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BW Businessworld

Good Options In Emerging Cities

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While investment in residential projects is currently the preferred route for investors, commercial and retail spaces  present potentially lucrative investment opportunities, especially in the larger cities. The returns in the residential sector are significantly lower (4-6 per cent) than those in commercial spaces (10-12 per cent). Residential space investment is comparatively a low-risk, low-return option, while investments in retail are a moderate risk/return option. However, capital values are higher in commercial and retail spaces, so they represent larger investments.

Further, since it is more difficult to exit in the case of commercial spaces, it is best to invest in existing, fully-leased assets by reputed developers. The best cities for commercial space investment are Mumbai, Bangalore, Pune, central Delhi and Gurgaon and Noida in the NCR region. Projects in the CBD (central business district) areas of the prime cities are obviously the most lucrative in terms of ROI (return on investment), but office properties in these areas are extremely costly. For investors with more moderate budgets, the secondary business districts are a more realistic option. Nevertheless, it is inadvisable to invest in any commercial property without  getting at least two expert opinions. This is especially true with projects that are under construction, because many developers are cash-strapped on account of the current liquidity crunch. Projected completion dates may not materialise. In residential projects, the focus primarily should be on properties that have potential for assured rental yields and capital appreciation.

This includes residential projects close to workplace catchments, industrial hubs and locations with high aspirational value. The Tier-1 cities of Mumbai and Delhi and Tier-2 cities such as Bangalore, Pune and Chennai are seeing the highest demand by investors. The configurations in greatest demand are 1 and 2-BHK flats in the central areas as well as the suburbs and 3-BHK flats in good township projects on the outskirts.

As with commercial real estate, investors need to take informed decisions on residential projects that are being built, regardless of location and developer. The same negative financial dynamics that are compromising completion dates of many office buildings hold true for residential projects, as well. If an investor decides to avail of the lower rates of an under-construction residential project, he should ensure that at least 50 per cent of the available units in the project are already sold and that construction has progressed according to schedule in at least 50 per cent of the units. Luxury and super-luxury housing should be avoided as an investment route for at least a year, since demand for such units is its lowest at the moment.

HOT PROPERTIES: Mumbai, Bangalore, Pune, central Delhi and NCR give maximum commercial returns (BW pic by Tribhuwan Sharma)

Investors can take an informed call on certain projects in high-value locations, since there is always a core group of HNI buyers who would purchase units in such projects. However, such a call must be taken only on the basis of extensive local-market research.

Non-Metro Property Investment
For investors looking at non-metro and emerging cities, there are quite a few options.

  • Ahmedabad, Surat and Vadodara in Gujarat definitely hold potential. Gujarat is among the fastest-growing states, and it has achieved remarkable progress in terms of industry, finance and infrastructure.

It is also among the states with the highest per-capita income

  • Kochi and Coimbatore are good for investment in South India. Kochi, the commercial capital of Kerala, is a major tourist destination and a growth nexus for medical tourism and eco-tourism, along with a boom in its local IT/ITES (Information Technology/ Information Technology-Enabled Services) sector.

Coimbatore is the largest industrial centre in Tamil Nadu after Chennai, and has transformed into a preferred destination for IT/ITES as a result of lucrative incentives given to IT companies by the Tamil Nadu government. It offers excellent business infrastructure, quality of life, a highly-skilled workforce as well as low cost of living, low pollution, a rapid pace of infrastructure development and a proactive government that is aggressively promoting the city.

  • Towards the north, Jaipur and Jodhpur are good investment destinations. These cities are major tourist destinations. Strategically located on the Golden Quadrilateral, Jaipur has excellent connectivity to Delhi NCR.

Jaipur, along with Ahmedabad and Nagpur — has been identified as a very promising emerging city for the IT/ITES and BPO (business process outsourcing) industry. Construction of the Jaipur Metro project has already begun, and this will enable rapid transit within the city.

  • In the east, Vishakhapatnam is promising. A major port, it is the second-largest city in Andhra Pradesh and is also a major industrial centre for the petroleum, steel and fertilizer industries. The city has a biotech SEZ and industrial developments like that in steel and power sectors are happening in the southern part of the city.

The major growth corridor is northwards, along NH-5 towards Vijayanagaram. The government of Andhra Pradesh has also started an IT SEZ in Rushikonda Hills at Vizag.

  • Chandigarh, the capital of Punjab and Haryana has the highest per capita income in the country.

The Rajiv Gandhi Chandigarh Technology Park, spread over 400 acres, has put Chandigarh on India's IT/ITES map.
Major Indian firms and multinational corporations such as Quark, Infosys, Dell, IBM and Tech Mahindra have set up base in and around the city.

In 2010, Chandigarh was ranked eighth among top Indian cities identified globally as ‘emerging outsourcing and IT services destinations.' The satellite towns — Mohali and Panchkula — are also rapidly developing and attracting a lot of investment.

(This story was published in Businessworld Issue Dated 23-01-2012)