Chennai Real Estate Market Analysis

Authored by Mark Fidelman

Chennai Real Estate to Appreciate by 10% over the next 12 months

Chennai is a blend of historic and
modern, traditional and advanced urban
elements co-mingled in a unique way.
The growth of Chennai into one of the
major cities in India is attributed to its
exceptional geographical location at the
seaboard of the palar delta. The main
factors, which account for its growth, are
the extent of its surrounding area, its
easy accessibility from the sea route
along with
far-reaching railways. Chennai has

developed as the largest commercial and industrial center in South India, with an
extensive network of transportation facilities including the largest seaport in South India,
an international airport (soon to have South Asia’s largest), some well-laid roads and rail
facilities.
Let us first discuss The Commercial Office Market in Chennai

According to experts, Chennai is expected to witness a supply of approximately 12
million sq.ft in 2007 - subject to scheduled completion of projects under construction. Of
this, nearly 10 million sq.ft. is expected to enter the market in the Chennai suburban and
Chennai peripheral locations. 9 million sq ft is expected to be taken up by IT or IT related
companies, while the rest is spread amongst the various Chennai industries.

Of the 12 million in supply, the India Street expects 80% of that supply will be claimed
before the projects are complete. The remainder will be leased within 6 months of the
structures being complete. The India Street sees no let up in Multi National Corporation
demand for IT space especially along the OMR IT corridor.

So for our 12 Month Office Market Outlook
The India Street further predicts that all major office related real estate zones around
Chennai will increase in value between 5 and 10% but not at the 2006 levels witness last
year.
Now let’s turn to the Chennai Residential Market

Let me mention an article I have written on the subject located at our Indiastreet blog that discusses the India bubble hype. Please review that article so that I need not summarize it here.
Unlike some of the other major cities in India, Chennai’s residential market still has legs.
Home prices are still increasing in the CBD, while new projects on the OMR are selling out quickly. Moreover, a proposed new Floor Space Index (or FSI) along the OMR from
1.5 to 2.5 will allow even greater density which means more profit for developers.

In the high-end market, residential prices in Chennai are creating new benchmarks. The
prices of premium properties have increased over 200% in parts of central and south
Chennai during the past 15 - 18 months.

There is still a lot of nervousness for high end residential properties outside of Chennai
including the OMR due to a lack of temples, quality schools and transportation. The
India Street believes a purchase along the OMR is smart given that most of the foreign
corporations are located there and there is a strong need for quality housing in the area.
Moreover, once the new airport is built, TIS predicts the residential market appreciation
areas will shift out of the CBD to the OMR and new Airport regions.
Finally, let’s discuss the retail market in Chennai

Like everywhere in India, quality retail establishments are hard to find. Yes, there are
malls and yes there are singular cases of quality retail, but until the market is opened up
to multi-brand foreign retail establishments, retail in India is substandard and weak. Yes,
you’ll hear from pundits that the market for retail is strong, but only because the only
suppliers are Indian. Given a choice, Indians will opt for foreign retail brands because
they are better (due to being in a competitive landscape) and we know that Non-Resident
Indians prefer them over similar India brands. Please understand we are generalizing
here, but we know from experience that this is true.

Due to the lack of mall space in Chennai, malls under construction are witnessing high
pre-leasing activity. It’s likely to be a landlord market through 2008. The High Streets
of Chennai continue to be the choice for organized retail as there are only 3 malls
operating in the City.

TIS predicts a 10-15% increase in retail lease value growth during the next 12 months.
The new malls are expected to witness high absorption and low vacancy levels through
2008. Currently demand is driven by local retail establishments like the Future Group
and Reliance. However, if multi-brand foreign retail is allowed, TIS predicts the rental
values will increase by 50% instead of the still robust 10-15% without multi-brand
foreign retail.

In summary Chennai is a better place to invest today than most of the other top cities in
India. That may change in the future, but investing in Chennai is currently a good bet.
Remember however, the Indian real estate market is not a mature market. It is still in a
fledgling stage, in terms of regulations. The markets abroad are much more developed
and structured due to their stringent real estate laws. In places like the US and Europe, no
agent can deal in property unless or until he or she has a real estate licence. The Indian
market is totally unstructured in that sense. Anybody can deal in property, there is no
licencing system so beware of those you partner or work with. Research them thoroughly
and ask the tough questions. India is not transparent, and therefore due diligence is a
must.