Analysis of Behaviour of Real Estate Rates in India a Case Study of Pune City

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Analysis of Behaviour of Real Estate Rates in India a Case Study of Pune City
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     Abstract — Decisions for investment, buying and selling of  properties depend upon the market value of that property. Issues arise in arriving at the actual value of the property as well as computing the rate of returns from the estate. Addressing valuation related issues through an understanding of behavior of real property rates provide the means to explore the quality of past decisions and to make valid future decisions. Pune, an important city in India, has witnessed a high rate of growth in past few years. Increased demand for housing and investment in properties has led to increase in the rates of real estate. An attempt has been made to study the change and behavior of rates of real estate and factors influencing the same in Pune city.    Keywords — Real estate, valuation, property rates, trend analysis. I. I  NTRODUCTION  OUSING, being one of the basic needs of human, accounts to high percentages of national transactions per year [1]. The real estate sector has grown to such a monetary size that even minute variations have significant effect on the country’s economic development [2]. These variations are dependent on the value of property and various extrinsic and intrinsic factors affecting the same. Land and property are main components of real estate whose value varies due to demand and supply conditions [3]. Hence, for a developing land market, a common issue that normally emerges is the measurement of asset values for investment purposes [4]. Real estate markets differentiate themselves fundamentally from other other markets as the values of properties are heterogeneous and vary from similar transactions. This heterogeneity exhibited by the real property values needs to be given due weightage to derive a pattern of variation in the values of properties over a period of time [5]. Careful attention should be given to the dynamics of various factors affecting the value of real estate for full understanding of the determinants of the market value [1]. This paper focuses on review of literature related to valuation of properties and assessment of real estate prices. It mainly identifies various factors affecting the rates for properties in Pune city as a case study and their effect on the rates of properties in various localities of Pune region over a period of time. Sayali Sandbhor is Assistant Professor & Research Scholar with the Department of Civil Engineering, SIT, Symbiosis International University, India (e-mail: sayali.sandbhor@sitpune.edu.in). Ravindra Bapat is Managing Director of Bapat Valuers & Consultants PVT LTD, Pune, Maharashtra, India (e-mail: ravi@bapatvaluers.com).  N. B. Chaphalkar is Associate Professor at the Department of Civil Engineering, College of Engineering Pune, Maharashtra, India (e-mail: nitin_chahalkar@yahoo.co.in).  A. Need of the Study In property markets, supply represents the quantity of  properties that are available for sale or lease and demand constitutes the number of possible buyers or renters seeking specific types of properties at various prices in a market within a given period of time [6]. Market value is the most probable  price the property would fetch if sold in a competitive market [7]. It is affected by factors such as buyer and seller each typically motivated and acting knowledgeably acting in their  best interest, price not affected by undue stimulus, adequate marketing efforts made and a reasonable time allowed for exposure in the open market, price represents the normal consideration for the property sold, unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. Asset markets have been playing an increasingly important role in many economies. Policy-makers, thus have become increasingly aware of the fact that sizeable changes and significant periodic corrections in asset prices may lead to financial and, ultimately, macroeconomic instability [8]. No market is continually in equilibrium hence the prices and values differ from time to time. Real estate market is the one that is characterized by cycles of booms and busts. These  booms or bubbles are sharp price increases not justified by fundamentals [9]. Real estate goes through bubbles followed  by slumps as observed from rates in Meru municipality, Kenya [10]. Sinai T. [11] documented several empirical  patterns in real house prices in the U.S. over the last three decades to understand the pattern of boom and bust cycle. The  burst of the real estate bubble in the United States triggered the deepest recession. Real estate market remains consistently under- or overpriced for long periods. The length of time involved may be related to the period it takes for buyers and sellers to move in and out of the market. In the stock market this period is generally short whereas in the property market it is relatively long. General trends may, therefore, emerge and if they can be forecasted, they may prove to be helpful in developing future investment strategies [12]. This needs to be studied in depth considering the contributing factors affecting the value of properties.  B. Indian Real Estate Scenario The real estate sector in India has assumed growing importance with the liberalization of the economy. In Indian real estate cycle, the boom period lasted for a period of six years from 1990 to 1996 followed by the bust from 1996 until 1999. The prices began to level off from 1999 onwards. The residential property prices in some markets have recorded a Analysis of Behaviour of Real Estate Rates in India- A Case Study of Pune City Sayali Sandbhor, Ravindra Bapat, N. B. Chaphalkar H World Academy of Science, Engineering and TechnologyInternational Journal of Economics and Management Engineering Vol:7, No:8, 2013 2465International Scholarly and Scientific Research & Innovation 7(8) 2013scholar.waset.org/1307-6892/17357    I  n   t  e  r  n  a   t   i  o  n  a   l   S  c   i  e  n  c  e   I  n   d  e  x ,   E  c  o  n  o  m   i  c  s  a  n   d   M  a  n  a  g  e  m  e  n   t   E  n  g   i  n  e  e  r   i  n  g   V  o   l  :   7 ,   N  o  :   8 ,   2   0   1   3  w  a  s  e   t .  o  r  g   /   P  u   b   l   i  c  a   t   i  o  n   /   1   7   3   5   7  growth of approximately 15 to 20 per cent in the last four years [13]. The last decade witnessed a frenzied boom in the residential property prices. Rising income level due to information technology (IT), IT enabled Services (ITeS), lowering of interest rates, increased Foreign Direct Investment (FDI) inflow in real estate sector after 2005, has caused real estate prices to increase backed by strong demand. The consequent increase in business opportunities and migration of  people has increased the demand for commercial and housing  properties. This demand in turn is primarily being driven by emerging favorable environment for real estate investment, developments in the retail, hospitality and entertainment industries, economic services, IT and ITeS etc. Real estate index called Residex given by National Housing Board (NHB) of India, shows that among all the cities in India, Chennai has the highest growth rate in real sector whereas Pune ranks third in the list. Hence, a detailed study of variation in property rates in Pune is undertaken for this study. II. C ASE S TUDY -   P UNE C ITY D EMOGRAPHICS  Pune city, the second largest metropolitan city in Maharashtra and sixth largest in India is fast changing its character from pensioner’s city to educational, administrative center and to industrial hub with reference to the IT sector. Population of the city has increased from 4.8 lakhs in 1951 to over 39 lakhs in 2010 [14]. A socio economic study of the city conducted in 2008 reflects that 40 percent of the total  population falls in the age group of 21-40 years, 32 percent in the age group of below 20 years, 20 percent in 40 plus age group and senior citizens constitute around 8 percent of the total population. City has large number of talented young  population with literacy rate of about 81%. Pune gives easy connectivity by various means to major cities in India. The city offers ample job opportunities in various sectors like education, industry, software, production and the service sector.  A. Key Drivers for Real Estate Growth in Pune Pune’s proximity to Mumbai and the competitive & attractive prices as compared to prices in Mumbai city has attracted lot of investors [15]. This has added fuel to the spiraling prices of properties in Pune. The growth in residential real estate market has been largely driven by rising disposable incomes, a rapidly growing middle class, fiscal incentive on both interest and principal payments for housing loans, demanding expectations of aware customers as well as increasing city limits and increasing number of nuclear families. Growth of any area leads to improvement in infrastructure which in turn fetches higher demand for real estate in that area. As the demand for the property increases the rates of properties in that particular area also increase. All these factors directly or indirectly affect the rates of real  properties. Overview of real estate sector in Pune shows that industries like IT, automobile, retail, food processing, hospitality, education can be considered as the key drivers for real estate growth. Reasons these industries affect the real estate are as given below: ã   Information Technology: Pune is fast emerging as an infotech hub. The availability of land in prime locations, coupled with a favorable climate have encouraged the continuous growth of IT park projects. There are about 110 companies registered with the Software Technology Park of India (STPI) and Pune houses all the major ones. The IT industry employs a high number of qualified people increasing the overall demand for housing. ã   Automobile: The automotive sector, comprising of the automobile and auto component sub sectors, is one of the key segments of the economy. Pune is defined as the ‘Detroit of India’ due to  presence of automobile industry units housing the labors and  professionals. ã   Retail: With the influx of professionals entering the city to meet the demands of the ever growing IT industry, the city has been witnessing a fast changing consumer spending pattern. As a result, retail companies are finding it a potential market for high end lifestyle products resulting into better and quality shopping complexes. ã   Food Processing Industry: Food and food processing industries are one of the fastest growing clusters contributing to the prosperity of the city. It has been identified as one of the major fruit and vegetable cluster and is planning a mega food park. ã   Tourism: Pune being cultural capital of India invites large number of tourists per year. The city is considered visitor friendly and safe. Growth in tourism sector has increased the occupancy rate around 50% increasing the demand for hospitality industry. The clearance for the proposed project for an international airport the vicinity of Pune will directly connect it with the rest of the world increasing the inflow and outflow. ã   Hospitality: According to a survey by Federation of Hotel & Restaurant Association of India, a large number of new national and international hotels are coming up in Pune city. This being a service oriented industry; staff requirement is very high creating demand for properties. ã   Education: Pune has been established as an academic hub and  popularly known as ‘Oxford of the east’. Education sector of Pune has witnessed a massive influx of students coming in from all over the country and the world. Out of the total annual influx into the city, 30% is the percentage of students. Above identified drivers are responsible for growth of various areas of Pune in varying proportions. Study of the variation in rates of the properties over a period of time in Pune is carried out as a part of this study. World Academy of Science, Engineering and TechnologyInternational Journal of Economics and Management Engineering Vol:7, No:8, 2013 2466International Scholarly and Scientific Research & Innovation 7(8) 2013scholar.waset.org/1307-6892/17357    I  n   t  e  r  n  a   t   i  o  n  a   l   S  c   i  e  n  c  e   I  n   d  e  x ,   E  c  o  n  o  m   i  c  s  a  n   d   M  a  n  a  g  e  m  e  n   t   E  n  g   i  n  e  e  r   i  n  g   V  o   l  :   7 ,   N  o  :   8 ,   2   0   1   3  w  a  s  e   t .  o  r  g   /   P  u   b   l   i  c  a   t   i  o  n   /   1   7   3   5   7  III.   S TUDY OF P ROPERTY R  ATES IN P UNE C ITY  For the convenience of the study, Pune is divided into 6 zones namely central (old), central (new), northern, southern, eastern and western (Table I). Quarterly rates of all these zones for the past 6 years are collected and average yearly rates computed from the same. It is identified that each zone has one or more prominent key drivers responsible for its growth. The zone and its respective key drivers are as shown in Table I below. TABLE   I I DENTIFIED Z ONES IN P UNE C ITY  Zones Prominent key drivers Central- Old Retail, Education Central- New Education, Hospitality  North Automobile South Retail, IT, Hospitality East Education, IT, Hospitality West Food, retail  A. Trend Analysis A comparative chart of yearly variation in rates (INR/ sqft) for the identified zones is shown in Table II. The rates of  properties in these zones vary from 2005 to 2012 with overall appreciation ranging from 180 % to 490%. Table III gives the yearly percentage variation of rates for the zones Data analysis is expressed in graphical form with X axis representing year, Y1 axis representing rates of properties in INR (or rupees)/sqft and Y2 axis representing percentage variation of rates. A combined plot of the lines of rate variation and percentage variation of rates for individual zones are drawn. Analysis of these graphs (Figs. 1 to 6) helps identification of patterns of rate variation. The yearly percentage rate of change for the zones and rate variation is evident from the graphs given  below. TABLE   II Y EARLY V ARIATION IN R  ATES  Zone Year Central- Old Central- New North South East West 2005 1627.1 2215.6 - 1256.3 1553.1 1343.8 2006 1949.5 3256.3 1497.5 1831.3 2631.3 2128.6 2007 2631.3 5371.9 2407.5 3260.0 4193.8 3398.2 2008 3172.5 7421.9 2811.0 3868.5 4950.2 3810.5 2009 3066.7 7218.8 2627.5 3585.0 4231.3 3265.6 2010 4118.8 8678.1 3055.0 4141.3 5016.7 3690.6 2011 5152.1 10821.9 3562.5 5142.5 6535.4 4467.2 2012 6395.8 12993.8 4230.0 6215.0 7716.7 5487.5 Overall% increase 293.08% 486.43% 182.47% 394.7% 396.86% 308.36% TABLE   III Y EARLY P ERCENTAGE C HANGE IN R  ATES   Year Zone 2005 to 06 2006 to 07 2007 to 08 2008 to 09 2009 to 10 2010 to 11 2011 to 12 Central- Old 16.23 25.80 17.15 -3.66 25.43 19.44 19.15 Central- New 31.49 40.46 24.90 -4.55 15.10 19.09 15.29  North - 37.91 14.47 -7.18 13.65 14.38 15.89 South 31.41 42.27 15.64 -8.72 12.82 19.56 16.27 East 40.75 35.40 15.41 -19.03 17.42 23.06 13.77 West 38.23 35.82 10.17 -13.87 12.08 17.37 17.88 World Academy of Science, Engineering and TechnologyInternational Journal of Economics and Management Engineering Vol:7, No:8, 2013 2467International Scholarly and Scientific Research & Innovation 7(8) 2013scholar.waset.org/1307-6892/17357    I  n   t  e  r  n  a   t   i  o  n  a   l   S  c   i  e  n  c  e   I  n   d  e  x ,   E  c  o  n  o  m   i  c  s  a  n   d   M  a  n  a  g  e  m  e  n   t   E  n  g   i  n  e  e  r   i  n  g   V  o   l  :   7 ,   N  o  :   8 ,   2   0   1   3  w  a  s  e   t .  o  r  g   /   P  u   b   l   i  c  a   t   i  o  n   /   1   7   3   5   7  2004200520062007200820092010201120122013-10-5051015202530  % Change Rate of property Year     %    C   h  a  n  g  e 1000200030004000500060007000 R a t   e of   pr  o p er  t   y  (  R u p e e s  /   s  qf   t   )     Fig. 1 Percentage variation in rate in Central old Zone 2004200520062007200820092010201120122013-1001020304050  % Change Rate of property Year     %    C   h  a  n  g  e 2000400060008000100001200014000 R a t   e of   pr  o p er  t   y  (  R u p e e s  /   s  qf   t   )     Fig. 2 Percentage variation in rate in Central new Zone 2006200720082009201020112012-20-1001020304050  % Change Rate of property Year     %    C   h  a  n  g  e 1500200025003000350040004500 R a t   e of   pr  o p er  t   y  (  R u p e e s  /   s  qf   t   )    Fig. 3 Percentage variation in rate in North Zone 2004200520062007200820092010201120122013-20-1001020304050  % Change Rate of property Year     %    C   h  a  n  g  e 1000200030004000500060007000 R a t   e of   pr  o p er  t   y  (  R u p e e s  /   s  qf   t   )    Fig. 4 Percentage variation in rate in South Zone World Academy of Science, Engineering and TechnologyInternational Journal of Economics and Management Engineering Vol:7, No:8, 2013 2468International Scholarly and Scientific Research & Innovation 7(8) 2013scholar.waset.org/1307-6892/17357    I  n   t  e  r  n  a   t   i  o  n  a   l   S  c   i  e  n  c  e   I  n   d  e  x ,   E  c  o  n  o  m   i  c  s  a  n   d   M  a  n  a  g  e  m  e  n   t   E  n  g   i  n  e  e  r   i  n  g   V  o   l  :   7 ,   N  o  :   8 ,   2   0   1   3  w  a  s  e   t .  o  r  g   /   P  u   b   l   i  c  a   t   i  o  n   /   1   7   3   5   7
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