Year-end trends: Small is big as developers aim for smaller projects in tier-1 cities

An increasing number of developers are launching smaller projects in metropolitan cities. We look at the reasons for the emergence of this trend and whether it is likely to continue in the year ahead

The metropolitan and large cities in India, have several real estate micro-markets that are reasonably priced and offer good returns for end-users and investors alike. As these cities tend to have limited supply of land, developers need feasible options, to meet the increasing demand for housing. Consequently, smaller projects are an option that is being explored. Moreover, the general reduction in the sizes of flats, has also contributed to affordability.

Rahul Shah, CEO of Sumer Group, points out that “While smaller projects are an attractive target for developers, given the smaller gestation period and quick returns, luxury housing projects have a niche following that gives it a sizeable market share. People in the metro cities are more concerned about the location of the house than the size of it and are, hence, are willing to opt for houses with sizes that fit their budgets.”


RERA and other government reforms shift the focus to smaller projects

The government’s reforms, like the Real Estate (Regulation and Development) Act (RERA), have also transformed the market into one that is presently driven by demand from end-users. In metropolitan cities, the focus has now moved from premium projects to smaller properties, in the affordable and mid-priced segments, says Aditya Kedia, managing director, Transcon Developers. “The changing market dynamics, is pushing developers to invest in smaller projects in metro cities, as the total project cost is less, as compared to larger projects, while the delivery time is maintained and the retrieval of cost is faster, which, in larger projects, mainly depends on sales,” he elaborates.


Construction and holding costs for real estate inventory

As the marketing costs are also higher in metro cities, the investment needed to sell units in a high-cost location, will be higher than that needed in areas with lower ticket sizes. According to Girish Shah, executive director, marketing and corporate communications, Knight Frank India, “In most tier-1 cities, the available land for the development of residential projects does not lend itself to large-scale projects, such as township developments. Hence, these are relegated to the peripheral locations. Another factor is the cost of holding inventory, which is far higher in tier-1 cities, as compared to tier-2 and peripheral locations.”

See also: How the Real Estate Act is impacting developers’ business plans

Farshid Cooper, managing director, Spenta Corporation, adds that smaller projects also provide financial and geographic diversification, for a developer.

“Most developers think it is easier to construct and sell 200 apartments each in five different locations, as opposed to selling 1,000 apartments in one location. A given local area will only have a limited number of customers, looking to purchase a home. In terms of financial diversification, smaller projects provide developers the opportunity to tide over difficult times, as certain locations may perform better than others and therefore, allow the developer to use his better performing assets to cover the fixed costs of his organisation,” Cooper explains.


Developers find better RoI in smaller projects

Expats and high net-worth individuals (HNIs) have also pushed up the demand for smaller projects in metro cities, as these people prefer smaller, exclusive communities, instead of larger developments. This has encouraged various developers to launch smaller projects, for this selective group. Moreover, developers always look for the value that they can unearth, irrespective of size. “For example, in Mumbai, where land comes at a premium, a developer would prefer to go for a smaller project, instead of a bigger one. Similarly, in Bengaluru, the availability of land in the central business district (CBD) and its nearby periphery, is scarce and expensive. Thus, a developer will always go for smaller projects in these areas,” reasons Ashish R Puravankara, managing director, Puravankara Ltd.


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