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Telangana State – Update on political developments – Impact on Hyderabad Real Estate Market – 01/08/2013

Ending the Period of uncertaintyThe announcement of Telengana being the 29th Indian state of India happened on 30th July 2013. For the Hyderabad Real Estate Market his brings to an end a period of uncertainty between the year 2010 to 2013. As a close observer of Hyderabad Real Estate Market, there were many lows and only few highs in this period. The previous announcement of a Telangana state on Dec 9 2009 by Union Home Ministry caught many market participants in Andhra Pradesh by surprise. Many thought it will be a temporary small blip of uncertainty for the market and had not bargained or planned their business for a sustained agitation. With the Telangana agitation stretching for a period of more than four years the market was bought to its knees. In this period, very few builders launched new projects. Only builders from outside Hyderabad and large builders from Andhra Pradesh launched new projects in Hyderabad. Many medium and small builders, who launched their projects in this period, struggled to sell their projects with the lackluster market.

The last financial year of 2013 was an average year for the Hyderabad Real Estate Market. Demand picked up moderately and customers too came forward to buying property. However from the beginning of this financial year the sales in the Hyderabad Real Estate Market have been sluggish. Customer walk-ins have declined and sales traction have been negligible. In addition to the Telangana factor increased prices of apartments contributed to the declining sales.

How will the announcement of a Telangana State impact the Hyderabad Real Estate Market?

Builders from Andhra and Rayalaseema account for about 60-70% of the builders in Hyderabad. However, investors from Andhra and Rayalaseema Region account for about 30-40% of the new apartment or land sales in Hyderabad. With the announcement of new state, we might see a temporary lull of about a year or two from this segment of the market in new making purchases. Residents from Andhra and Rayalaseema will continue work in Hyderabad, but they will think twice before making any investment decisions in Hyderabad and they will plan to invest their savings in the new state capital of Andhra Pradesh.

How much do Andhra and Rayalaseema Investors account for the real estate market in Hyderabad

But the clarity on the Telangana state will improve the market sentiment and speculative activity will increase. I have spoken to many investors from North and West India who stayed away from the market and are willing to make a beeline to Hyderabad in the coming quarters. Further investments from PE, NBFCs and other institutional funding which were more or less stopped over the last few years will also begin again into Hyderabad.To sum up the contours of the Hyderabad have grown well beyond to have a real term impact in the medium and long term, while in the short term, there could be some capital flight from the city. In the short term too, the impact can be curtailed if the new government of the state of Telangana assures the industry, that existing policies would be continued.

The market sentiment is likely to improve

Private investment into Hyderabad Real estate industry has been pouring in the last few years. As on today, Hyderabad will be the Joint Capital for a period of 10 years between Telangana and Andhra Pradesh… Bulk of the investment into Hyderabad was and is from Industrialists from Andhra and Rayalseema. These industrialists will not stop further investment into Hyderabad but will be cautious and will also look at investing in other cities of Andhra and Rayalseema regions to diversify their risk.

Capital flight from Hyderabad? – Will it continue to happen

Hyderabad with its fantastic infrastructure is competitive among leading Indian cities in attracting capital from global and Indian companies based on various factor conditions. The last four years have been bad for Brand Hyderabad. In the period 2005-2008 Hyderabad was almost closing the gap on Bangalore in terms of IT exports. While Hyderabad faltered in the last four years, Bangalore has zoomed far ahead in this period. With Metro Project ready to be launched in April 2015(Lane 3 first phase) the Hyderabad Metro Rail project is keeping up with its timelines. This project along with the ORR which is likely to be completed shortly will put Hyderabad among the best cities with world class infrastructure globally. This infrastructure and access will provide a great fillip to the growth of new residential and commercial townships across Hyderabad City.

Hyderabad Infrastructure:

Hyderabad with its fantastic infrastructure is competitive among leading Indian cities in attracting capital from global and Indian companies based on various factor conditions. The last four years have been bad for Brand Hyderabad. In the period 2005-2008 Hyderabad was almost closing the gap on Bangalore in terms of IT exports. While Hyderabad faltered in the last four years, Bangalore has zoomed far ahead in this period. With Metro Project ready to be launched in April 2015(Lane 3 first phase) the Hyderabad Metro Rail project is keeping up with its timelines. This project along with the ORR which is likely to be completed shortly will put Hyderabad among the best cities with world class infrastructure globally. This infrastructure and access will provide a great fillip to the growth of new residential and commercial townships across Hyderabad City.

Hyderabad Infrastructure:

Hyderabad real estate market has been very sluggish in the last few years. Most of the developers are sitting on a significant stock of unsold inventory. Builders too have been sitting on the inventory with a hope that the market will recover. With an exception to few builders such as My Home, Aparna, Aditya Construction and Mantri all the others have been facing tough times in the last few years. Only few projects such as the following have done well in terms of their sales velocity.My Home Vihanga and My Home Abhra. Aparna’s project new launches in Chandanagar and NallagandlaMantri CelestiaAditya Construction projects in Shaikpet In case of most of the other projects in Hyderabad the unsold inventory has stretched to more than 16 to 20 quarters. The recovery of the Hyderabad market, which was earlier expected to be in the second quarter of FY 2014, has been elusive and it is expected that the demand may pick up steam by Jan 2014.

When will the market pick up steam?

Yes, in the last four years FY 09 to FY13 (last year), there has been a dip in the top line of the real estate industry in Hyderabad due to slack demand. In the short term, the prices may dip marginally because of unsold inventory and as demand is still sluggish and supply currently overrides demand, while land transactions may pick up. While ready/constructed housing prices may dip marginally, projects were construction is on and announced projects might see prices dip by about 5-10%.What will happen in the medium and long term: It will depend on policies of the new government in the state.

How will housing prices be affected in the short, medium and long term?

Which Geographies of the market look good?Hyderabad West market – with a strong access and connectivity to the IT Zones and developments is expected to perform well in the next two years. What can investors do?The fundamentals of real estate industry in Hyderabad are sound with the IT and Pharma industry in Hyderabad performing creditably in a difficult business environment in FY 2013. Hyderabad today is a competitive among various cities in India and abroad. We expect that it will continue for the time to come. Patience can be virtue in this market. Investors in realty could look at bargains in the ready/constructed housing market in the next few quarters.

What can investors do?

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