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Bangalore: The great spillover effect

City's population growth is resulting in development of suburbs, says study.

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Infrastructure projects in Bangalore have opened up the land and helped alleviate mobility constraints for economic inputs. Many commercial and residential projects have been launched; and this has not only affected emerging micro-markets but also influenced property sector returns in mature and established local areas.

A research project conducted by the London-based Royal Institution of Chartered Surveyors (RICS) has found that the most noticeable effect of the infrastructure investment is to be seen on land value across the city. The report on the findings remarked: “While investor presence is prominent, end-user activity in commercial and especially residential sectors is driving compression in cap rate in many areas.”

The result is there for all to see. A number of property sector developments are to be seen across local markets like Kanakapura Road, Magadi Road, Peenya, Bannerghatta Road and Mysore Road, which, according to the RICS study, “appear to have resulted from spatial spillover effect of a number of physical infrastructure projects.”

Another thing is obvious. Increasing demand for both commercial and residential space due to the strong growth in Bangalore’s IT and knowledge industry has outpaced supply and led to a significant demand-supply mismatch, and thereby exerting an upward pressure on capital values, the report found.

The study, ‘RICS Research – Sectoral and Spatial Spillover Effects of Infrastructure Investment: A Case Study of Bengaluru, India’, has been authored by Anupam Nanda of the University of Reading and Piyush Tiwari of the University of Melbourne.

There was a backdrop to the study. “An important aspect for the economic policy formulation in a developing country is the understanding of the relative significance of the informal sector. There are quite a few studies which explored the subject in the developed countries. However, evidences from the emerging economies are quite limited. In this study, we tried to ascertain the effect of infrastructure spending on the local and regional economies, using the case of Bangalore,” the authors wrote.

And there are some lags in the market too. According to Nanda and Tiwari, “The length of lag in the market adjustment appears to depend on local market structure and severity of market constraints like presence and strength of the informal sector. For example, Tumkur Road and Mysore Road micro-markets are growing at a slower pace as compared to other micro-markets of the city. Such spatial variation in impact of infrastructure investments is heavily influenced by location of the project and size of the infrastructure endowment in local areas.” So, it comes back to infrastructure.

As does the cascading effect. Developments in the office sector is triggering residential sector activity, as an increased labour force is creating demand for residential buildings.
Such sectoral spillover effect is evident in the Kanakapura Road area. The primary growth driver behind residential developments here has been proximity to the work places like Bannerghatta Road and Electronic City and also closer to well-known IT company campuses like Wipro and Infosys, the RICS researchers observed.

Locations such as Whitefield and Electronic City witnessed shortening of yields prior to 2005 due to the preference of these locations by the IT industry (major driver of the economy in Bangalore) over Central Business District and secondary business districts.
However, after 2005, the relocation of the international airport and delays in other infrastructure development projects impacted property yields in these locations.

The authors put in a word of caution too. “There are significant bottlenecks (such as regulatory framework, government controls and other institutional constraints) that add to lagged effects. Unless such bottlenecks are mitigated or removed, the desired policy outcome may not be achieved,” they said. And as a result, “the growth of the real estate sector is thwarted by infrastructure bottlenecks and to some extent this is reflected in softening of commercial property cap rates in locations like Whitefield and Electronic City, which have been affected by shifting of airport to a location 50 km away and delays in transport connectivity projects.”

THE HIGHS AND LOWS
Infrastructure projects in Bangalore have opened up the land and helped alleviate mobility constraints for economic inputs.

Office and residential sectors are responding to the infrastructure investment quicker than the industrial sector.

After the completion of infrastructure projects in late 2000s, many locations have been experiencing consistently high absorption and substantial supply during last few years.

Most noticeable effect of infrastructure investment is seen on land value across the city.

Strong growth in Bangalore IT and Knowledge industry has led to significant demand – supply mismatch, exerting an upward pressure on capital issues.

Locations such as Whitefield and Electronic City witnessed shortening of yields prior to 2005, due to preference of these locations by IT industry over central and secondary business districts.

Results from Cap Rate modelling confirm that investors have generally been backward looking.

Macroeconomic factors such as general risk spread in the economy have also affected yields at the local level.

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