Business & Finance Investing & Financial Markets

Realty players shy away from Tier II, III cities

Real estate developers who have stretched themselves to Tier II and III cities may have tough times ahead as private equity players say they will not invest beyond Tier I markets.

When expansion was the buzzword, developers did not hold themselves back. DLF, Unitech, Puravankara, Omaxe, Parsvnath, all announced ambitious plans for cities like Ludhiana,Indore Bhopal, Surat and Visag. Their reasons were prices had become too high in tier I markets.

IT companies like Infosys, Wipro, Satyam and IBM had announced plans for Bhubaneshwar, Lucknow and Chandigarh. According to knight frank, McDonalds was scouting for a premise in Guwahati and it is believed that Biyani too had plans to launch "Big Bazaar". All this was during Q1 of 2007.

Today is a different story. Unitech Corporate Park has seen a 90% dip in their leasing activities in IT-SEZs. And DLF is struggling with the high receivables in its balance sheet, all for DLF Assets Limited which is struggling to find tenants for its IT-SEZs.

Little wonder that the Tier II markets boom lead by the IT and retail sector is not where investors are willing to park their money in.

Sunil Rohokale, ED, ASK Group said, I think PE players realised that the top seven cities like Mumbai, Chennai, Hyderabad, Bangalore, Delhi NCR and Calcutta attracts attention and gives risk adjusted returns which is expected. There is no reason to look beyond these seven cities.

Saurabh Goswami, MD, Walton St Cap (India) said, There is a lack of understanding from foreign investors into these markets. Secondly, the diversification of local economies needs to be better understood. IT is no longer the growth story it once was.

Investors say, land prices have corrected and the pressure is on to bring prices of apartments lower so where is the viability to complete projects. Going forward then, the growth story of tier II and III markets does not look so robust after all.

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