‘Changing your behaviour in the face of changing information is always hard. But when people are doing well, they don’t want to change. They choose to ignore the discordant notes and the tunes they are hearing. They feel threatened by bad news and dread the uncertainty of change and the hard work it demands. This tendency makes them passive and rigid at the very moment they should be most active and flexible’ (Schawarzman, Stephen - ‘What it takes'). The lockdown imposition pushed the residential segment into a state of complete flux and not surprisingly the market remains in denial mode.
To understand the residential market better, we need to see it from the following perspectives:
Price movements (past & future)
Covid-19 pandemic likely impact
Do’s and Don’ts for today’s buyers
Price Movements:
When in doubt the past is good place to start. The residential market movement over the past 10-15 years might help us to understand the future better.
The residential segment in Hyderabad had it’s golden period prior to 2008. The office market growth, fuelled the residential segment in 2004-07. At that point in time, it was not uncommon to find, housing loan EMI’s equal to or lower than rent generated by residential units. Lot of people used to leverage and pick up multiple residential units.
In 2008-2014 period all market segments in Hyderabad went down, first due to recession and later due to political activity. Generally it is presumed that good office market absorption would result in the revival of the housing market. In case of Hyderabad this never happened post 2014. Office market kept achieving new absorption peaks from April 2014 to March 2020 but this had limited impact on the residential segment. Sales remained sluggish with spurts of average performance once in a while.
Period post demonisation was one of the most challenging times for Hyderabad’s residential market. After this lull, sales started had to just look up in 2019 but again slipped by Q12020. On the back of a slow first quarter in 2020, Covid-19 has been a major blow to this segment.
In last 10-12 years basic price quotes of apartments seem to have increased by about 100%. Basically an apartment which was being quoted at Rs. 4000/- psf basic price in 2010, is probably being quoted at Rs. 8000/- psf currently. 90%+ of residential units in Hyderabad are sold basis housing loan leverage with financial institutions providing an average of 75-80% funding. With a buyer servicing a 7.5-9% p.a. interest on their housing loan plus inflation at 4-5% p.a, residential investments have not yielded any returns in the 2010-20 period.
The basic price of a residential apartment is not it’s landed price. We need to add taxes, registration and interiors costs to arrive at the final landed cost. All these additional costs are sunk-in costs and when the basic price moves by just about 8-10% p.a., then owners have not gained much. The only way residential investment made sense, during the last 10-12 years, was the interest subvention scheme utilised while filling personal income tax returns.
To share an e.g. a friend bought a 1500 sft apartment in 2008 at a basic price of Rs. 1600/-psf. The landed price including amenities cost, registration, service tax, interiors (Rs. 8-9L considering about 25-30% of the total investment) amounted to a final cost of Rs. 37-38L. Housing loan on this unit was around Rs. 23-24L @ 8-9% p.a. In 10 years, the basic price of this unit moved to about Rs. 2800-2900/- psf. This unit was sold for Rs. 43L in 2018 and the owner ended up paying Rs. 43.5L to the bank. The only solace, if any, was the income tax return breaks on interest payments.
Currently monthly EMI on an housing loan are equivalent of about 2.5-3 months of rent. Financially speaking renting an apartment makes much more sense that owning it. This also holds true from the fact that housing loan is at 7.5-8.5% p.a. currently, but residential rentals returns remain at 1.5-2.5% p.a.
If one is planning to buy an apartment at Rs. 8000/- psf basic price today and if the prices do not move to Rs. 16-18000/- psf by 2030 or earlier, it probably makes less sense to buy. In today’s gloomy period this kind of a price movement seems unlikely. Incase the interest subvention scheme is removed over the next couple of years then returns wise residential investments become even more challenging.
Buying an apartment would make financial sense only if one does not leverage more than 40-50% of the landed cost of the unit or one buy’s just to satisfy an inert need to own an asset in one's name without considering the financial returns.
Covid-19 impact:
A recent joke on WhatsApp was about how much time we all spent cleaning and mopping our homes during the lockdown. This 60-90 day experience of cleaning and mopping will affect client psyche about sizing / kind of homes to buy in future if such situations might become a regular occurrence.
Statutory requirements to maintain certain minimum distance between residential units has turned out to be a boon in the current situation. Apartments developed in the past decade have no common walls which brings in a measure of social distancing into the design phase itself.
Currently the residential market is more of a 3/4/5 bedroom market with most of the design without a provision of a servant room and / or study. This can be expected to change to a more practical 1/2/3 bedroom market.
Clients wanting larger units (1800sft and above) will want servant quarters with separate entrances. These expectations will change floor plans drastically. The floor plans for 1/2/3 are likely to include a study. Sizing of apartments might change to a practical range of 600-800sft for 1BR+study, 900-1100sft for 2BR+study and 1200-1400 sft for 3BR+study. Hyderabad developers have always been averse to developing single bedrooms or studio apartments and this is likely to change. The 1/2/3 bedroom market is a highly budget conscious segment hence increasing apartment sizes which would lead to increased budgets would not be advisable.
Another feature which could get impacted is construction of tall residential towers. Being cooped up on the 15/20/30th floor for 45-60 days will change client perceptions about such tall towers. Gated communities have been a boon or bane as the case maybe depending on how the current situation was handled by them.
Going forward clients might prefer non-gated communities with individual freedom remaining intact especially in times of an epidemic crisis. Expect developers to come out with some innovative community plans which can merge the benefits of gated communities with the freedom of choice of non-gated communities. The older communities used to be planned like this without the razzmatazz of clubhouses, gym’s, community halls, swimming pools etc.
Expect significant number of tenants to move out of gated communities towards non-gated communities post the lockdown experience. Rules of lockdown were the same for all but gated communities got more stringent and suffocating with additional policing.
Expect a lot of senior citizens to put up their houses for sale and exit gated communities in favour of non-gated communities. They were the worst affected people in the lockdown phase. Lack of access to support staff like nurses, maids, drivers and cooks hit the senior citizens the worst. Second sale market might have an oversupply situation.
Co-living segment will go the co-working way. Brands which burn money might not survive. The better brands will have to work on density and social distancing norms. This segment might actually see a spurt in built-to-suit deals.
Construction is expected to be delayed and project handovers will get delayed by atleast a year or more.
Given the gloomy economic situation and job uncertainties, even if one manages to retain his / her job still only the brave hearted would commit now to a major financial decision like buying a house. Fence sitters would definitely back out of deals. Cancellations could become problematic for ongoing projects.
Banks calculate housing loan entitlements basis salary slips and bank statements for the most recent 6 month period. Majority of us have taken salary cuts during April / May / June period. This effectively reduces the loan entitlement for everyone who has had to take a cut. Once the salary levels are restored to pre-covid levels then 6 months from that point one could hope to regain similar loan entitlement levels as one had until March 2020.
Some recent reports suggest that financial institutions are revalidating loans which are still to be disbursed completely. Clients are being asked to submit the last 6 months bank statements of the current year to complete this process. It is being ascertained if one has had to take a salary cut or lost one’s job. Basis this assessment any curtailment of loan disbursement will further add to the stress in this segment.
Do’s and Don’ts for buying:
Price of inputs like steel, cement, labour etc have gone up post lockdown and resultantly quoted prices up. While this is true, it is also a fact that land prices have begin to soften across the city. The land market was so overheated that prices where being escalated almost on a weekly basis till March 2020. When market is this heated something bad is always bound to happen. Land prices will see a major correction and this should be reflected in apartment quotes.
Projects which are still under construction from the last recession period of 2008-10 will face the problem of not being relevant in the changed world now in terms of specs, amenities, technology and pandemic specific safeguards.
Real Estate projects are long gestation projects requiring financial closure for costs to be incurred over the project period of 4-5 years including manpower costs. Aspiration of developing millions of sft in each project does not match the action of cutting manpower costs over the past 3 months.
Buyers would prefer ready to move-in units or units which will get completed in 6 months time. Smaller and faster executed projects would be preferred.
Avoid buying in non-RERA approved projects. Offering for sale or buying without RERA approval is an offence. In our state projects approved before January 1, 2017 do not require RERA approval. This means that projects for which developers paid approval fees before January 1, 2017 need not register under RERA. Generally GHMC approvals are for a 5 year period. With regard to projects not requiring RERA this 5 year period will get over in December 2021. If such projects are yet to start or not at advanced stage of construction then sale would be slow
Work only with brokers who are RERA approved. A broker needs to be registered with RERA plus the developer has to approve him / her as an authorised broker on the RERA website under their respective project. A professional and well educated broker is your best guard available in choppy markets as today.
Buyers are more confused today and not sure what to do or what will happen next, this is the time to guide them properly / professionally without seeming to focus only on profits. Success breeds arrogance and complacency, we only learn from our mistakes and when the worst happens. In the words of the founder of Blackstone, who are one of the largest owners of real estate on the planet ‘It might take five years, but real estate will bounce back. It always does.’ Amen to that
Written by Aju Thomas, June 24, 2020 | Comments Off on Hyderabad’s Residential Market’s 2020 Conundrum
CIRIL members are market leaders in their respective markets with an average 2 decades, commercial real estate market experience. Members have a transaction management portfolio of 30+ mn sft...
