between new Although 2013 witnessed a fall in both absorption as well as launches and absorption has gradually reduced since June new launches, the fall in absorption during the last quarter 2012 and reached the minimum level in December 2013. The (October-December 2013) was at a much sharper rate than narrowing gap between these two lines shows that the that of new launches during this period. This has resulted in developer community has reacted swiftly and reduced the further building up of unsold inventory and hence a sudden pace of new launches in line with the slowdown in absorption. spike in the QTS number during October-December 2013. Even the short term (4 quarters moving average) movement of both launches and absorption confirms this trend. Although The above analysis points towards a weakening trend in the this may give a false sense of improving market condition, the health of the market which could have a direct bearing on the true picture cannot be gauged without understanding the prices of residential properties in the city. However, it would impact of the existing unsold inventory in the market. be unfair to bundle the entire city into a single market and RESIDENTIAL RESEARCH

draw conclusions from such an analysis. Since each MICRO-MARKET DEFINITION micro-market is driven by a different set of demand-supply dynamics, the movement in prices could vary across Micro-Markets Locations locations. Hence it is important to delve deeper into each Central , Boat Club, , , T Nagar, , R.A Puram, Adyar micro-market in order to understand their respective demand-supply scenario and its impact on price movement. West , , , , , , Manppakam

North , , , QUARTERS TO SELL UNSOLD INVENTORY (QTS) ,

9 South Old Mahabalipuram Road (OMR), GST Road, East 8 Coast Road

7 Source: Knight Frank Research 6

5 No. of Quarters

4 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 MICRO-MARKET SPLIT OF UNDER

Source: Knight Frank Research CONSTRUCTION UNITS AS ON DECEMBER 2013

Chennai residential market can be broadly classified into four 5% 5% micro-markets with locations within each micro-market sharing similar characteristics in terms of price, quality of 30% projects, buyer segment, infrastructure development and distance from the city centre among others.

Currently, has the largest share of under- 60% construction units at 60% followed by West Chennai at 30%. These two markets together account for 90% of the total market with the remaining two micro-markets sharing a miniscule size of 10%. Since Chennai is land locked from the Central North South West eastern side, its development has spread to the other three Source: Knight Frank Research sides. However, still lags behind in terms of residential development as non-availability of vacant land, narrow arterial roads and lack of employment opportunities New Launches have restricted its real estate growth as compared to other parts of the city. Apart from a few locations such as Tondiarpet, Perambur, Ayanavaram and Madhavaram among Old Mahabalipuram Road (OMR), GST Road and the various others, buyer interest in residential projects in the north has locations between these two roads in South Chennai have remained subdued. continued to witness the largest number of new launches during 2013. The share of South Chennai in new launches has increased from 60% in 2012 to 74% in 2013. The focus of government over the last decade in promoting OMR as an IT/ITeS destination along with the setting up of Mahindra World City on GST Road has created immense HAS employment opportunities in South Chennai. Additionally, the BEEN THE HARDEST HIT IN proximity to Chennai airport, presence of arterial roads and availability of vast vacant land parcels has enabled this zone TERMS OF ABSORPTION to rapidly grow into an emerging residential market. Preference of employees in staying close to their work place DURING 2013 WITH SALES and affordable pricing as compared to Central Chennai has VOLUME DIPPING BY MORE sustained the interest of home buyers in this market. During 2013, South Chennai witnessed a diversified mix of launches THAN 49% COMPARED TO in all the ticket size ranges. Some of the prominent launches during 2013 are Jain housing's La Verde at , 2012. Vijayshanthi Love at Mambakkam and Mahindra Nova at . RESIDENTIAL RESEARCH

CHENNAI WITNESSED A DROP IN SALES VOLUME TO THE TUNE OF 33% DURING 2013, MARKING IT AS ONE OF THE WORST PERFORMING YEARS FOR THE RESIDENTIAL SECTOR IN THE HISTORY OF THE CITY. NEW LAUNCHES IN CHENNAI HAVE COME DOWN FROM 30,900 UNITS IN 2012 TO 20,100 UNITS IN 2013 RESULTING IN A FALL OF 35%.

Share of West Chennai in new launches has drastically come MICRO-MARKET WISE TICKET SIZE SPLIT OF down from 34% in 2012 to 22% in 2013. Unaffordable prices in LAUNCHED UNITS DURING 2013 Central Chennai, proximity to the city centre, presence of employment hubs like DLF IT Park and Ambattur Industrial 100% Estate and relatively developed social infrastructure had 80% attracted immense buyer interest in certain pockets of West 60% Chennai that were located closer to the city centre. This led to 40% a large number of project launches during 2012 in locations 20% such as Porur, Ambattur and Korattur resulting in an 0% oversupply situation. Taking cognizance of such a scenario, <2.5 mn. 2.5-5 mn. 5-7.5 mn. 7.5-10 mn. 10-20 mn. >20 mn. developers seem to have deliberately restricted the flow of Central North South West new supply during 2013 with new launches falling by 59% Source: Knight Frank Research during the year. Some of the prominent launches during 2013 are Republic by Akshaya at Kovur, Dynasty by VGN at Poonamallee- High Road and Prestige Downtown at KK Nagar. Absorption

Central Chennai's share in new launches has reduced to a Chennai witnessed drop in sales volume to the tune of 33% miniscule level of 1% in 2013 against 3% in 2012. Non- during 2013 marking it as one of the worst performing years availability of vacant land, home buyer's resistance towards for the residential sector in the history of the city. South unaffordable prices and poor sales conversion in the existing Chennai, which constitutes the largest micro-market of the projects despite the huge number of enquires have refrained city, witnessed a sharp fall in absorption of 25% during the developers from venturing into new projects in this micro- year. Although this fall is relatively smaller than what the market. Apart from a select premium projects which are under other micro-markets have observed in 2013, the sheer size in construction by developers such as Akshaya, Jain Housing, absolute number drags down the overall market activity in the True Value Homes, VGN Group, ETA Star, Ceebros and city. The slowdown in sales is primarily being observed in Appaswamy among others, new launches have remained projects with a relatively higher ticket size due to larger fairly subdued here. apartment configuration. Projects with compact 2 & 3 BHKs (650-1300 sq.ft.) are witnessing better traction compared to those with larger configurations. Additionally, buyer interest MICRO-MARKET SPLIT OF UNITS LAUNCHED is still low in locations that are away from the city centre on IN 2012 & 2013 the OMR & GST Road with lack of social & physical infrastructure being citied as the key reasons. 3% 1%

3% 3% Absorption in West Chennai, after a stellar performance in 22% 2012 with 24% growth, has fallen down by 38% in 2013.The 34% unprecedented price rise in the range of 10%-15% per annum during the last two years in locations such as Porur, Mogappair and among others has resulted in various projects breaching the affordability level of the target 60% segment here. Such a sharp appreciation in prices seems to 74% have negated the positive traction that the market observed until last year. However, projects offered by small developers 2012 2013 which are less than 15 units in size with minimal amenities are still witnessing good traction as they are offered at a relatively Central North South West lower price than their large-sized counterparts. Source: Knight Frank Research Central Chennai has been the hardest hit in terms of PRICES IN CENTRAL CHENNAI HAVE BEEN ON A absorption during 2013 with sales volume dipping by more CONTINUOUS UPSWING SINCE 2011 AND than 49% compared to 2012. Although the number of units ` 9,000/SQ.FT. HAS BECOME THE NEW BENCHMARK available for sale in this market is very small as compared to FOR EVEN THE CHEAPEST LOCATION WITHIN THIS other micro-markets, developers are finding it difficult to sell MICRO-MARKET. even this inventory. Prices in Central Chennai have been on a PRICES DURING 2013 HAVE INCREASED BY 5%-7% IN continuous upswing since 2011 and `9,000/sq.ft. has become CHENNAI DESPITE SALES VOLUME FALLING BY 33%. the new benchmark for even the cheapest location within this 75% of the total units launched during 2013 micro-market. Additionally, the minimum area of any newly in Chennai cost less than `5 mn. Which is launched apartment starts from 1,500 sq.ft. thereby taking the significantly higher than the 64% figure smallest available ticket size upwards of `10 mn. Appetite for corresponding to 2010. such large investment is limited in Chennai and this is reflected in the dwindling sales number. Pace of price rise in the various locations of South Chennai MICRO-MARKET LEVEL ABSORPTION IN has been relatively slow compared to the other micro-markets of the city. The continuous flow of new supply over the 2012 & 2013 previous four years has created sufficient competition among the various projects located here thereby limiting the scope of 20,000 sharp appreciation in prices. In addition to this, the abrupt 15,000 drop in sales volume since July 2013 has amplified the unsold units 10,000 inventory available in the micro-market making developers of

No. 5,000 jittery about the sustainability of the current price level. This

0 has compelled various developers to introduce schemes such Central North South West as free car parking, stamp duty exemption and free furnishing among others in order to push sales volume. Certain 2012 2013 developers have even used a more direct approach by Source: Knight Frank Research reducing the selling price in the range of 5%-10%.

Property prices in West and North Chennai have been holding Prices steady especially in locations that are closer to the city centre. While the first half of 2013 witnessed a steady price rise in The demand supply dynamics have a direct bearing on the locations such as Porur, Korattur, Mogappair and price movement and the Chennai residential market is no Manapakkam among others, slowdown in absorption during exception to this. Primarily driven by end-users, the volatility the second half had put a brake on this. However, prices in in prices is limited with a steady year-on-year appreciation. locations away from the city centre are observing a downward Since 2010, both new launches and absorption have been pressure as buyer interest in these locations has declined moving in a similar fashion resulting in a relatively balanced dramatically in the last six months. market. This led to a steady increase in prices which have moved up by 33% during the last 3 years. In continuance to Locations such as Tondiarpet, Madhavaram, Perambur and this, prices during 2013 too have increased by 5%-7% despite Ayanavaram have witnessed significant price increase in the sales volume falling by 33%. A relatively sharper fall in new last two years backed by the limited supply of new projects. launches by 35% during the year is the key reason behind Additionally, the existing residents of the area that largely such a trend. Although prices have witnessed an upward constitutes of the business community having offices in the trend for the entire city, not all locations have been privy to nearby localities are generally averse to the idea of shifting to this. other locations within the city. This has ensured steady demand for new projects that have been launched in North Chennai. INDEX OF REAL ESTATE INDICATORS Central Chennai has been able to hold on to the existing price 2.00 level with certain locations witnessing marginal appreciation despite slowing sales volume. Since most of the projects on 1.50 offer cater to the luxury segment with ticket size upwards of

1.00 `10 mn., developers are willing to hold on to the unsold inventory in expectation of achieving higher prices at a later

Index Value (Base:2010=1) 0.50 date rather than selling currently at a discount. In addition to 2010 2011 2012 2013 this, only a handful of new projects have been launched in the Launches Absorption Prices Unsold Inventory last six months limiting the options available to home buyers. Source: Knight Frank Research RESIDENTIAL RESEARCH

While residential prices in Chennai have been gradually country seems to have finally trickled down in this market too. increasing over the last four years, it is interesting to note However, the swift reaction from developers in terms of that the affordability level of the market has also moved in a decrease in new launches, marginal reduction in prices and similar fashion. The share of apartments below `5 mn. in the introduction of innovative schemes such as stamp duty total units launched has been on a constant rise moving from exemption, free furnishing and free car parking among others 64% in 2010 to more than 75% in 2013. In other words, 75% of is expected to revive sales volume in the coming months. the total units launched during 2013 in Chennai cost less than Prices in most of the South Chennai locations will continue to `5 mn. which is significantly higher than the 64% figure remain subdued due to the huge amount of unsold inventory corresponding to 2010. This indicates the rise in supply of available here. Additionally, absence of any mass rapid transit affordable homes despite prices moving up. Increasing system on the OMR is leading to heavy traffic snarls on the number of new launches happening in the peripheral markets existing roads. This has reduced the attractiveness of where the prices are still below `4,000/sq.ft. is an obvious residential locations along the OMR with buyers preferring reason for such a trend. However, there are other factors too projects that are closer to the city centre. Although there is a at play that are contributing to this. proposal to build an elevated road corridor along the existing OMR to ease the traffic congestion, it will take another 2-3 Resistance of home buyers towards large-sized apartments in years for the project to become a reality. These factors will the peripheral markets over the years has compelled continue to hinder the growth of this micro-market and we developers to rethink on the ideal size of an apartment. The expect prices to remain flat with marginal appreciation in average size of a 2 & 3 BHK has been brought down to locations closer to the city centre. 650-1300 sq.ft during the last couple of years from the earlier 900-1800 sq.ft. Additionally, Development Control Regulations (DCR) of Chennai mandate residential projects of West Chennai will continue to attract buyer interest in the more than 1 hectare in land area to construct a minimum of coming quarters on the back of emerging employment hubs of 10% of the project size for lower income group with unit size DLF IT Park and Ambattur Industrial Park. With locations closer not exceeding 484 sq.ft. Since most of the new projects in the to the city centre such as Porur, Manapakkam and Mogappair peripheral markets are being developed on land area above among others breaching the affordability level, traction in 1 hectare, supply of smaller sized apartments has been rising emerging locations such as Poonamalle, Ambattur and consistently since 2008 when this rule came into effect. These has increased during the last two years and is factors have ensured a steady flow of affordable homes in expected to continue in the coming quarters as well. Going Chennai and such a trend is expected to continue going forward, we expect prices to increase moderately in West forward. Chennai.

MOVEMENT IN TICKET SIZE RANGE OF STRONG PREFERENCE OF THE EXISTING RESIDENTS OF NORTH CHENNAI TO RELOCATE LAUNCHED UNITS IN CHENNAI IN NEW PROJECTS WITH BETTER AMENITIES

100% WITHIN THE SAME MICRO-MARKET WILL ENSURE MODERATE APPRECIATION IN 80% PROPERTY PRICES GOING FORWARD. 60%

40% Strong preference of the existing residents of North Chennai 20% to relocate in new projects with better amenities within the same micro-market will ensure moderate appreciation in 0% 2010 2011 2012 2013 property prices going forward. However, such a trend will be <5 mn. 5-10 mn. 10-20 mn. > 20 mn. more relevant in locations that are closer to the city centre Source: Knight Frank Research while the remaining locations will continue to witness pricing pressure in the coming quarters.

With the first phase of the metro corridor expected to be Outlook commissioned over the next two years, attractiveness of the various locations within Central Chennai is set to increase The drop in absorption and launches during 2013 has among home buyers. This will further encourage developers to drastically shrunk the size of Chennai market. Although such hold on to the current price level despite slowing sales a trend was already being witnessed in other major cities like volume. Additionally, absence of any new major project Mumbai and NCR since the beginning of 2013, in Chennai the launch during the second half of 2013 will support this during actual signs of a slowdown begin only after July 2013. The 2014. negative sentiment prevailing among home buyers across the RESIDENTIAL RESEARCH

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Research Dr. Samantak Das [email protected]

Consultancy & Valuation Saurabh Mehrotra [email protected]

Residential Agency Mudassir Zaidi [email protected]

Cities Mumbai Naushad Panjwani [email protected]

NCR Rajeev Bairathi [email protected]

Bengaluru & Hyderabad Satish BN [email protected]

Pune Shantanu Mazumder [email protected]

Chennai Kanchana Krishnan [email protected]

Report Author Hetal Bachkaniwala - Lead Consultant

Knight Frank research provides development and strategic advisory ro a wide range of clients worldwide. We regularly produce detailed and informative research reports which provide valuable insights on the real estate market. Our strength lies in analyzing existing trends and predicting future trends in the real estate sector from the data collected through market surveys and interactions with real estate agents, developers, funds and other stakeholders.

This report is published for general information only and not to be relied upon in any way. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability whatsoever can be accepted by Knight Frank for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. As a general report, this material NCR Office Mumbai Residential Economy & Realty Traction@Glance Traction@Glance Traction@Glance does not necessarily represent the view of Knight Frank in relation to December 2013 November 2013 October 2013 particular properties or projects. Reproduction of this report in whole or in part is not allowed without prior written approval of Knight Frank to the form and content within which it appears.