No Meaningful Correction in Hyderabad Real Estate Prices

Real estate price corrections in Hyderabad being prevented by extensive market inefficiencies, cartels and unscrupulous business practices.

In a free market economy, demand and supply create a check on unrealistic prices – at least that is what theory says. So when demand is less, then prices should fall.  This is not happening in Hyderabad, though the real estate market has been down for over a year.  The correction in pricing has been minimal compared to the unrealistic growth in prices earlier (for several years).  Plus, it has not factored in and reduced prices because of the new reality - the reduced number of buyers today and the buying power of the current buyers.

If we look at the US real estate market nationwide statistics, the prices are already down 24% from peak prices. Economists are expecting another 10% downward price revision from peak price in 2009. The peak was reached in 2005.  During peak, the price in Hitech city was 4000/- This means, by US standards it should have been around 3000/- now and go down to 2600/- next year.  I don’t think apartments in My Home Navadeepa (Next to Cyber Towers, Madhapur) are being sold for 3,000/sft.

I am not saying that because US had a correction of 34%, the same price percentage should come off from price of apartments in Madhapur.   My point rather is that I have not seen any meaningful correction in real estate pricing in Hyderabad. 

Even after the global recession, there is no lay-off in Hyderabad and there is no correction in the sticker price (the sarcasm intentional!).  However, I have seen ICICI close down the entire Home Loan origination office in Begumpet and made everyone pay including those of branch managers into commission basis.  A good friend of mine who is head of Sales in another mid-size real estate firm has also converted been into commission pay.  However, there is no change in sticker price of real estate.

The reason for this honestly is that - cartels and unscrupulous business practices prevent realistic price correction. Greed and fear also are preventing businesses from adjusting prices downwards. Real Estate Business people are unwilling to accept anything less than exorbitant profits from their business.

The best explanation of market inefficiency can be drawn from my personal experience with the stock market. The day there are good prices in stock market my online stock trading system does not work as well.  The prices are not refreshed as quickly, I place orders with older data and obviously I don’t get to fully grab the opportunities. Frustrating but true.  When systems don’t work during the times that favor price corrections – it reduces price correction. 

However, when prices have been increasing, media acts as a force multiplier (for the small price of a Journalist colony in that area).  Every new area - Madhapur, Gachibowli etc has a Journalist colony.  I wish there was a footnote after a very glowing article in the newspapers about an area saying, this journalist is being considered for a plot in the Journalist colony coming up in the same area.

Cartels work in a different way, I was in a Gold shop the day prices fell.  Another shopper said Gold prices are lower the last few days, to which the shop owner said – “Yes, papers are quoting lower prices but there is no supply. If you find anyone who has supply tell me, I want to buy a few kgs of gold too!’  Cutting off supply ensures the transaction cannot be made.  So price benefit does not reach the customer.

I recently spoke to someone in Bangalore and they said the price of a apartment in Bangalore is around Rs.2,800/- with decent local builders in Whitefield. 

I know for a fact the apartment prices in Madhapur or Gachibowli, which are equivalent locations in Hyderabad, are definitely higher.  Is there anything that makes the market value of Hyderabad better that Bangalore.  I don’t believe so. The fact remains that Bangalore is still the IT capital of India.   The only top5 IT firm headquartered in Hyderabad is today in doldrums. 

The only reason that the prices are higher are probably because of the greed of builders, the absence of smaller builders and the immaturity of the buyers.  

As we all know, there are two sets of people who get jobs in Hyderabad.  People from outside AP – mostly Madhya Pradesh, Chatisgarh, Orissa, West Bengal, UP etc.  Or non-hyderabadis from rural  and small towns.  A vast majority of both these segments are new to Hyderabad and have no idea of the real estate price history in Hyderabad.  They are isolated and easily fooled by the realtors.  Non-Andhra people compare prices with Mumbai and Delhi and get fooled.  

While, the problem with Andhra people are that they have a long and very established history of being extremely speculative plus having a little bit ‘unrealistic and exaggerated sense of their own’ capability – mostly derived from seeing too many movies of their favorite Tollywood hero. Well, I may be exaggerating a bit.  But there is nothing wrong at taking a good hard look at our attitudes and expectations.  Wisemen, say when you ‘Know Yourselves’ you have less chance of making mistakes!

Hostels - Unsung Heroes of Hyderabad

In the last decade,  Hyderabad transitioned from a sleepy town with Nawabi lifestyle to global offshore destination.  In the process, attracting many MNC companies to setup offices in Hyderabad.

In this transition, the Hostels played a very key role.  By providing a place to stay for those who moved to Hyderabad in the first few months or years in Hyderabad.  The hostels enabled companies to scout for talent from other locations in AP as well as from outside AP.  The hostels made it easy for people to find a place to stay in Hyderabad.  Otherwise, they would have to find a relative or friend already established in Hyderabad.

As you probably know most landlords have a bias against bachelors.  It is very difficult to find a place to stay easily. Without the hostels, it would have been difficult to get people to move to Hyderabad.  This would have put the hiring plans of the Hyderabad companies in jeopardy.

I am aware the hostels are not classy places. However, they serve a purpose and they do it fairly decently.  In my company, I have benefited from hiring several people who were new to the city and these hostels enabled them to find a place to stay.  Thus, helping them to stay focused on doing well on their job!

Builders Selling Small Number of Super Luxury Apartments are Fringe Players Nationally!

If every national real estate player starts their apartments at 60 lakhs – they are not a national real estate company. They are a fringe player in the Indian economy.  

As per World Bank data  80% of Indian earn less than $2 per day.  Also, 33% of Indians earn less than $1 per day.  We need housing solutions that can cover needs of a vast majority of people.  Families (not people) earning over 5 Lakhs per annum are small fraction of 1% of the population. 

Only a Hindusthan Unilever that offers a wide variety of soaps for every segment of society can be called a National player.  Does not matter how sexy the offices are of DLF, Unitech, Maytas and the endless ‘Big names of Indian Real Estate’.  These companies are only fringe players in the Indian economy.  These companies are not an equivalent of a  MS Dhoni or Kapil Dev – They are like some key player from some local school somewhere in Delhi.  Does not matter how much your dad (your business) advertises in the papers and what your stock price is.   

Only if you can build something like 1 lakh apartments covering all segments of the population (who can buy) – you have a right to be called a national player like an Airtel or an Hindusthan Unilever.  There are 80% of India that can probably not buy any modern construction.  However you should atleast be able to provide housing solutions for the rest including people like clerks in government department, Sr. sales executive with 10 years experience in a Bata shoe store, an engine driver with Indian Railways and a traffic constable.  

I dont understand what is the big deal in building fancy housing for 0.01% of Indian population. This satisfied the years of latent demand created for housing due to the  job creation done mostly by IT offshoring industry.  The recent push by the Government and incentives including classification of loans below 20 Lakhs as priority sector lending are very welcome.   However, we  need to understand that a house is a 'manufactured good'.  

The Indian Real Estate Industry is 'Primitive' till the time we can mass produce at least 10 lakh of functional, decent homes per year that provide hygeinic living conditions and create decent neighborhoods.  Let me illustrate this with an example -  If the Indian army had a few thousand soldiers with modern arms and while the balance several lakh soldiers carried bows and arrows.  Nobody would consider such an army as a modern. It will be called a primitive army.  Similarly, the Indian real estate industry has a very long way to go. At this time, they have a small number of localized successes. No single company has been able to manufacture what is required from the Indian market.  

In 1947, one real estate entrepreneur called William Levitt (Levitt & Sons, Inc) built 17,000 homes in a single development covering 18.7 sq kms. This was done in 4 years and the new town was called Levittstown as a suburb of New York city.  People can commute conveniently by taking a local train to Manhattan for work.  

60 years later there have been dramatic advances in construction technology, methods and management. Plus, we already know others have constructed large numbers of affordable houses in various parts of the world. The sad story is there is no capable real estate entrepreneur in India.  This is despite a huge demand for affordable housing. We desperately need a hero in Housing industry.  Someone like what  Kishore Biyani was for Indian Retailers or Sunil Mittal or Dhirubhai Ambani was for Cell Phones.  Any one listening ?

Hyderabad Real Estate Bubble Busts

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.