Southern real estate market: Hotbed of growth & opportunity

Shrinivas Rao, FRICS, CEO, Vestian

Indian real estate industry is gathering steam on the back of increasing economic activity, rising income levels and a spurt in foreign investments. The growth in the sector is also being aided by a host of policy initiatives (such as GST, RERA, and demonetization), constant push for infrastructure development and promotion of manufacturing through Production Linked Incentive (PLI) scheme in various segments of the traditional and new-age economy.

The government has also announced various schemes and policies to boost infrastructure in the country. It has trebled its spending on infrastructure under the Union Budget 2023-24 compared to 2019-20. The National Infrastructure Pipeline, Bharatmala Pariyojana and PM GatiShakti Master Plan have been introduced to improve India's logistics network. Southern cities are also likely to benefit from these initiatives as the connectivity between North and South will be boosted. Therefore, Bengaluru-Chennai, Bengaluru-Mumbai, Chennai-Kanyakumari, Kochi-Coimbatore-Bengaluru, Hyderabad-Nagpur, and Hyderabad-Warangal corridors are also likely to shape the economy of southern states.

As per the quarterly office market report from Vestian 'The Connect Q2 2023', India's three key southern cities - Bengaluru, Chennai, and Hyderabad - dominated office absorption in the second quarter of 2023. These three cities accounted for 59 per cent of the total office leasing in India during the quarter, with a combined leasing of 8.2 million square feet. Here's looking at the three major southern cities of India.

 Bengaluru

Bengaluru was the first city in India to announce an IT Policy in 1992 to capture the IT-ITeS industry. The growth was further amplified as the city transformed from an IT hub to the start-up capital of India. The existing IT-ITeS industry provided a conducive environment for the nurturing of the start-up ecosystem. Combined with the availability of investors, funds, facilities, business environment, and skilled talent, the start-up ecosystem saw exponential growth in Bengaluru.

This is reflected in the fact that of the total 108 unicorns in India, 41 are headquartered in Bengaluru. This has led to a spurt in demand for all asset classes in the city. The city's geographical boundaries expanded significantly in the past couple of decades to accommodate this growth. Furthermore, Hurun Research Institute has identified 147 start-ups in India that can turn into unicorns soon. As per their research, Bengaluru topped the charts with 53 future unicorns. This may further push the city's growth.

However, massive migration of people from other states to the city, owing to job opportunities, has led to population explosion and put a huge stress on the existing infrastructure of the city - traffic snarls and water shortages being a direct fallout of the same. Improvements in physical infrastructure and decentralisation of growth to peripheral areas are necessary to ease these challenges. Karnataka's dream of becoming a USD 1 trillion economy needs to go through the path of holistic development of Bengaluru city.

Chennai

The city has been an old trade centre due to its proximity to the Chennai port. The economy of the city was majorly driven by export-import of goods which saw major automobile companies to set up their base here. Due to the presence of large automobile and auto ancillary companies, the city is widely known as 'the Detroit of India'. Later, it witnessed exponential growth in the office sector due to the rise of IT-ITeS sector along the OMR stretch. This led to an increase in demand for residential units around that area. As time progressed and new asset classes emerged, the city captured a significant share of the data center market as well. Currently, it is the second most desired market in India after Mumbai for data centers, due to the availability of sea data landing cables. The city comes with its own set of challenges in terms of infrastructure. Floods in the past couple of years have exposed the over-exploited physical infrastructure in the city which needs to be addressed, to attain its desired growth trajectory.

Hyderabad

Being the capital city of the newest state of India, Hyderabad is widely known as the 'Pearl City of India'. However, the city has transformed from a traditional business market for pharma to a hub of IT-ITeS companies. Competitive rentals compared to other metro cities, abundant skilled workforce, and world-class existing infrastructure has enabled the growth of residential, commercial, retail and other asset classes. The city is rapidly expanding towards the west and south to accommodate the growth.

Centralisation of growth in the micro-markets of West Hyderabad is a cause of concern. Various infrastructure projects are planned to ease the commute and distribute the growth to other parts of the city.

Outlook

The major cities of southern states are strategically located and enjoy geographical advantage. These cities are connected through all modes of transport, enabling seamless movement of goods and services between domestic and international markets. International business through sea routes is an added benefit for southern states as it is the cheapest mode of transport. Overall, port-related economic activities have also shaped the economy of these states for decades and will continue to do so.

Southern states have embraced new avenues of growth in the past couple of decades as large multinational companies set up their bases. The ever-expanding IT-ITeS sector is expected to boost the economy further and provide employment on a large scale. This may provide impetus to the real estate sector in these states.

As per market estimates, the commercial sector is expected to grow at a CAGR of 6-8 per cent over the next five years with increased focus on sustainable buildings. It is also estimated that the residential real estate market in southern India is expected to grow at a CAGR of 5-7 per cent over the next five years. This growth is expected to be largely driven by new-age real estate asset classes such as co-working, data centre, senior living, student housing, life sciences, etc.

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