A new highway can bring out new real estate opportunities in a matter of years. Its impact on the value of the land surrounding it can take decades to materialize.
That is where many conversations around real estate with infrastructure as the trigger miss out on nuance. A new expressway is commissioned or an interchange earmarked, and immediately thereafter people begin speculating if the nearby land will see demand.
Sometimes they are right, and sometimes not.
What gets missed in the process is demand generation.
Better connectivity can make a site more accessible, but that does not necessarily mean it will be used for more purposes or attract more users.
What matters more is what change in accessibility does for the current and prospective users of the location.
Does it unlock new options? Does it reduce commute time? Does it make the area a viable option for setting up shop or a place to live?
That is when an infrastructure project begins to have an impact on a certain region or even an asset.
Would Better Connectivity Automatically Trigger Higher Values?
Not necessarily.
A road creates accessibility, and demand emerges from this change.
It is helpful to think of demand as friction being taken out of the equation. Shorter and more reliable travel makes a far off suburb a viable place to live for someone who needs to be at work downtown. It allows for cheaper commercial space to come up on the edges of a city for someone who wants to set up shop but has little capital. It makes a logistics company more competitive by virtue of shorter distances to its clients. It gives a developer a chance to think about a land that would have been too far away previously.
Each of these is demand, and the combination of these can drive up value. There is research to show this, too. In Rajkot, Gujarat, researchers found a positive correlation between transport accessibility, infrastructure, and differential land prices. Mumbai, for example, sees premiums command higher prices for being closer to the Mumbai Trans Harbour Link.
Not that proximity to major roads always makes an impact.
But what the examples show is that accessibility has economic value, and it needs to be teased out how it affects a specific site.
What Really Changes With New Highways Coming Up?
The first change is usually in the distance.
Land that was previously too far away for residential or commercial use suddenly falls within range.
A commuter has more options in choosing where to live based on travel time versus before when she had to factor in distance as a limiting factor. A business has shorter logistics chains and can operate more competitively. The movement of goods sees a boost. Families can live further away from a city without adding significantly to their commute.
Then another change can follow. With new commercial and residential options opening up, the ecosystem begins to respond.
More services begin to cater to the incoming residents or workers. Other developers begin to see opportunity in the emerging market. The road now serves as a catalyst for development rather than just a conduit for transporting people and goods.
That is why a road should be seen not as a price driver, but rather as a friction reducer and catalyst for building new demand ecosystems.
Why Interchange Matters More Than Just Being Near The Road?
That is one of the biggest insights we have for buyers looking to benefit from better connectivity.
In many ways, a plot that is two kilometres away from the nearest interchange (but connected by good roads) can have better accessibility than one that is one kilometre away but on the other side where connectivity is poor.
The reason is simple: controlled access. Expressways are controlled access highways. NHAI documents on major expressway projects make this clear. The entrances and exits on controlled access highways are limited to specific interchanges. Buyers need to think in terms of how connected their site is rather than how far they are from the road. This is why the value of a particular stretch of road can be much higher than others. The connection from a plot to the interchange matters as much or more than the distance.
That is why we look at routes to the interchange rather than absolute distance and take a closer look at road conditions. We look at likely upgrades to the road in the future and traffic patterns. Proximity to other transport infrastructure matters, as does the ability of any given plot to be able to handle the traffic.
Connectivity is one thing, but the overall linkages to the broader transportation network matter significantly.
When Would Better Accessibility Begin To Drive Demand?
Normally when there is a use case for that connectivity.
When a transport corridor creates accessibility, it unlocks potential for demand generators in the region.
Industrialization is one such example. An improved road may allow for more commercial traffic to move, but if that begins to enable industrialization in the region, the demand for land comes from a variety of sources. Industrial parks need residential workers, logistics support, suppliers, and ancillary services. This generates demand from multiple sectors rather than just one.
Similarly, residential demand generators are about what the home buyer will use the house for. They are looking to minimize distance to what they need to access. The commuter has specific requirements and will choose where to live based on proximity to their place of work, education, entertainment, healthcare, and other factors. Most real estate demand generators require multiple accessibility nodes to thrive.
The strongest growth stories are usually those where multiple factors come together to create demand.
Infrastructure plays a role in that, but it is not the only element. Our note on how to read the signs of a growing region looks at the others.
What Exactly Do You Mean By Infrastructure Arbitrage?
Infrastructure arbitrage is a good way to think of the difference between what a location is currently worth and what it could potentially be worth if a certain infrastructure project comes up.
A site currently has poor connectivity, but is expected to see significant gains after a major road project. The value of the land in the immediate vicinity may currently not reflect this, and a buyer will benefit from the difference between what the land costs now and what it will be worth after the infrastructure project is completed. However, different players will perceive this value change at different times. Some may realize the benefit earlier on while others will come on board later.
This means there is a potential window for buyers to profit from the anticipated change in land value before it actually materializes.
The key to successful infrastructure arbitrage, however, is that there is an expected change in demand. An announced but unrealized project is not enough. An envisioned but undrawn road will not impact land prices until it can actually be used by the public. The danger in infrastructure arbitrage is the possibility of delays in project completion which could leave buyers waiting for value gains that never come.
Infrastructure arbitrage is about identifying a land where the potential for improved accessibility is realized, but the market has yet to respond.
How Can You Identify These Opportunities?
Some simple questions can help.
- What do the infrastructure projects connect? A road that connects major economic centres has different implications compared to one that connects sparsely populated areas.
- What infrastructure projects are already in place? Industrial, commercial, residential, or tourism generators in the vicinity can give an indication of the potential demand growth.
- Can people actually get to the location? This is sometimes termed the last mile connectivity. A region with excellent highways may not be attractive to certain buyers due to shortcomings in local roads.
- Who will these projects serve? If the future demand generators are commuters, residents, tourists, commercial entities, logistics, or second home buyers, it will affect how attractive the land is to different categories of buyers.
Most importantly, there is one very important question that gets overlooked in the excitement about a new road. How much of the anticipated growth already reflects in current prices? A good location can become a good buy if there are opportunities that have not yet matured or been captured in current pricing.
