INDIA’S TOP RESIDENTIAL DESTINATIONS TO INVEST IN Investment Advisory Report November 2012 INVESTMENT advisory REPORT India’s Residential Destinations This reportLGHQWLƪHVthe INTRODUCTION top residential destinations in the country from the investment point of view Balancing return with the associated risk is the property is generally done with leverage in the over the nextƪYH focal point of any investment decision. Equity and form of a housing mortgage. This leverage further years (2013-2017) debt are considered to be the mainstream asset increases the potential for earning higher returns FODVVHV+RZHYHUWKHWUDGHRĝEHWZHHQUHWXUQ since the initial equity contribution is a fraction of and risk in both these asset classes is strikingly the property value. GLĝHUHQW:KLOHHTXLW\DVDQDVVHWFODVVLV associated with high returns albeit with a greater From the perspective of risk, property investment risk score as measured by volatility, a relatively fares better because asset price generally stable debt investment comes with a larger remains stable. It has been established that an compromise on returns. investment in real estate based on sound research can seldom go wrong. In the sense that Real estate, the third mainstream asset class, in comparison to an asset class like equity which RĝHUVWKHEHVWFRPELQDWLRQRIUHWXUQVDQGULVN is dependent on several factors related to the From the perspective of return, real estate XQGHUO\LQJEXVLQHVVOLNHSURĞWDELOLW\OHYHUDJH investment in India has garnered superior returns and corporate governance, a real estate in comparison to other asset classes over a long investment is based on the underlying asset. A term. Further, an investment in residential sound research is inherently founded on deep IMPORTANT TERMS USED IN THE REPORT We have developed a TERM MEANING framework built on ‘top- Metropolitan region 7KHXUEDQUHJLRQDVGHĞQHGE\WKHUHJLRQDOGHYHORSPHQWDXWKRULW\ down approach’ in the Zone A Zone is a geographical division of the metropolitan region comprising of several selection of WKHƪYHPRVW localities that possess similar characteristics in terms of access to employment hubs, promising cities and zones connectivity and demography. In most cases, the metropolitan region is divided into 4-5 within them and ‘bottom- ]RQHVWKDWDUHODEHOHGDV&HQWUDO6RXWK1RUWK:HVWDQG(DVW up approach’ in the Destination Destination is the most promising residential locality from the perspective of investment selection of top Benchmark location investment destinations ,GHQWLĞHGEDVHGRQWKHQHDUHVWSULFHFRQWRXUDEHQFKPDUNORFDWLRQLVDQHVWDEOLVKHG residential locality that has saturated in terms of real estate growth and infrastructure development and is considered as the most sought after residential market within the ]RQH:LWKUHVSHFWWRSULFHIRUHFDVWLQJIRUWKHGHVWLQDWLRQDEHQFKPDUNORFDWLRQSUHIHUDEO\ in the same zone, becomes the reference point Property price This map splits the geography of a city in accordance with the prevailing residential contour map SURSHUW\SULFH5HVLGHQWLDOPDUNHWVIDOOLQJZLWKLQDFRQWRXUOLQHFRPPDQGSULFHLGHQWLĞHG by such line Investor Return It is the IRR (Internal Rate of Return) for a typical investor in residential property Assumptions for Size of property: 1000 sq. ft. Investment horizon: 5 years calculating Investor Loan to Value ratio: 60% Mortgage rate: 10.5% pa Return Loan tenure: 20 years Residential Property The price indicates the average capital value in the residential market of the destination Price (` per sq.ft.) and benchmark locations Hidden Gem Locations where we expect the real estate drivers to gather momentum beyond year 2017 INVESTMENT advisory REPORT ,QGLDßV5HVLGHQWLDO'HVWLQDWLRQV understanding of the property market along with Although the prominence of real estate as an From the perspective of the study of factors that drive it. asset class is increasing, the investment research risk, property investment in the subject lags much behind in comparison to Real estate is an asset class where an educated other asset classes. With this report, we will make fares better because asset investor can mitigate the risk and enjoy the an incipient foray into the subject by identifying price generally remains associated superior returns at the same time. the top residential destinations in the country stable Coupled with the other mainstream asset classes, IURPWKHLQYHVWPHQWSRLQWRIYLHZIRUWKHQH[WĞYH this investment vehicle can make for an optimally \HDUV 7KHGHVWLQDWLRQVDUH GLYHUVLĞHGSRUWIROLR,QPRVWFDVHVLQYHVWPHQWLQ residential markets that we expect will real estate is fraught with decisions based on gut outperform in terms of the investor returns on feeling and tips which result in poor account of the appreciation in property prices. We investments. Hence, an investor has to clearly KDYHGHYHORSHGDIUDPHZRUNEXLOWRQÞWRSGRZQ delineate a real estate investment from DSSURDFKßLQWKHVHOHFWLRQRIWKHĞYHPRVW speculation. promising cities and zones within them and ÞERWWRPXSDSSURDFKßLQWKHVHOHFWLRQRIWRS 7KHJOREDOĞQDQFLDOFULVLVRIKDVEURXJKW investment destinations. Since real estate about a striking change in the attitude of activities are not restricted to city limits, we have investors. This change towards expectation on considered the entire metropolitan region in our investment returns, growth and risk does not analysis. Our understanding of the local property single out any one asset class but applies to most market and experience in dealing with of the assets whether it is equity, debt, SDUDPHWHUVWKDWGHWHUPLQHDQXUEDQFHQWUHßV commodity or real estate. Amidst this changed growth equips us to develop the framework for scenario it is evident that an advice on this pioneering report. investment in any asset class cannot be generic. Real estate as an asset class is the foremost While selection of the top residential investment example that will witness the challenge thrown by destinations remains the core of this report, we this tenet particularly in this tough economic DOVRSUHVHQWĞYHORFDWLRQVZKHUHZHH[SHFWWKH scenario. Even within real estate as an asset real estate drivers to gather momentum albeit class, the judgment on investment outlook on GXULQJWKHHORQJDWHGWLPHKRUL]RQEH\RQG In most cases, investment commercial real estate and residential real estate 7KHVHORFDWLRQVKDYHEHHQLGHQWLĞHGDVÞKLGGHQ in real estate is fraught FDQQRWEHDXQLĞHGRQH7KHGRPLQDQWIDFWRUV JHPVßLQWKHUHSRUW that drive investment returns for both these are with decisions based on diverse to a great extent. Hence, the investment gut feeling and tips which opinion should take into account each of these result in pOor factors. investments. Hence, an investor has to clearly delineate a real estate investment from speculation INVESTMENT advisory REPORT India’s Residential Destinations APPROACH FOR IDENTIFICATION OF THE TOP RESIDENTIAL Regional growth within a INVESTMENT DESTINATIONS city is anything but even and the direction of such growth is a critical factor in determining the fate of a particular India residential property Urban centres Top 100 cities Top 100 cities based on population Top 5 cities Business activity: Banking penetration, hotel room demand, air passenger traffic Infrastructure development: Current and proposed infrastructure expenditure Zone Employment: Occupied office space, industrial activity Social & physical infrastructure: Analysis of development plan of respective authorities and extensive field survey Destination Connectivity with important locations Access to social infrastructure Special factors: Proximity to premium office space, land availability, lifestyle shift, planned development INVESTMENT advisory REPORT India’s Residential Destinations From the growth and METHODOLOGY & investment perspective, zones that have high APPROACH concentration of business activity at present and projections of meaningful Selection of top cities in the country increment in future will have a comparative advantage over others The top residential destinations have been picked expenditures were taken as proxies for that have saturated on from the universe of all urban centres in the infrastructure development. The cities were this country. In this multi stage selection, each ranked on these individual parameters and based parameter was chosen in a manner that captures on the average ranking Mumbai, Delhi, WKHFDXVHDQGHĝHFWUHODWLRQVKLSRIVXFK Bengaluru, Chennai and Pune emerged as the top parameters with the growth of residential ĞYHFLWLHV development in the city. With the fundamental prerequisite already in The population base of a city is a crucial indicator SODFHWKHVHĞYHFLWLHVDUHZHOOSUHSDUHGWR RIWKHSRWHQWLDORILWVKRXVLQJPDUNHW,QWKHĞUVW participate in the growth trajectory for the VWDJHRIVHOHFWLRQWRSFLWLHVZHUHLGHQWLĞHG foreseeable future. While a framework was based on their population. The extent of business SUHSDUHGDQGWRSFLWLHVZHUHLGHQWLĞHGRXU activity and thrust on infrastructure development HQGHDYRXUZDVHYHQPRUHVSHFLĞF:HKDYH DUHFULWLFDOIDFWRUVDĝHFWLQJWKHKRXVLQJPDUNHW striven to provide a crystal clear view on and accordingly these selected 100 cities were investment destinations for a typical investor in a studied. Banking penetration, hotel room residential property. This objective meant GHPDQGDQGDLUSDVVHQJHUWUDĠFZHUH LGHQWLĞFDWLRQRIUHVLGHQWLDOGHVWLQDWLRQVWKDW considered as surrogates for business activities would outperform others on the investment return and current and proposed infrastructure scale. Selection of zone within a city Regional growth within a city is anything but even the kind of employment generated by such and the direction of such growth