The real estate market in Bangalore took off in 1991. It has traced an upward curve in terms of the per square foot rate in all parts of the city, including the green belt. Prices had dropped in 1997-1998 during the nationwide property slump but are now rising beyond the reach of the common man. Let's take a look at some of the factors that have triggered this steep increase in real estate prices:
- Rise in income and expectations of the middle class;
- Boom in IT sector;
- Increase in demand for accommodation for expatriate employees of multinational companies posted in Bangalore;
- Expansion of large Indian companies;
- Reputation of being cyber hub and other technology related industries;
- Availability of premium quality commercial space with the availability of the International Technology Park (Whitefield) and Electronics City. This rapid rise in supply of office space has attracted MNCs to set up shop in Bangalore;
- Increase in number of MNCs coming to Bangalore;
- Long term investments from NRIs being pumped into residential & commercial projects;
- Cut in bank interest rates discouraging people from keeping their capital income in bank deposits;
- Affordable EMIs from banks for all classes of people;
- Fall in bank interest rates for housing loans;
- Bangalore's pleasant climate is a major draw for expatriates, NRIs as well as people from other states, which has led to rising demand for real estate.
Over the years the profile of real estate buyers has changed. During the 1980s, the typical property buyer was usually in his fifties or sixties preparing for life after retirement. Today, because of the boom in the IT sector, even people in their mid-twenties are earning enough to buy real estate in Bangalore. But the scenario has changed lately, where even the highly paid software professional is finding it difficult to buy real estate in some of Bangalore's prime localities. The IT slowdown, particularly after the 9/11 attacks on America, has also hit software professionals in terms of their annual increase in salary. In short, the rise in salary levels has not kept pace with the rise in real estate prices since September 11, 2001. People thought that real estate would hit a downturn in the wake of the IT slowdown post-9/11 attacks, but this was not the case. If anything, real estate prices have been spiraling by the week and are reaching levels that are out of the reach of salaried people.
The younger property buyer from the software sector is typically in his late twenties or early thirties with a salary around Rs 50,000. Let us look at an example of a real estate sale that happened in 2002 and 2004. In 2002, the market value of residential land in JP Nagar was in the range of Rs 1300-1400 per square ft. So a 1200 sqft built-up house would have been in the range of Rs 20 lakh. Against a loan taken at 11% per annum, a price tag of Rs 20 lakh was within the reach of a person earning around Rs 50,000 per month. In 2004, in JP Nagar, the real estate property value ranges from Rs 2000- Rs 3000 per square ft. So the same 1200 sqft built-up house is now priced around Rs 35 lakh. A price tag of Rs 35 lakh is now out of reach for a person on a salary of around Rs 40,000 - Rs 70,000 per month. So, if you look at the rate of real estate growth and compare it with the rate of salary increase for a person working in the very lucrative software industry, the latter has not kept pace. I have taken Bangalore South in my example as it has experienced the most rapid growth in real estate prices.
If you compare the graphs above, it is obvious that the steep increase in real estate prices has outstripped the increase in salary of an IT professional. It is now turning into a market where both husband and wife are employed and can together afford to buy real estate. Average property deals are largely taking place in the Rs 20-40 lakh price range. Properties above Rs 40 lakh are either unaffordable, or prospective buyers have serious doubts about the sustainability of price levels in the long term. Let's evaluate the real estate growth in Bangalore. By and large, most areas in Bangalore have experienced rapid growth in property prices over the past decade. To determine the growth rates, we will use the average per square foot (sqft) sale price over the past ten years. We will consider Bangalore South for this example, which has experienced rapid growth. Let's take Jayanagar/JP Nagar/ HSR Layout. We will take the per square foot rate increase in these areas over the past decade and also the number of houses sold in the past 5 years in these areas.
One can see a steep increase in the price per square foot in all the areas. Even though Jayanagar is an older and more developed area, compared to the other two, we see prices in JP Nagar & HSR Layout narrowing the gap with
Jayanagar. Interestingly, a more in-depth analysis reveals that prices in the prime localities within these areas are almost the same. For example, 4th/5th Block of Jayanagar , Sector 6 of HSR and 1st, 2nd & 3rd Phase of JP Nagar have almost the same per square foot rate for land, with Jayanagar ahead of the other two by a mere Rs 100-200. The graphs below show the number of transactions for land or houses sold in these areas in past decade.
Going by the number of property deals that have been transacted in all these areas far the past 10 years, we see a dramatically steep increase in the rates in JP Nagar and HSR layout followed by Jayanagar. The per square foot rate in Jayanagar has increased in tandem with HSR and J P Nagar, even though fewer sales have taken place. Here Jayanagar seems to have taken advantage of the hike in real estate prices in the other developing areas. Another factor that may have boosted prices in Jayanagar is that supply of available real estate is lower compared to demand. While JP Nagar and HSR Layout (particularly the latter) are upcoming localities, vacant plots are easily available unlike in Jayanagar. However, the market forces of demand and supply are openly at play across Bangalore with prices rising fast on the back of strong demand.
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