Ghar4u ~ Real Estate in Hyderabad – Impact of Telangana- Short Term Perspective.

Real Estate in Hyderabad – Impact of Telangana- Short Term Perspective.

The long term prospects of investing or buying real estate has been a major point of debate for the past one year or so. The global recession had a deep impact on Indian Realty Markets. The excessive capacities planned during the days of the boom led to correction in prices. The market was slow for close to an year, more aptly it was more like the market stalled. Price corrections were not attracting buyers, who were themselves suffering from job losses or an uncertain future. Over the year India slowly but surely emerged stronger and though the prices did not go up volumes started coming back into the market.

Hyderabad went through the exact same cycle like the other cities during this period and just as the volumes started picking up the city’s real estate is faced with

a new turmoil. The prospect of a separate state of Telangana seems to have made buyers postpone for the fear that prices may fall and developers, uneasy about future prospects.We can approach this question with an ostrich mentality and state pompously, like any good broker 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 in the market to buy these far flung lands. It has been the residents of the State of Andhra Pradesh and a significant portion of the buyers being from the rich Andhra community. The creation of a new state might 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.

Micro Market	Cost per Sft. In R upees/Sft	Construction Cost. In Rupees/Sft	Developers Mark Up @ 20% in Rupees/Sft	*Land Cost/ Sft or FSI Cost in Rupees**	Per Acre Cost In Rupees Crores/Acre	Cost Per Sqyd 1 Acre = 3000 sqyd of plotted land in Rupees/Sqyd
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. Multiply the FSI Cost with total built up area and 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, that can fluctuate 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 the current prices(price at which land was bought plus holding costs in terms of interest). 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 causing 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 sector remains unchanged. When this sector starts growing again at a good rate the city’s real estate is bound to bounce back to higher levels. The turnaround in Indian economy is under way and good tidings according to all experts and economic indicators will surely propel the country to a growth path of above 9% - 10% rate.

Hyderabad with its ready infrastructure and location is bound to reap the benefits of the next growth curve. In the short term of 3 – 5 years investing in residential property being constructed is a good bet. The creation or non creation of a separate state cannot change the growth story of Hyderabad.