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The resilience of middle India
The cranes have not yet fallen silent, but building activity as well as demand for new homes is cooling off in the major cities.
However, smaller cities are such as Jaipur and Indore are now acting as safe havens for India’s real estate sector. A quick look at the data compiled by Propequity , a real estate data, intelligence and analytics firm, shows that new launches and absorption rates of residential units taken on quarter on quarter basis have decreased at a much faster pace in tier I cities, as compared to tier II and tier III cities. The absorption rate is the rate at which the inventories of homes for sale are being cleared.
Large cities such as Mumbai are already very expensive. It would be interesting to see whether the relative robust building activity in the smaller cities is an early indicator of a structural trend, as economic activity becomes more dynamic in smaller cities. For example, consider what has been happening in the software outsourcing and BPO sectors: GE, Infosys, Dell, IBM etc. have already set up projects in cities such as Kochi, Jaipur and Coimbatore. These cities are blessed with lower real estate prices, good human capital, telecom connectivity and decent urban infrastructure — key factors facilitating growth in the IT sector.
Rising house rent, increasing commuting time and an increase in the price of many necessities in major cities could also be forcing people to look for alternatives to purchase homes. There are other indicators of a structural shift as well. A recent report by Nielsen India predicts that Middle India — or emerging cities — would be next marketing frontier for consumer companies. As Mint had reported in December: “400 smaller towns with a population of 0.1-1 million where the market for fast-moving consumer goods, or FMCGs (soaps, toothpaste, deodorants, whitening creams and the like), will surge from $5.7 billion now to $20 billion in 2018 and $80 billion by 2026. Why Middle India? Because these towns—Bhatinda in Punjab, Anantapur in Andhra Pradesh, Nanded in Maharashtra, Jhansi in Uttar Pradesh—form a bridge between the big metropolitan centres and rural India.”
To be sure, there are more immediate reasons why housing demand in the smaller cities is holding out. According to a report by Crisil Research, “India real estate overview”, housing sales in top tier-II cities are unlikely to be significantly hit by higher interest rate. Demand in these urban areas is robust thanks to lower prices while buyers depend relatively more on their own savings rather than on bank loans.
Analyzing Reserve Bank of India data, rating agency Crisil finds that mortgage lending patterns in key metros across India have been stagnant since March 2007. Buying by investors who consider real estate an asset class rather than buying by people who want new homes has become an important driver of real estate activity in the big cities. So they are more susceptible to swings in interest rates or tight cash flows.
This is not the case in tier II and III cities, which leads to steady price appreciation rather than volatile prices.
Source: http://www.livemint.com/2012/02/03185441/Views-The-resilience-of-middl.html?h=A1
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