Real estate rush

Print edition : August 25, 2006

TIDEL PARK AND Ascendas IT Park at Taramani, the new catalysts of growth in Chennai. - N.SRIDHARAN

The unprecedented growth of the real estate business has changed Chennai's reputation as a relatively sober market.

CHENNAI is experiencing a major real estate makeover. Indeed, the new growth areas are not in the heart of the city; it is the sleepy suburbs that are witnessing frenetic construction activity. Nothing illustrates this boom better than the shooting up of land prices to levels unimaginable even a year ago.

The obvious catalyst for this growth is the phenomenal development of the Information Technology sector in the past decade. But just as important are the new facets of the traditional strengths that the city offers, particularly as a retailing and manufacturing hub. Simply put, IT has led to increasing levels of disposable income in the hands of the young workforce. Their consumerist culture has had important implications for the city. The happenings in the real estate market only testify to this.

Chennai is an important base for all the IT majors, including Wipro, Ascendas, Tata Consultancy Services, Infosys and Polaris. There are several reasons why this is so. The most important one is the city's reputation as a reliable centre for technical education, which results in companies being assured of a steady supply of qualified personnel. Apart from the Tier I companies, there are several smaller ones that operate in the IT-Enabled Services (ITES) and Business Process Outsourcing (BPO) segments.

Not everything that is new is related to IT. International automobile giants such as Ford and Hyundai, telecom majors such as Motorola and Nokia, and retailing majors such as Shopper's Stop and Lifestyle have an important presence in Chennai. Moreover, several mega malls are being planned. There are also indications that the consolidation in the retailing industry could result in larger retail outlets and better-paid jobs.

In order to provide a further impetus, both the Centre and the State government are initiating projects such as the four-lane Chennai bypass Phase II, a cloverleaf structure close to the airport that will directly connect the city to different National Highways. This is expected to ease traffic congestion in the city. The Rs.200-crore project is to be completed by 2008. A six-lane road, replacing the two-lane Old Mahabalipuram Road, leading to the IT corridor is also due for completion.

In order to cater to the needs of business travellers, several business centres have been established in the city. For travellers who combine business and leisure several up-market hotels have been built in recent years. International players such as Courtyard Marriott, Radisson, Hilton and Le Royal Meridien have a visible presence in Chennai. Several more such facilities, including five-star hotels of the Leela and JW Marriott group, are under construction. The city already has a convention centre, the Chennai Trade Centre, spread over 25 acres (1 acre is equal to .4 hectare).

Until about a decade ago a typical property hunter would have been about 50 years old, planning for a house on the verge of retirement. Invariably such persons would have been residents of Chennai or would have hailed from Tamil Nadu. This situation has changed. Real estate developers say the average age of prospective clients now has dropped to 28-35. Young and adventurous, with disposable incomes that are a manifestation not only of the IT boom but also of newer occupations in the service sector, they come from all over the country. Says one real estate promoter: "Chennai's biggest advantage is that it blends the characteristics of a small town and a big metro."

It would be a mistake to think that the boom is entirely driven by the IT phenomenon. The noticeable change in the age profile of the industrial workforce - not just in IT but also in the manufacturing and services sectors - has been made possible by a more flexible approach to labour. Employers across the board appear to prefer a younger workforce, which has implications for the real estate sector.

But this workforce is highly segmented. At the top of the heap are professionals of the IT and allied sectors and those working in private banks and the financial services sector, followed by top executives working in the manufacturing sector, particularly those employed in the private sector and multinational companies. The most important element within this segment is the non-resident Indians who are increasingly buying property in the city. This segment constitutes the core of the "high-value" market in the real estate sector.

Land prices in Chennai have spiralled in the past few years. This means that the traditional bungalow, or `independent house', is beyond the reach of even the wealthiest. The "flat culture", although slow in taking off, has now matured significantly. This makes it possible for owners to get amenities and a quality of life that would be virtually impossible in an "independent house". Swimming pools, penthouses, round-the-clock security, landscaped gardens, play areas for children - all these are standard amenities provided in the new housing complexes.

As land prices increase and the provision of basic amenities come under strain, scale becomes critical in the real estate business. N. Ravichandran, chairman of True Value Homes India Private Ltd., told Frontline that real estate was "more of an organised business", implying that small builders are finding it more difficult to satisfy the discerning buyer.

THE SIX-LANE road under construction, at Taramani.-M. KARUNAKARAN

More important, the economies of scale that accompany organised business make it possible for large-scale builders to offer the amenities that buyers want. "Life in the city has reached a point where a dwelling unit is only a small part of what buyers want," explained Ravichandran. Buyers not only realise that these amenities are critical elements in their new lifestyle aspirations, but also know that these enhance the resale value of their properties. When operations are scaled up, amenities that were earlier considered luxuries now appear within the reach of the new middle class.

Jain Housing and Constructions Limited is regarded as a pioneer in handling large projects. In the past 16 years the company has built more than 3,000 dwelling units, covering more than 2 million sq ft. Its current projects involve another 2.5 million sq ft. The company provides its customers a preferential allotment scheme, which enables them to book built-up property in advance.

Flats are not the only kind of dwelling units coming up in Chennai. For those who have high levels of disposable income, there are builders and promoters who offer "independent" houses, different from the bungalows of yesteryear. For instance, Isha Homes offers middle-class villas with facilities such as food courts, party halls, gymnasia, swimming pools and special recreational play areas for adults and children. Moreover, the project, located near the nerve-centre of the IT corridor, provides dedicated Internet connections, apart from a common sewage plant, black-topped roads and other facilities on the campus.

A new breed of developers has ventured into large projects. Ravichandran, a civil engineer, started his business in 1997 by building in the range of about 25,000-30,000 sq ft per project. In contrast, True Value Homes' Park Villa project, a "premium project launched two years ago at Perungudi close to the IT corridor, is spread over more than 5.25 acres. It consists of 288 dwelling units. Built adhering to the principles of Vaasthu Sastra, the project has virtually created a mini township. It has its own ATM-banking facility, open-air theatre, shopping arcade, play areas, swimming pools and health clubs.

Since the project is located on the outskirts, every need of the residents had to be met in order to make it a self-contained township. Ravichandran said the company's "face changed dramatically" after it completed the project. It is now building residential complexes of 1 million sq ft. He said land prices in the area shot up from Rs.5 lakhs an acre to Rs.50 lakhs an acre since the project was completed.

The real estate market in Chennai has traditionally enjoyed a reputation for being less speculative compared to markets in other metros. Even during the early 1990s, when the sector witnessed a major boom, land prices in Chennai did not rise as sharply as they did in the other metros. That reputation, of being a relatively sober market, has changed for sure.

Ravichandran says the change has happened for several reasons. First, several international companies have set up base in Chennai. "These companies," he said, "are not particularly bothered about rental values. They are more worried about the quality of the infrastructure. They are ready to pay even the rental values in Delhi if they are assured of good quality." In fact, True Value Homes, like other big property developers, is building an IT Park at MRC Nagar with a capacity of 4 lakh sq ft. The company is also planning a 100-acre satellite township near Tambaram. Several major real estate players have entered the market in recent years. Ravichandran predicts that the building activity will soon reach Mahabalipuram, about 60 kilometres from Chennai. One of the most important consequences of the unprecedented boom is that small builders, who were the pioneers of the 1990s boom, are unlikely to remain competitive.

Representatives of larger real estate developers say that in the new situation those without proper project management systems will find it difficult to stay afloat. This is because rising land and building costs require builders to plan projects in order to keep costs under control. Real estate developers say that the boom in the industry has meant that inputs such as steel, cement and concrete are not only costlier but not available off the shelf. This means that builders have to plan their projects in advance. A builder said: "If you need steel or concrete, you have to book a month in advance from the vendors and get the test certification. This means that the different aspects of a project have to be synchronised. This is what is meant by organised real estate business."

The unit cost of a built-up property on a small plot will not be competitive vis-a-vis a large-scale residential township. The clinching factor is that the large project will be able to provide a host of amenities and services that would be simply impossible in a small property. Big developers say that the future of the business is in the organised sector, not in the small builders. There are problems associated with the boom. Land prices have shot up to astronomical levels, there is a shortage of quality manpower, building materials are costly and are in short supply, and, the presence of "trial and error" operators in the business is also a burden for better-quality builders.

The housing business, like any other, is also a segmented one. Property developers have been paying attention to housing projects for the relatively well-to-do sections. The Tamil Nadu Housing Board has been a relatively quiet player in this ongoing boom. Soaring land prices have made the purchase or construction of houses beyond the means of the middle and lower middle classes. Recent reports have indicated that the Tamil Nadu government proposes to acquire about 7,000 acres for the establishment of a satellite town outside Chennai. It is estimated that 30,000 acres would be required to build the township, inclusive of all amenities.

The Chennai Metropolitan Development Authority (CMDA) plans to implement a `single window' system for processing building plan applications quickly. The idea is to devise a system that would provide a "one-stop shop" for building plan approval - from verification of land records to approval of building plans and on-the-spot inspections. At present, applicants have to verify the records of land use and get approvals from the various government departments. Industry sources said the new system would expedite the planning approval process.

The promotion of Tamil Nadu as an investment destination has resulted in prices of industrial and commercial plots becoming costlier than housing plots. The increase in the Floor Space Index (FSI) for IT companies has played an important role in the rise of the price of land for commercial and industrial use. In fact, this was sanctified by the State government's IT policy in order to encourage hardware and software industries and associated services. The policy also encourages private developers to establish IT parks. These IT parks are eligible for various concessions.

Specifically, IT parks are allowed an FSI that is 50 per cent more than the normal limit. The FSI basically sets a limit on the extent to which a builder can build within a given extent of the property. From a town planner's perspective this is important because it indicates the extent to which the infrastructure, in a particular locality would be pressured to meet the needs of the people using the facility. A higher FSI for the IT industry means that, other things remaining the same, the area's infrastructure would come under pressure. If a town authority increases the FSI for IT companies without developing the infrastructure it can result in severe strain on the city's infrastructure. Critics of the CMDA have pointed out that merely increasing the FSI without actually developing the infrastructure has resulted in severe problems, particularly in the management of traffic.

Lured by the enormous opportunities for profits in the real estate business, property developers are now seeking to occupy the industrial wasteland in the city. The old industrial heartland, extending from the northern part to the western part of the city, has particularly attracted them.

One of Chennai's oldest industrial landmarks, the Buckingham and Carnatic Mills in Perambur, is now being developed as a real estate project. SSI Ltd, which acquired the property from Binny Mills, the site of a bitter industrial dispute in the 1990s, is building 5,000 apartments on a 70-acre plot. The Rs.1,000-crore project, with landscaped grounds is projected to change the face of the area which was once a working class suburb. SSI expects to build 1,000 apartments, priced between Rs.30 lakhs and Rs.40 lakhs, every year for the next five years. The company also plans to let a leading private school establish its premises in the township. Also planned are a hospital, a three-star hotel, and a 20-acre commercial area.

The speculative interest in land has resulted in promoters from all over the country flocking to Chennai. Developers from Ahmedabad, Bangalore, Hyderabad and Delhi are now promoting large projects in the city. They are planning integrated townships along the GST Road, on the Tambaram-Velachery Road, at Valasaravakkam, Sriperumbudur, Vandalur and at Siruseri where a major IT park is already located. The extent of land for such projects ranges from 10 acres to 200 acres. Added to this is the government's move to open up Foreign Direct Investment in the sector. Moreover, the Securities and Exchange Board of India has approved guidelines for the Real Estate Mutual Fund, a scheme meant to facilitate investments in real estate property. This could cause prices to spiral out of control. And that may have implications for equity in the real estate business. In specific terms, a roof over the head for the poor could well be in jeopardy.

For the State government, the increasing value of land is a boon. Higher property prices translate into higher revenue collections. In the first quarter of the current financial year revenue collections from stamp duty and registration charges showed an increase by nearly 40 per cent compared to the same period in the previous financial year. Chennai accounts for more than 40 per cent of the total stamp duty and registration charge revenue accruing in the State. The Tamil Nadu government's Registration Department collected nearly Rs.320 crores in the first three months of the current financial year from the three zones of Chennai.

Sources in the real estate business say that nearly 1,000 medium and large residential housing projects are coming up in the city. The buoyant interest rates on housing loans have not dampened the market.

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