Investing in Hyderabad Real Estate Today – Boom or Bust?

We, as Indians have always been predetermined to invest in real estate as a primary source of investments. Why? you may ask. You will find the answer to most of these questions lies in “it’s the way our parents have done things and for some of them it turned out to be great” or “there is a limited amount of land but an increasing amount of people, surely demand must outgrow supply” or similar thought process. While this approach may have worked out well for the previous generation, it is imperative for the current generation to challenge the status quo and make informed decisions based on the information available.

The reality is that 2019 has been a challenging year for the sector, the GDP nosedived to 4.5% and forced the government to introduce corrective measures to boost demand and infuse liquidity such as the creation of INR 250 billion Alternative Investment Fund, GST rationalization and partial credit guarantee schemes for NBFCs. You may still point out that your friend, relative or acquaintance has had a great investment 2-3 years ago and argue that all these measures are for the rest of the country, but Hyderabad’s real estate growth is booming. To a certain extent you are right, let us look at a couple of different statistics to corroborate our theory.

Chart 1.

What this chart simply shows is the alarming amount of new launches in comparison with the change in sales of units. Let us also have a look at the change in prices (Rs/Sq. ft).

Chart 2.

To be clear, Hyderabad now stands as the second most expensive place outside of MMR (Mumbai and its suburbs). You may argue that Hyderabad has much better quality of life compared to other metros, but you definitely should be mindful about how much of that translates into a quantitative value that allows for a sound investment. Also, with the rapid growth of new units you see in Hyderabad, let us examine the existing backlog and how the sales of those units fare:

Chart 3.

This too should be a cause for alarm as the chart shows an 8% YoY increase in the number of unsold units. That means not only is Hyderabad unable to sell/clear the existing backlog of units, we are doubling down and increasing the launch of brand-new units to the tune of 150% (Chart 1).

For a casual investor, you may get wide-eyed when you see the 16% price increase in YoY, but the smart investor will be the one that compares that rate with the rest of the country. You should also be able to arrive at a theory that basically says this

Hyderabad as a real estate investment avenue is right now trading at high prices with number of prospective units too increasing thus creating additional supply for which demand is non-existent, all leading to a sharp downturn of prices in line with the rest of the country”

Now, if you feel precarious about real estate but would like to start investing for your future, the equities market should be where you turn to. With the recent slump in markets due to COVID-19, the index has corrected more than 22% from its recent peak. Going forward the future holds promise for India more than any other country for the following reasons:

  • Interest rates across the world are falling like nine pins. It augurs well for capital hungry India.
  • All governments are determined to ease the money supply and lower interest rates to boost the economies, post Covid19. Easy money flows to countries with higher growth and India stands tall on that metric.
  • Lowered Income tax rates attract new capital from world markets and fresh FDI flows will help revive capital equipment cycle.
  • Lower international oil prices help India manage CAD well and boost forex reserves. Government will save big on imports and if they dabble in import duty on crude, their revenues will rise without significant unrest from public. Increased financial resources will lead to higher spend by government.
  • Lower oil prices will ensure low inflation nudging RBI to consider lowering interest rates.
  • RBI’s expected decision to lower interest rates will help companies source funds at lower rates.
  • Significant shift in habits of household savings towards financial securities mean strong support from MFs to markets at lower levels.
  • Nifty trailing twelve months PE has come to around 18 from a high of 24 offering bright opportunities for FDI and FII money.

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