Chennai Real Estate Crawls out of Lull; Witnesses Growing Demand and Cut in Inventory

The dampening effects of the demonetization policy on the real estate market in Chennai seem to have started to reverse. The policy, which was announced in November last year, coupled with the real estate bill and the devastating floods that shook the city in 2015, had a back-to-back blow on property rates in Chennai. The result was that the city started accumulating a lot of unsold inventory owing to paucity in demand, although, surprisingly, the rates were not going down.

Now, it seems, the rates of residential properties are coming down notably. And, taking advantage of this emerging trend of price fall, buyers are taking properties on rent instead of purchasing them. According to The Real Estate Management Institute, the average weighted rental value of residential properties in Chennai, as well as some other tier-I cities like Mumbai and Delhi,are on an upswing--somewhere in the range of 8% to 12%. Moreover, media reports suggest that banks and other financial institutions, too, are contributing to this positive development by bringing down lending rates for home loans.

Experts note that there has been about 15% increase in property sales in the first half of 2017 as compared to the same period last year. They attribute this growth to the demonetization policy of last year. A majority of the property rate hikes this year were seen in South Chennai, in relatively affordable places like Mahindra World City, Navalur, Padupakkam, Sholinganallur, and Thalambur.

The spurt in demand has brought about a major reduction in unsold inventory in Chennai, with a supposedly 30% drop in the past two years, according to Knight Frank India. Because there was a bulk of unsold inventory over the past 1.5 years, there were no new flats coming up in Chennai. The real estate consultancy believes that the unsold inventory in the city can easily be exhausted in another six years.

With the real estate market scenario getting better after the demonetization drive, commercial office space demand is slowly increasing. This, according to Knight Frank India, is a sign of employment prospects, which will lead to increasing incomes and housing needs, which means need for more residential properties. The vacancy levels of office space has come down to 10.8% in Jan-Jun 2017 from 22.5% in the same period in 2015. The highest rental growth has been witnessed in the Old Mahabalipuram Road or OMR Business District, in locations such as Guindy and Taramani.

The major contributor to the commercial real estate market in Chennai has almost always been the IT sector. This sector alone accounted for 0.7 million sq ft of office space in the city in this year. However, demand from the banking and financial sector is also increasing. With the limited office space now, and the increasing demands, the weighted average rental values of commercial real estate have increased to about Rs. 55 a month for one square foot.

This is a guest post by Dinesh Dhawde.