Real estate market dynamics of Bengaluru

Bengaluru is known as the “Silicon Valley” of India because 40% of all companies are in the service sector and is a hub for Information Technology (IT). The city has consistently ranked among the top 20 destinations for investment in South Asia Pacific (SilliconIndia 2015). It has also become a favorable destination for a wide range of citizens, from the middle-class working population to the high class industrialists and even retired people for a number of reasons. This trend picked up after 2000, when India became the preferred destination for software development. It propelled the city to the top spot in India for short and long term investments. This also created an initial boom in its real estate market (The Economics Times 2015).

However, recently this city like all other cities in India is experiencing a reverse trend in real estate market. This article mainly focuses on real estate sector of Bengaluru city, decoding its demand and supply dynamics. In addition this article will also analyze the impact of recent macro-economic changes on it.

Bengaluru a better destination for investment 

According to Cushman & Wakefield (2015), Bengaluru has proved to be a favorable destination for short and long term real estate investment. The study shows that there are very less fluctuations in prices of rentals and yields on rents have been high (2-4%) as compared to other metro cities like Mumbai (1-2%). Apart from rental yields another reason why economic confidence of buyers is intact here due to less number of delayed projects and less piling up of unsold residential units as compared to other cities like Delhi NCR and Mumbai. Hence, this city is facing more absorption of property (sale and renting out) unlike other parts of India (Financial Express 2016).

However, due to several macro-level changes that have transpired in a past few months such as demonetization, implementation of Real Estate Regulatory and Development Act (RERA) and announcement of GST, the number of new launches has decreased by 70% in 2016 when compared to 2015 (Magicbricks.com 2017b).

Major Investors in real estate market of Bengaluru

Despite an increase in the inventory of commercial and residential properties in Bengaluru, real estate market is observing a steady demand for affordable housing on the outskirts of the city. Availability of large land parcels at lower prices and improvement in road infrastructure has prompted a rise in investment in these areas. The advantage of investing in the peripheries of Bengaluru is cheaper and promises growth in demand in the future. The majority of the demand of property in these areas are coming from the workforce employed in the companies within the automotive, engineering and other technology-based industries located on the outskirts of Bengaluru (NDTV Property 2016).

Demand and supply of real estate market in Bengaluru

In Bengaluru’s real estate market, the demand for both the commercial and residential space is increasing at a faster pace. The major reasons behind the growth are;

  • higher rate of migration of working population from other locations to Bengaluru,
  • increase in demand for commercial offices
  • improvement in infrastructure in the form of Aerotropolies or City Side Development and
  • Transit Oriented Development (ToD) (PwC 2016).

However this supply has not translated into a proportionate rise in demand due to the recent pile up of unsold stock, policy changes such as Benami Transaction Act, rise in construction costs and financial constraints faced by buyers. The situation of demand and supply is different for residential and commercial property.

Residential property demand and supply dynamics

The demand for allocation of certain percentage of developed land for the affordable housing segment has picked up in recent months. Residential housing sales in Bengaluru have seen 9-10 per cent growth over the last two years in spite of subdued markets in India (Financial Express 2016).  The demand of luxury housing is also gaining momentum especially in South Bengaluru. The reason for this trend is the increase in high end consumers or high net worth consumers, potential investments made by Non Resident Indians (NRIs’) and increase in the younger population demanding premium houses (SilliconIndia.com 2015; 99acres.com 2016)

Though the rising demand may increase the supply of residential apartments, the execution of new projects will be slow due to the presence of various factors like RERA and Land Acquisition Bill. The implementation of RERA is a welcoming move for the buyers as they will be able to make more informed decisions due to increased transparency. But developers are not as enthusiastic and are analysing the impact of this Act on their business (Hindustan Times 2016).

In the near future there is expected to be a shortfall in supply of affordable houses, i.e. houses under Rs. 4 million due to problems and limitations faced by real estate developers such as:

  1. shortage of labor,
  2. unavailability of land in urban localities,
  3. delay in getting approvals from the authorities,
  4. rise in construction costs and
  5. financial constraints among home buyers (Sulekha.com 2014).

Furthermore, the recent announcement of the implementation of Goods and Services Tax (GST) of 12% on rented property is expected to affect demand for rental housing in the short term. However the situation will gradually stabilize after a few months. In short, the outlook for residential property in Bengaluru (rental as well as purchase) is favorable for the next decade due to the developmental initiatives taken by the government at state and central levels.

Commercial property demand and supply dynamics

Commercial space is showing an upward movement in demand due to the establishment of technology companies, migration of people to the city and improvement in public infrastructure. For instance, the state government has announced plans to develop 17 Special Economic Zones (SEZ) out of which 12 are based in Bengaluru to promote industrialization. This has spurred a rise in demand for commercial space (indianrealestatemarket.com 2016). Apart from this Bengaluru being a hub of start-ups and e-commerce has seen a greater demand for commercial space than other cities. Particularly in areas such as Electronic City and Whitefield Road.

Given that other major cities such as Sydney and Singapore have reached a point of saturation in real estate development, initiatives like SEZ are good news to global investors. However just like in case of residential property, commercial complexes in Bengaluru also faced a slump after the demonetisation. Most properties are transacted in cash in India, making the industry extremely vulnerable to such policy changes. In the aftermath of the recession, developers had to reduce the prices of unsold stock of constructed commercial property and undergoing construction has also halted (Magicbricks.com 2017a).

The figure below demonstrates the factors affecting demand and supply of residential and commercial housing in India.

real estate market in Bengaluru and the major factor affecting its dynamics

Factors affecting the demand and the supply of residential and the commercial property in Bengaluru

Challenges in real estate of Bengaluru

Due to the large macroeconomic changes that took place in recent months like implementation of Good and Service Tax (GST), RERA Bill, Benami Transaction Act and demonetization, the real estate sector is undergoing a transition phase. The demonetization move was a blow to the industry due to its huge dependence on cash for transactions. This brought a negative sentiment in the real estate market. According to policy analysts, Bengaluru is mostly protected from the fluctuations in price. However, it might observe a sharp decline in property prices especially in South and Central parts of Bengaluru where luxury housing segment is available.

However, of late another new challenge has hit the real estate industry that is job losses. For instance a recent move by IT companies to show the pink slip to thousands of their employees will drastically impact housing property purchase in Bengaluru. In Bengaluru majority of the buyers prefer mid-premium segment housing but after the layoffs. This segment will witness a negative trend (Business Line 2017). Developers might have to sell the property at lower rates because of high bargaining power of buyers.

Furthermore, announcement of lowering of basis points by the Reserve Bank of India (RBI) is not fully disseminated by commercial banks which is very important for growth in investments in construction (SilliconIndia 2015). Construction developers and investors still face high cost of borrowing and passing of the reduced rates by banks is important to encourage more loans for construction.

figure explaining the major challenges in real estate sector

Challenges in Real Estate Market of Bengaluru

Need more investments in infrastructure development

The latest change to occur in the country’s real estate scenario is the implementation of Goods and Services Tax. It will eliminate the problem of multiple taxes. The overall prices of under-construction properties will decrease, giving room to more absorption of the piled up stock of property.

Also, in a policy announcement made last year government Bengaluru was sanctioned Rs.7300 Crore for infrastructural development (The Hindu 2016). The step was taken because of the need to develop urban infrastructure which should accommodate and cater the needs of 11 million people in the city. Only  8% of budget is allotted in Bengaluru for maintenance and operations, whereas in Singapore the figure is 20% (Invest Karnataka, 2016). So, definitely there is a need to improve on infrastructure facilities to match international standards.

In order to take reap the full advantages, there has to be more set of actions needed from the developer end. This includes maintaining transparency in sale process, delivering projects on time and easing the process of loan procurement. Government schemes for urban development such as the Smart City initiative will take time to flourish but private players can do more to improve the status of the industry. This includes development of eco-friendly housing, sustainable development and aiding overall infrastructure development to boost housing demand.

References

Deepti Sharma

Deepti Sharma

Freelance Research Consultant at Project Guru
Deepti is a post graduate in Economics with a specialization in Agribusiness. She has a passion for writing which lead her to work with Project Guru and write for Financial Express, www.smartindianagriculture.in- an agri blog with several other journalists and researchers. She wants to make her career in the field of economics. She loves to travel in her spare time and is a big foodie.
Deepti Sharma

Related articles

  • Challenges faced by the Indian real estate sector The Indian real estate sector has come a long way since the 1990s' by becoming one of the fastest growing markets in the world. It is not only successfully attracting domestic real estate investment but foreign investments too.
  • Real estate market in Mumbai and Pune In the past five years, there has been an undeniable slump in India’s real estate. This was due to reasons such as after-effects of the recession, inflation, inventory pile-up, etc. However the same has not been majorly felt in India’s two metropolitan cities, Mumbai and Pune.
  • Digital India initiative brings new hope to the real estate industry The Indian real estate sector is the second largest employer after agriculture in India. The strength of the Indian real estate market can be attested from the fact that it is expected to touch US $180 billion by 2020 (IBEF, 2015).
  • Impact of macroeconomic factors on the growth of the real estate sector in India In India, the construction business in the real estate sector is the second largest in terms of employment generation. It is next only to the agriculture sector. As an economic activity construction provides employment to approximately 33 million people in India (Nithyamanohari & Ambika, 2014).
  • Creating a sustainable housing system in India using green bonds India’s real estate sector has depicted a remarkable growth trajectory over the past two decades. This is due to the growing demand for housing and increased disposable income. Investment has also grown proportionately during this period from domestic and foreign investors in order to […]

Discuss

We are looking for candidates who have completed their master's degree or Ph.D. Click here to know more about our vacancies.