Hyderabad Real Estate Bubble Busts

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In late November 2006, I had put a post on the coming bust in Hyderabad real estate. Quoting from that article ” It is not a question of whether the real estate bubble will bust but when it will bust”.

As I write today on Independence day 2008. The real estate bubble is BUST in Hyderabad. The prices of real estate land have fallen in the outskirts and the price of apartments per sft is flat or down in the past 12 months.

This is despite doubling of steel price and major increase in prices of all construction material(sand, cement, bricks). In addition to that the wages have increased for daily wage
workers, skilled construction workers as well as for people working in the corporate and marketing offices. Despite all these pressures, the real estate developers could not increase the price per sft for apartments or price per yard for open land. The prices have remained same or fallen 10-20%.

Maytas Hill County moved from “selling by invitation only” to putting put half page ads in Deccan Chronicle. Legend, another local well known builder known for selling like
hotcakes also put up a half page ad for several weekends to sell the apartments in their newest venture. This was not done by Legend earlier.

Add to this the fact that tens of thousands of luxury apartments will be ready for occupation and needing buyers in the next 3-24 months. Also real estate companies have bought thousands of acres in “Land banks” and they cannot sit on that investment without realizing some revenue.

The HUDA auctions are not raising money. A key reason could be the sub-prime real-estate crisis and its impact on real estate abroad has led to several NRI’s burning their hands in real estate. Their apetite for real estate investment in India is probably low now. Plus, with the developed nations moving into recession NRI’s might be concerned about maintaining their current income levels.

Local businessmen and investors (both should be called herd-minded speculators) are stuck with their “investments”. The lands that they had originally planned to buy and sell in a few months at good appreciation – actually depreciated and most of them could not dispose of their land for nearly a year. Many have forfeited the initial payment on the agreement for sale. Today, this segment of buyers “in-herd” have no apetite for real estate investments.

With stock markets falling from 21K to 15K levels, one of the pillars of wealth creation for the real estate buyers is destroyed. This pillar enabled a number of real estate investors to fund the margin money for buying the properties. This source of wealth may not be available for many years to come. Currently, some financial institutions are in fact advising investors not to invest in stock market for at least 6 months. Modest pay hikes at mid to senior IT positions will deprive the real estate developers of new buyers. With their companies looking to fire non-performers with high income levels, these real estate buyers are now more focused on their programming skill development on weekends rather than scouting out for real estate ventures or stock market picks.

Most of the ‘old’ high income earners have already bought real estate and with spiralling EMI’s and cost of living are struggling quite a bit. Things are not any better in this customer segment either for the real estate companies.

Most importantly the job market has weakened. The major IT companies are focusing more on increasing the quality of graduates and focusing on recruiting fresh graduates for staff growth. These employees earning Rs.3 to 4 lakh per year cannot buy 70 lakh rupee apartments. So no luck here for the real estate companies.

BPO firms are going slow on hiring and almost every one of the big BPO firms has fired a few dozens to a few hundred people (Extensively reported in the media). Their hiring plans are also much slower.

The current situation will not get any better with a weakening in the earning capacities as well as the sentiment of all types of real estate buyers – NRI’s, highly paid employees and domestic businessmen. The future does not seem to be any better with spiralling inflation, lowering growth rate for economy and increasing interest rates.

In the early to mid nineties Mumbai (then Bombay) went with a similar boom to a negative correction and the prices took over a decade to come back. It will be interesting to see how
the Hyderabad market pans out.

One last observation, in a country with 23 crore people not able to get 2 square meals a day (definition of poverty line in India) and with average per capita GDP of Rs.40,000/- per year. How can real estate companies start out at 70 lakh per apartment?

USA has per capita income of 16 Lakh rupees per year and apartments start out at 80 Lakh rupees (about 5 times annual income). Likewise, India then should have apartments starting out at 2 Lakhs. Only the real estate geniuses should know how to build sustainable businesses with their pricing starting at 175 years per capital annual income of the country.

I will discuss on this last part later.

You may also like to read:
No Meaningful Correction in Hyderabad Real Estate Prices
Builders Selling Small Number of Super Luxury Apartments are Fringe Players Nationally!
The Coming Bust in the Hyderabad Real Estate Bubble
From Invitation Only to Open Carpets – From Super Luxury to Affordable and Functional Homes
Can Cyberabad Exist Without Hyderabad

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