Rise and fall of Bengaluru’s realty market

A reality check on the real estate in Namma Bengaluru.

Real estate activity contributes significantly to the overall economic output in India, as it does in most economies across the globe. The sub prime crisis in the US, triggered by the high default rate of sub prime home loan borrowers, has snowballed into an economic crisis that has pulled most of the world into its grip. The co-relation and co-existence of a flourishing real estate sector with a healthy economy has never been more obvious than it is now.  Here’s a reality check on the situation in Namma Bengaluru.

Real estate

(File Pic: Meera K)

Cause and effect of the last two property cycles in Bengaluru

The ascent of the real estate industry in Bengaluru started much before the city became the focus for all things IT. If you speak to local real estate czars who have traced Bengaluru’s real time growth history, they will vouch that there was a bullish sentiment about the city’s prospects from as early as 1993. After the Indian economy was liberalised, Bengaluru – like other metros in India – witnessed a hitherto unseen appreciation of real estate prices. Also, with Hong Kong being handed over to China, a large number of expat Indians headed home, especially towards Bangalore, thus causing a demand spurt. This, coupled with the then state government’s policies to encourage IT growth in the state and city, brought Bengaluru under the real estate spotlight.

Seasoned businessman Prakash Gurbaxani, MD and CEO of QVC Realty, India’s first venture capital funded realty company, says, “During 1994-96 the Karnataka government gave a major boost to the IT industry with its policies and announced development of ITPL and the Whitefield area for the purpose.”

Though the IT industry was in its infancy, Bengaluru held out a certain economic promise. There was huge investor interest and the optimism led to the city seeing property prices increase at an incredible rate. Of course this unnatural growth, had to tone down.  “The appreciation in property values was driven by speculation without too many serious transactions that resulted in projects. In 1997, when the markets crashed, the areas to suffer the most were the suburban regions in Bangalore which had seen speculative growth,” states Gurbaxani. 

In the first half of this decade, India became a crucial and lucrative global economic destination and Bengaluru was at the centre of attention from the global business world. Analysts from multinational real estate services firm, Jones Lang LaSalle Meghraj (JLLM) say that “the investments pouring into Bangalore resulted in creating a solid demand for quality office space, thus re-defining the real estate market in Bangalore.” Bengaluru’s real estate demand has been, and continues to be, driven by IT / ITES and the banking and financial services sectors.

Symbiotically, the economic changes in the nation shaped the real estate industry in Bengaluru, as it did in other key metros of the country. “The industry moved from being an unorganised business to getting organised and professional. For the most part of its history, real estate raised funds from unorganised sources. However, in the last five years, major players in the market have begun tapping organised sources like capital markets and private equity funds. Liberalisation of foreign direct investment norms for real estate has made foreign funds available to developers,” says Gurbaxani.

People from the industry attest that the economic growth resulted in growth of high disposable income groups, which in turn fuelled the scaling up of residential projects in Bengaluru. Villas and premium category apartments became the fad. Attractive tax rebates on home loans and reasonable home loan rates took the real estate market to the next level. Infrastructure wise, Bengaluru grew in this period and the city became home to many campus styled IT parks, Special Economic Zones (SEZs) and Software Technology Parks of India (STPIs) in the IT belt of Whitefield, Hosur and Electronic City. Outer Ring Roads (ORRs) in the city have since become a hotbed for IT campuses.

Seasoned economists argue that it’s easy to spot the signs of a looming downfall after a boom. This unprecedented boom too had its signals, only nobody wanted to stop and take notice. Land prices climbed to ridiculous heights, everybody who was anybody began venturing into the real estate business, greedily eyeing the high returns as prices assumed dizzying proportions. And then the inevitable happened.

The fall in the US financial sector had a domino effect on global economies including Indian economy. Realty companies that had raised funds through the capital markets and private equity funds suddenly started finding themselves in a soup. Funding options began to dry up. Asset values fell. Stock markets took on a bear run. Stock valuations of realty companies plunged and inflation reached alarming proportions. The RBI raised key rates to curtail money inflow in the system. Banks hiked consumer loan rates as also home loan rates. Corporates waking up to pressure on expenditure began to announce lay offs, salary cuts and many such cost cutting measures. Cautious consumers battling multiple whammies began to put off home buying decisions. Demand has since stagnated and fallen drastically.

Effect on Bengaluru

While no industry insider is willing to put an average figure to the quantum price cut, across commercial and residential spaces in the city, various reports suggest that the price cut varies anywhere between 10 to 30 per cent. The price cut is not only a result of excess supply and lowered demand but also due to fall in construction input costs like cement and steel. Fall in global fuel prices and the softening of inflation has also played a part.

‘The biggest positive outcome of the slowdown is the sobering down of price levels. Also, the shake out has displaced smaller, one time developers who were in the game for a quick buck. The market is tilting to becoming more buyer friendly.’ – JLLM

Analysts from JLLM claim that Bengaluru has the lowest office space vacancy levels when compared to other Tier I cities in the country. However, micro markets like ORR and Bannerghatta Road have seen correction in rentals/ prices. Demand for smaller office spaces, between 15,000-20,000 sq ft, is higher than larger spaces.

In the residential segment, the picture is far from rosy. According to JLLM, demand has come down considerably due to buyers’ ‘wait and watch’ policy. Owing to conflicting media reports, city buyers – as in the rest of India – are uncertain about what to expect.

Grade A developers in the city are offering discounts up to 30 per cent on units to attract demand. And some are even doling out attractive parallel discounts in the form of fitted kitchens and furnished apartments, claims JLLM.

However, the biggest positive outcome of the slowdown is the sobering down of price levels to attain more realistic proportions. Also, the shake out has displaced smaller, one time developers who were in the game for a quick buck, claims JLLM. The market is tilting to becoming more buyer friendly. For the developers, “it has given an opportunity to redesign product strategy and focus on designing homes that are affordable. This might result in innovative ways of rationalising costs,” claims Gurbaxani.

Regulations for stable growth

This brings us to a very basic question: at the ground level, how can the formation of another such bubble be prevented? Real estate prices in Bengaluru are fixed by demand and supply factors, usually artificial, given the influence of vested interests. There is no regulatory body or reference rate barriers to restrict registration of sales transactions with exorbitant values.

Illustration: Narasimha Vedala

“It is very difficult to have a regulatory body to govern prices,” say sources from JLLM. “When development becomes prolific, developers tend to fix their own pricing depending on factors like location and land value. And land is a scarce resource.”

However, the National Housing Board (NHB) had launched Residex in early 2007, a housing index which, like Sensex that tracks stock prices, tracks real estate prices. The index was launched in Bengaluru and four other cities, with a plan to eventually extend it to 63 cities. Residex is yet to be functional.

The housing index will assign weights to 12 parameters like location, quality of construction, amenities, surrounding infrastructure and the demand profile of the neighbourhood, among other things, to arrive at an average price of residential property in different areas. The index will be revised every six months to understand how the prices change. See NHB site for more.

The objective of such an index is to provide reference indicators for property transactions, restrict undue price increases and prevent artificial shortages; thus discouraging sales transactions that violate permissible levels. Also presently, the government, tax authorities and other lending institutions use different valuation parameters. After Residex is firmly in place, it can be adopted by all parties to create uniformity. 

What sort of an impact will Residex have on the Bangalore realty market? “If it is implemented, it will be a welcome move, as it will bring about stability in pricing,” says Farook Mahmood, President of Bangalore Realtors Association of India (BRAI), National Association of Realtors, India (NAI) and also owner of Bangalore-based Silverline Realty.

Realtor Ajit Prakash, MD and CEO of Sana group and passionate about the revival of the sector, believes that the introduction of Residex will make the market transparent and efficient and reduce illegal transactions. He believes that the National Housing Board is making efforts to collect data from the micro market and hence the pricing will be realistic and not as broad and impregnable as the guidance value fixed by the government. Kumar  also emphasises that the system will be rid of the graded system of evaluation and bring all stakeholders in a transaction under the IT scanner.


What lessons have been learned to prevent a relapse? Mahmood offers that “Developers should adopt a cautious approach and not get carried away by bullish tendencies triggered by market factors and high demand. The upswing is built over a period of time by various stakeholders of the sector like buyers, investors, stock market etc. Premonition of a downfall is always written on the wall.”

Mahmood also adds that the existence of an oversupply situation will always help keep prices to realistic levels. How can one ensure an oversupply situation? He proposes that government should allocate large land tracts meant for development purpose and either hand it over to developers or partner with private builders for residential and commercial projects. This situation will also help keep land prices under control, because of considerable less pressure on land procurement. And also solve the twin purpose of providing land and opportunity for the government to supply housing for the low and middle income groups.

Adapting to the slowdown

The situation has also caused developers in Bengaluru to shift to small housing projects or affordable housing. Consultants at JLLM opine that major demand across the country lies in the affordable housing segment. They point out that the slowdown has prompted developers to identify and cater to this demand in order to stay afloat. “Instead of the high value + high profit + low volume model they had been following, it is time to make the shift to the low value + marginal profits + high volume model.”

Potential in Bengaluru’s realty market

According to JLLM, “Bangalore, being the most economical of Tier 1 cities on operating costs, along with the availability of talent, will continue to be an attractive destination. Though there may be a slide in the total absorption, the city will fare better, relative to other Tier 1 cities in India. Also, the presence of future demand drivers like telecom, semiconductors, KPO, and so on in Bangalore will further enable the demand to continue in the city, though at a rate more cautious than what was witnessed during 2005-2007.”

Gurbaxani, however, expects some sops from the government to help the sector – which is the country’s second largest employer – overcome the lull.  Land being a state subject, he hopes the state government will bring down transaction costs by bringing down stamp duty and related costs. He also hopes that the local administration focuses on better planned infrastructure and timely completion of projects in Bengaluru. In addition, Gurbaxani hopes that the centre will dole out tax incentives for the much in demand ‘affordable housing segment’, to encourage more and more developers to foray into it. 

BRAI’s Mahmood is very optimistic about the future of Bangalore realty market. He claims that the Bangalore market is the cheapest in the country for the quality it offers and will only emerge stronger in the coming years. He also sees the city emerging out of the present downturn, before other metros.

The next few months will be decisive in being able to set a tone for the real estate sector in the country for some years to come. With banks ready to offer home loans at competitive rates and with prices of mid range and luxury segment housing projects poised to plunge significantly and low cost housing set to gain momentum, housing perhaps will no longer be limited to the privileged.


  1. S Srinivasan says:

    Everyone thinks that once he books a property, say ,an apartment from a Developer/Builder, he is going to possess and live in that property in a reasonable time as agreed in the Sale agreement. High pressure advertising , Home shows and glossy brochures mislead the prospective buyer in luring him to invest his lifelong savings and Bank Loans . Then, the problem starts in getting the property in your possession totally fit for occupation. The delays are enormous, the buyer will get pittance compensation for the delays , will have to pay heavy interest on loans etc. Asking for refund will be a disaster. The builder does not stick to his schedules , the infrastructure like Electric supply, water, Gas, Standby generators etc will be non-existent or incomplete . The builder would have built up his empire and advertise for more prestigious projects leaving you high and dry.He will have enough clout and the buyer will have no voice except to suffer financially, mentally and physically.
    This is the life of property buyers in Bangaluru !!

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