Will Political Stability in Hyderabad Boost Real Estate?

Image: Harsha Vadlamani for Forbes India

At 3.25 pm on February 18, 2014, Krishnamohan Reddy jumped with joy when the Parliament announced the creation of the separate state of Telangana. For the property developer from Hyderabad, the decision to form India’s 29th state marked the end of a long period of uncertainty that had undermined business growth in what was once a booming real estate market in the country’s fifth largest city.

His elation manifests that of almost all the property developers in Hyderabad who now expect to reap the benefits of this newfound political stability. There is renewed hope that this decision will spur economic growth in the city, which is home to the Indian headquarters of Microsoft, Google, Facebook, Amazon and Yahoo.

The Worst Is Over
“After the subprime crisis in the United States, property prices in all the metros in India had crashed. While prices recovered in those cities, Hyderabad missed out on the boom. The Telangana protests forced corporations to rein in their expansion plans,” says C Shekar Reddy, president of the Confederation of Real Estate Developers Associations of India (Credai), a national body that represents property developers.

Shekar Reddy believes that the worst is over, and that Hyderabad could well be on the path to rapid growth. “A plot of land in Hyderabad, which was similarly priced as those in Chennai and Bangalore in 2007, is now 25-40 percent cheaper than those in comparable locations in the two southern cities. Hyderabad has good civic and social infrastructure, and this will bring back investors,” he says.

But there is a twist to the tale. Even after the Centre’s in-principle approval to the division of Andhra Pradesh in 2009, property prices in Hyderabad did not recover as expected. Reason: Hyderabad had a land surplus and low demand at that time, creating a buyers’ market. But by 2013, builders had exhausted land resources, and started going slow on new projects. This has re-established equilibrium, says Shekar Reddy. Property rates have risen by about 30 percent in one year. Shekar Reddy attributes this to high input costs and low supply.

DILEMMA IN CATCHMENT AREAS
A dipstick survey among people from coastal districts of Andhra Pradesh, however, reveals a few thorns in the city’s rosy future. Of the nearly 80 lakh people who call this 400-year-old city their home, about 30 lakh hail from the coastal and southern districts which are now collectively called Seemandhra, and form the residuary state of Andhra Pradesh. Before Telangana, demand from citizens in these coastal districts was one of the main drivers for Hyderabad’s real estate market. Now, however, many are having second thoughts about investing in the city.

“I sold my house in Hyderabad a few months ago. I wanted to buy a new one at a better locality in Hyderabad. But after the Telangana announcement, I don’t know whether I should invest in Hyderabad or in my native town of Srikakulam,” says Kishore Kumar, an IT professional.

In the aftermath of the division, potential buyers who live in the coastal and southern districts—which includes the cash-rich Krishna-Godavari delta—are shying away from buying properties in Hyderabad and would rather put their money on Seemandhra’s yet-to-be-announced new capital.

Shekar Reddy, however, dismisses the impact of a shift to Seemandhra, and says the market has already discounted the Telangana effect. “Hyderabad is predominantly an end-user market. Over the last 5-6 years, we’ve noticed that people from other Indian states are making up 70 percent of the consumer base. The rest are from all three regions—Telangana, coastal Andhra, and Rayalaseema in Andhra Pradesh. Even if people from Seemandhra don’t buy properties in Hyderabad, demand from those outside the state will more than compensate for the loss.”

WAIT-AND-WATCH
Though Reddy and other developers are optimistic, property registrations in Hyderabad have declined since January 2014. “There has been a drop in the registration of properties in the Ranga Reddy district,” says Ramakrishna Raju, the deputy district registrar. Hyderabad metropolitan area spreads across the revenue districts of Hyderabad, Ranga Reddy district, and some areas of Medak.

The dip in property transactions, however, is not confined to Hyderabad alone. Other cities in Seemandhra, such as Guntur and Vijayawada, have also reported lacklustre business as sellers await further price appreciation. According to an official in the state stamps and registration department, there has been a 20 percent decline in property registrations in January-February in 2014 across the state as compared to the same period in 2013.

“Prospective buyers are adopting a wait-and-watch approach in both Telangana and Seemandhra. In Telangana, people are waiting to see if there will be a further drop in prices, whereas those who want to buy property in Seemandhra are waiting for the selection of the new capital,” says P Dasarath Reddy, president of the Andhra Pradesh Real Estate Developers Association (APREDA). He adds that property transactions usually drop during the closing of the financial year, and that people don’t purchase flats before the general elections.

Dasarath Reddy is hopeful that the real estate market will revive after the elections when buyers see no further decline in prices. “We rule out price erosion on two simple premises. First, we cannot sell properties at less than cost price. Second, prices in Hyderabad, which has world class superior infrastructure, are now on par with those in smaller cities like Bhubaneswar, Vijayawada and Pune.”

NO MORE DOWNSLIDE
The good news is that the real estate market cannot afford a further drop in prices. “Over the last five years, the Hyderabad real estate market has been undervalued so much that it cannot get any worse than this. Prices can only go up,” says Sandip Patnaik, managing director, Hyderabad, JLL India.

Patnaik feels that there is a huge upside in the residential market. “Developers from outside Andhra Pradesh did not start their projects in Hyderabad due to political turmoil. But now, many non-AP developers are scouting out land for new projects.”

Since 2008, only 2-3 multinational corporations have established their presence in Hyderabad. But this may be a thing of the past. According to industry experts who do not wish to be named, Deloitte is looking for about 1.5 million sq ft of office space, and Novartis is scouting for 1.2 million sq ft space in Hyderabad.

FEWER SPECULATORS
The Hyderabad real estate market is inherently strong with a lesser speculative component in the overall demand. “Prior to 2004, Hyderabad was unattractive to out-of-state developers because of the steady price increase and low margins. Even now, 80 percent of the demand for residential units come from end-users; investors comprise 20 percent,” says Veera Babu, Hyderabad office head of Cushman & Wakefield.

Like Babu, Patnaik also believes that Hyderabad’s market will cater primarily to the end user. “The lesser the speculative demand the stronger the market is considered to be. Speculators will most likely bet on the new capital of the residuary state of Andhra Pradesh as it would give higher returns than Hyderabad,” Patnaik says.

LUXURY TAKES A HIT
The luxury real estate market remains the most badly hit sector. “During the peak in 2008, Hyderabad saw a monthly average sale of 200 luxury units. But because of political instability, sales have declined to 75 units a month,” says S Pochender, CEO of Lanco Hills, a subsidiary of the Lanco Group, which is developing the largest luxury real estate project in the city.

In Hyderabad, apartments priced over Rs 1.2 crore are bracketed in the luxury segment. “Despite the expectations of a quick recovery, sales in this segment remain flat. Most of the demand is driven by NRIs who have adopted a wait-and-watch approach. I think they will wait till August for positive signals from new governments at the state and federal levels,” says Pochender, whose conservative estimate is that buyers will see a capital appreciation of at least 25 percent in one year.

According to a report by CBRE Global Research and Consulting, limited options with a subdued demand from high networth individuals led to stability in prices for the premium housing in micro-markets of central and western parts of Hyderabad during the second half of 2013.

POSITIVE POLICIES
The government has been proactive by ensuring that policies focus on developing good infrastructure and attracting global corporations to set up their base in Hyderabad. This is unlikely to change. The real estate sector will continue to get a boost from government policies.

The latest project is the development of an Information Technology Investment Region (ITIR), which is planned with a capital expenditure of Rs 2.19 lakh crore over the next 25 years. “The trickledown effect of ITIR will be massive. As more companies come to the city, demand for office, retail and residential space will rise drastically,” says Patnaik. The AP government expects that ITIR will increase total employment offered by IT and ITeS sectors in the city from the current 3 lakh to 17 lakh by 2040. It will also create an indirect employment for nearly 53 lakh people.

Hyderabad could also be the beneficiary of various tax incentives offered by the Indian government to Telangana and the residuary state of Andhra Pradesh. “These incentives don’t include service tax exemption, so IT companies may not benefit,” points out Y Harishchandra Prasad, former president of CII AP chapter. “But it will attract manufacturing companies to both states. In Telangana, Hyderabad will be the obvious beneficiary.”