Impact of Telangana on Hyderabad Real Estate

apmapThe long term prospects of investing or buying real estate in Hyderabad has been a major point of debate for the past one year or so. Initially global recession had a deep impact in the entire Indian Realty Markets. The excessive capacities planned during the days of the boom led to correction in prices. The market was slow for almost an entire year, to be blunt the market stalled. Even price corrections were not attracting buyers, as they were suffering from job losses or looking at what seemed like an uncertain future. Over time, Indian economy slowly but surely stabilised and emerged stronger and though Realty prices did not go up significantly transaction volumes started picking up.

Hyderabad went through the exact same cycle like all the other booming cities in India, during this recession hit period and just as the volumes started picking up the city’s real estate was faced with
a new dampener.

The prospect of a separate state of Telangana seems to have made buyers postpone their decisions. Customers scared that the prices may fall and postponing purchases have made most developers uneasy about future prospects of Real Estate in Hyderabad. We can approach this question with an ostrich like mentality and state pompously, like an interested party should, that no such impact would be felt. This would be to deny the obvious. There will be a significant impact of this in the peripheries of Hyderabad, Ranga Reddy and Medak Districts. The land prices in these far flung areas will see a significant dip. This conclusion can easily be arrived at because the immigrant professional in IT, Pharmaceutical, or other sectors has never been an active buyer of these far flung, yet to be urbanised lands. It has been the local residents of the State and a significant portion being from the rich Andhra community who were active both as developers and buyers of these lands. The investments were purely banking on growth of the city and were speculative in nature. The creation of a new state will deplete these speculative investors.

The more relevant discussion is to study the impact in the key micro markets where there is significant residential development for end users.

Let us take a small snap shot of the Micro Markets where a majority of the new projects are focussed.

viewer

Madhapur 3200 1400 650 1150 11.50 38,300
Kondapur 2800 1400 550 850 8.50 28,300
Gachibowli 3000 1400 600 1000 10.00 33,300
Kukatpally 3000 1400 600 1000 10.00 33,300

The FSI Cost to Land cost varies from market to market. Let me just introduce the concept of calculating land cost from FSI cost in these specific micro markets.

The extent of built up area (for a normal 14 floor tower) per acre would be 100000 sft. to 1,10, 000 sft. If you multiply the FSI Cost with total built up area, then you will arrive at an estimated price per acre. An Acre of Land is equal to 4840 sq.yds but to divide the cost per acre we need to take it as 3000 sq.yds, which is the saleable plotted land when you plot an acre of land. Thus, the price per acre divided by 3000 Sq.yds, will give you a reasonable estimate or value for land.

Needless to add it is the value of land that drives the prices of real estate and hence the conclusion that the only impact on cost of a constructed property. The only variable is the cost of land. A 10% further reduction in land prices can only impact the eventual sale price by Rs. 100/ Sft or around 3%. However what one must also consider is that most of these land parcels have been bought at either current prices or higher prices during the boom. The prices of these land parcels had gone up by 30 – 40% before bottoming out again during the recession. Unless the owners of these land parcels face a severe financial crisis they will wait it out and sell land at least at the cost at which it is purchased plus interest costs for the holding period.

To Summarise
1) Land prices in most micro markets have already bottomed out and are more or less at cost price today.
2) No Significant downside even if land prices go down by further 10 – 15% in the very short term.
3) At today’s prices Hyderabad is again offering the cheapest real estate in India- compared to any other city of its size and resources.

Looking at the demographic profile of the residential buyer in the last one year or so, it is safe to say that most buyers are end users and intend to buy apartments to occupy them. The buyer is a working professional or businessman and related to IT, Pharma or Infrastructure businesses. The business growth of these sectors is not dependent on the creation or non creation of a separate state of Telangana. The only factor that is cause for anxiety is the uncertainty that grips the city, with agitations and disruption of work.
Hyderabad’s long term prospects as a city of growth with availability of resources for IT and other sectors of the economy remains unchanged. A drive around the city will show you that Hyderabad’s struggles with the construction of its Outer Ring Road are over. The first phase and the Second phase are ready and the third phase is to be inaugurated by March or April of 2011. These ring roads with arterial connections in place, coupled with Metro Rail by L&T are bound to transform the city into a modern metropolis in a few years. Modern infrastructure and all sectors of the economy including IT back on the growth path are clear signals that “Brand Hyderabad” is on its march again. The city’s real estate is bound to move to higher price levels on the back of most modern infrastructure, affordability and a growing Indian Economy.

Our analysis is that in the short term of 3 – 5 years investing in residential property now will fetch good returns for the investor and is also a good bet for those looking to buy a home purely for self use. The creation of a separate state cannot change that growth story of Hyderabad.
1) Land prices in most micro markets have already bottomed out and are more or less at cost price today.
2) No Significant downside even if land prices go down by further 10 – 15% in the very short term.
3) At today’s prices Hyderabad is again offering the cheapest real estate in India- compared to any other city of its size and resources.

Looking at the demographic profile of the residential buyer in the last one year or so, it is safe to say that most buyers are end users and intend to buy apartments to occupy them. The buyer is a working professional or businessman and related to IT, Pharma or Infrastructure businesses. The business growth of these sectors is not dependent on the creation or non creation of a separate state of Telangana. The only factor that is cause for anxiety is the uncertainty that grips the city, with agitations and disruption of work.
Hyderabad’s long term prospects as a city of growth with availability of resources for IT and other sectors of the economy remains unchanged. A drive around the city will show you that Hyderabad’s struggles with the construction of its Outer Ring Road are over. The first phase and the Second phase are ready and the third phase is to be inaugurated by March or April of 2011. These ring roads with arterial connections in place, coupled with Metro Rail by L&T are bound to transform the city into a modern metropolis in a few years. Modern infrastructure and all sectors of the economy including IT back on the growth path are clear signals that “Brand Hyderabad” is on its march again. The city’s real estate is bound to move to higher price levels on the back of most modern infrastructure, affordability and a growing Indian Economy.

Our analysis is that in the short term of 3 – 5 years investing in residential property now will fetch good returns for the investor and is also a good bet for those looking to buy a home purely for self use. The creation of a separate state cannot change that growth story of Hyderabad.

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