Hyderabad market has been making headlines for sky-rocketing land prices in the recently concluded auctions. These auctions seem to have put the market in a different league of its own. Still it also makes one wonder as to what does all this mean for the average buyer who is likely to invest her hard earned money into these sky-rocketing valuation seeking auction properties.

We spoke to a few real estate players to get their reactions. The one omnipresent reaction was of shock at the numbers that had been achieved. Considering the supply overhang in the market for residential, retail and commercial, these soaring valuations generated responses like unviable, very expensive, insane etc. Even to regular market watchers, who have witnessed this market for 2-3 decades, these numbers sounded unbelievable.

• One of the questions that kept popping up was about financial viability at these numbers. It has been pointed out to us that Hyderabad market dynamics are different from any other Indian market. Considering the unlimited FSI rule, it seems for such high value properties the FSI cost of the land is assumed fixed at Rs. 1500/sf. Normally in any market if a land is worth say Rs. 10cr. and 2,00,000sf is the development potential of the land then FSI cost works to be Rs. 500/sf. Interestingly in our market this FSI cost goalpost seems to be presumed fixed at Rs. 1500/sf.
• What this means is that for a land worth Rs. 100cr/ac. The development potential could be presumed as 6-6.5Lsf/ac. The FSI being planned seems to be in the range of 13-15 times of the land area. At current building rules the floor plate in such developments, targeting maximum exploitation, might be around 10,000sf and to achieve the desired FSI number one needs to develop 60-65 floors. Dividing this floor plate into multiple apartments would throw up very high common area loading factors hence many projects are developing apartments ranging from 6000-7000sf going upto 10000/15000/20000sf apartments. These are unimaginable numbers for any residential market.
• Going by this logic if land is auctioned at Rs. 70cr./acre then development potential accordingly comes down a little and if tomorrow the auction expectations are beyond Rs. 100 cr/acre then development potential expectations increase. It is a different story that infrastructure strain on a city with such high density vertical development is unimaginable and possibly not being factored into. In some ways the traffic jams and other infrastructural issues faced by Hyderabad especially Hitec city is a direct result of this unbridled developments being allowed in a city which effectively is not short on land.
• The Rs. 1500/sf FSI cost logic seems fine on paper but on actual basis this could be a very dicey and dangerous strategy. Any number of factors could spoil this fragile party. Markets are at an all time peak in terms of valuations and a potential slowdown could hamper all these assumptions. The government has been vocal about eventually restricting FSI or removal of GO111. Any of these factors will greatly affect the valuations being proposed. We are given to understand from newspaper reports that removal of GO111 could entail releasing about Rs. 1.25L acres into the market for development. All this land lies around the two lakes of Osman Sagar and Himayat Sagar abutting Kokapet, Narsingi, Mokila, Shamshabad etc. Oversupply of land should logically bring down prices but then our market seems to be operating above the laws of demand and supply economics.
• From a customer perspective it is pertinent to note that offerings in such projects would have to be high to very high in pricing leaving absolutely nothing on the table for customers as potential gain that normally they would get during the construction period. One should expect that apartments would be offered at nothing less than Rs. 15000 - Rs. 20000/sf. This situation is like buying into a very expensive IPO. The retail investor lot size is generally in the range of Rs. 12-16000/investor in any IPO. Companies might be offering 6 or 60 or 600 shares but the lot size remains the same. Many investors burn money on the listing date when reality hits home. Good thing about the real estate market is that it generally should not behave like the stock markets. As a general rule as and when the real estate market starts behaving like the stock market then just stay out of it.
• It was pointed out to us that Airports Authority of India (AAI) probably does not give more than 60 floors approval in the western corridor. If this is correct then this height restriction will act as a major deterrent for further escalation in land valuations until and unless the market value of properties actually move up. Recently a client approached us for help in selling a small residential plot in Uppal in a good locality. We were discussing the pricing and client expected Rs. 1.5L/sqyd. After a general survey of the market we felt that a valuation in excess of Rs. 1L/sqyd. seemed difficult to achieve. In such locations the most ready buyers are the local developers and going by the current apartment rates we reached our valuation assessment.
• This got us thinking that if a highly populated location cannot justify a valuation of more than Rs. 1L/sqyd., then how does upcoming areas justify auction prices of Rs. 75000-Rs. 1L/sqyd. These upcoming areas are bereft of development and will take years if not couple of decades to develop all aspects of wholesome community living. Sky high valuations don't seem to be making sense at this point in time considering the oversupply risk in terms of apartments and land availability.
• All valuations will come to a nought if our market does not improve its score in RERA compliances. The overall situation is more or less the same in terms of RERA compliance - we continue to be the worst market in this matter. Now even the search option on the TS RERA website to search on projects and brokers has become non-functional for many months now. In a way it is good, why pretend that something is working when actually authorities have no interest in implementing RERA. Non-compliance leads to neglecting customers, violating their trust and altogether loosing their loyalty. Today's cosmopolitan clients have better choices available in markets with far better compliance levels. Actually states with strict RERA compliance would have seen better sales with customer trust coming back.
• Overall our recommendation to customers has remained the same for the past few years. If you need to buy then buy only ready to move-in properties or properties which you can make out on your own that they will get completed in 3-6 months of time. Please buy only RERA approved properties or in RERA approved projects. Do a lot of due diligence on the developer, market, location, future price movements after all you are the one who is investing your entire life savings in a property and nobody else will protect your interests.