Have you ever wondered why property prices in a neighbouring town head for the stratosphere while the plot you buy languishes without any gains? Well, as they say, the three Ls of property investment are — location, location and location. Here are two key factors that drive property prices in a market.
Job creation Property prices usually tend to spurt irrationally in new localities when developments are announced, but sustained job growth is what helps support demand and prices in a location over the long term.
Take the case of Coimbatore, which was expected to attract a lot of IT companies since 2007, leading to job growth. The high-income jobs did not grow as expected, as companies decided to expand in their existing locations and the manufacturing industry in the region was also hit by the downturn. As a result, property sales have slowed, hurting price appreciation.
Data from NHB’s Residex Index shows that prices are on a decline, falling by 6 per cent in 2013. On the other hand, the booming IT job market in the Outer Ring Road (ORR) area in Bangalore continues to boost both the commercial and residential property markets in the region, notes Mridul Upreti, CEO, Segregated Funds Group, a real estate private equity fund.
It is also important that the jobs be in a diversified set of industries, rather than concentrated in a single sector. For instance, Chennai offers opportunities for a wide variety of sectors, such as automobiles, entertainment and IT. The large number of jobs in these segments creates a more resilient property market.
One indicator you can use to gauge the job market is by looking at office space demand. The amount of office space taken up in a region helps you judge how robust the residential and retail markets are likely to be. For instance, data from real estate advisory firm Knight Frank shows that office space utilisation in Greater Noida region will increase by 141 per cent in the next three years — giving a boost to the housing market there.
Better infrastructure Demand alone isn’t enough. You need infrastructure development, such as improved road and rail connectivity to keep up with the growing demand. For instance, when metro rail projects are announced, the localities along the route benefit immensely. Even in the downturn, the expected implementation of the Monorail had pumped up property prices in Chembur and Wadala by over 100 per cent in a short span of four-five years, says Ramesh Nair, COO – Business, JLL India, a real estate advisory firm.
Chembur also benefited by the construction of SCLR and the locality is likely to see good price appreciation in the coming years as well.
Additionally, the social infrastructure, such as access to schools, hospitals and retail, must also improve for price growth. For instance, Yelahanka in Bangalore saw swift price rise when the Bangalore International Airport development was launched.
But the lack of organised retail and social amenities and shortages in basic amenities such as water are likely to keep prices subdued for the next three years, notes a Knight Frank’s investment advisory report .
But be cautious about buying into promising developments when they are still unclear. For example, smart cities that were announced in the recent Budget hold promise of job growth and good infrastructure. “But the locations of these cities have not been disclosed yet and the time line is also ambiguous,” cautions Vijay Ganesh – Director – Land and Industrial, Capital Markets, Cushman & Wakefield, a real estate advisory firm. Instead, you may want to go with locations such as Delhi-Mumbai, Chennai-Bengaluru and Amritsar-Kolkata industrial corridors, where the plans of development are already in place.
That said, be cautious when you enter markets you do not understand well, as there may be some subtle factors that can dampen price rise. “Purchase property in a market where you are comfortable, rather than venture out too far,” advises Nitin Goel, Partner – Real Estate Investments, Milestone Capital Advisors, a private equity fund.
Also read: > How to home in on your property