Don't confuse what you wish were true with what is really true' (Dalio, Ray - 'Principles'), this quote kind of summarises the market mood post lockdown. By this time we all have been subjected to numerous webinars, videos, market reports, opinions etc., basically unsolicited gyan about what is going to happen in Hyderabad's real estate market especially residential. Gist of all these efforts seems to be to convey that everything is alright and future is all hunky dory with real estate prices only going to go upwards. Being positive always is a good trait but these are times to become a hyperrealist. Let us evaluate for ourselves what exactly happened or is happening in the Hyderabad's real estate market since the lockdown started.

Office Space Market:

• In the immediate aftermath some of the new deals done in Q12020 either got cancelled, renegotiated, postponed or reduced. More such repercussions are still getting panned out.
• Vacancy levels in March were minimal and during the lockdown it started creeping up to about 4-5% and today are inching towards 8-10%.
• The developer market has clearly got differentiated between the men and the boys. Grade A buildings of national developers occupied by larger tenants have generally reported 97-99% rental collection for Apr-Jun period. The disruption of existing tenant base in this segment has been minimal. The Non-Grade A segment of the market has witnessed the maximum disruption in tenancies, non-payment of rents, lock-in period deviations and resultantly this segment might be taking the maximum benefit of the loan moratorium scheme.
• The co-working segment seems to have borne the brunt of this disruption with all players being affected significantly. Centres would have lost 40-50% of their pre-covid tenants. Covid has hastened the consolidation in this segment.
• Work-from-home (WFH) has definitely affected space take up and deals have slowed down to a trickle. It is not uncommon to hear companies vacating space in favour of the WFH model.
• Recent newspaper reports give details of some large space take-up's transacted in the city and across other metros. A closer inspection might show significant number of these deals being of pre-covid times or closed much earlier than that.
• The initial expectation that space take-up in Hyderabad could be down by 25% seems an optimistic estimate now.
• Rentals have also started coming down as quotes soften and developers and co-working companies are much more flexible than in the Feb-Mar period.
• A sure short indicator that leads base has shrunk is evident from the fact that couple of large building developers, with ready stock to lease, are now offering increased brokerages to consultants.
• It is now pretty evident that each major metro will have a different timeline to come out of the Covid impact. In the office space segment it seems that Bangalore and Hyderabad would be amongst the first to bounce back.
• In Hyderabad by July few SEZ deals have been cleared and some non-SEZ deals also got inked. Clients are signing up for co-working spaces as well, keeping rent start dates for later this year. With clients getting into a nil capex mode, co-working operators seem better poised to cater to their requirements.
• The Telangana government made a very important decision recently in the form of the GRID policy. Finally the government acknowledges that Hyderabad's lopsided development needs to be corrected and IT needs to be developed on the North and east sides of the city as well. A few developer projects have been sanctioned in Uppal / Nacharam as part of the policy launch. Policy would have borne better fruit if it was released at least a year back. With the overall markets being in a depressed mode any new initiatives / developments in untested markets will take more time to show on-ground results. In the banking sector RBI has a policy for branch licences which balances the urban-rural divide. In a similar way government might have to link developer approvals in the western side to project development on the other sides of the city to ensure more equitable growth of the city on all sides.
• Decongestion of Hitec City seems to be on the cards. Companies may now be easily persuaded to avoid employees travelling the length and breadth of the city for work. Hopefully the WFH model eventually matures into a more palatable 'work near home' model.
• The recovery in the office market has started but will have to wait to evaluate its extent and accordingly weigh in on the future. The investor confidence in the recent Mindspace REIT IPO, who have their major portfolio in Hyderabad, is good news for the city's office market.

Retail Market :

• This segment is the worst hit due to the covid induced lockdown. Overnight this vibrant segment became stagnant with rental waivers and CAM reduction negotiations becoming the new norm.
• Marquee tenants seem to be terminating contracts in malls as business future projections continues to remain grim.
• Large number of build-to-suit deals are likely to be back on the negotiation table or will get postponed.
• Some larger malls seem to be struggling to survive and might be up for grabs to possible large investors looking at building a retail portfolio across the country.
• Most brands are pushing their rental deals to be converted to revenue share deals. Any possible expansion in future seems contingent on landlords agreeing to revenue share models or expansions are on hold till late 2021. Any brand offering rental deals today is doing so at very low rentals.
• In this segment also the larger developers have managed tenants better than fragmented ownership model malls.
• Too early, to predict the future for mall retail as the most important component i.e. cinemas are yet to open up. Hopefully with domestic air travel opening up, a similar model might become a yardstick for cinema's opening up as well.
• Malls are partially open as part of the various unlock stages. The real challenge remains to persuade the average customer to have faith to walk into a mall to do their shopping. It is this challenge which would the biggest hurdle for cinema's also when they open up.
• It is not uncommon today for retailers reaching out to their loyal client base offering video calls to do shopping and ensuring home delivery. This is being done for garments, shoes, home furnishing, books & stationery etc.
• High streets operations of various brands are likely to stabilise earlier than malls and reach pre-covid levels later this year. In the short term customers seemed focused on only need based shopping from high street stores for immediate requirements.
• The post covid scenario will augur better for high streets with demand for space remaining higher than malls. Brands will completely relook at their strategy in retail in ways and means to reach out to customers closer to their homes rather than flocking everybody into malls.
• In some of locations like Hitec / CBD, malls were already in oversupply pre-covid. With many brands driving a hard bargain demand for malls likely to go down.
• Some of the malls might have redevelop as office spaces to keep their properties relevant.

Residential Market:

Commenting on the this segment is always tricky for obvious reasons. Customers like to hear that things are going down and developers want to hear the exact opposite. Anyway here is our 2 bits on the state of the market.

• It is a bygone conclusion that residential market sales in Hyderabad have been severally impacted by the lockdown.
• Has lack of sales brought prices down? At least it does not seem so as of now. Developers continue to hold onto pre-covid pricing and trying to offer clients variety of schemes such as price guarantee or collecting 15-20% payment now with balance on possession or funding some portion of interiors or just taking a token booking amount now plus allowing clients 6 months to mull over their decision etc.
• Will prices come down? Logically they should. If you look at the above schemes in some ways some amount of the client costs is being taken over by the developer hence some benefit is being passed to clients.
• How much will prices correct? Earlier commentary by industry experts that prices might correct by 20% have not been taken kindly by the market constituents. Reports showing data of reduced prices have elicited sharp response. At best market currently remains in denial mode partially because we are all learning new things or reacting to new developments on a daily basis.
• The market is 90%+ dependent on mortgages for sales and in the first quarter the mortgage industry results shown significant decline which corroborates the contention that sales have come down across all major residential markets.
• In the current financial year, June has been a little better month for sales with most developers. July traditionally is a slow month as most buyers postpone buying decisions due to sentimental reasons.
• The general expectation is that with each passing month henceforth sales would improve and market should be back to 80-90% of its pre-covid level by Q4 of this financial year.
• Hyderabad's residential market has had a unique trajectory in the past decade and half. The market was at its peak in the 2006-07 period like all other cities. The market tanked as a reaction to the 2008 financial sector crisis like all other cities. All other metros started recovering from early 2010 but Hyderabad's residential market continued its downward spiral until political stability was restored in 2014-15 and the office market started improving.
• Period post demonisation was one of the most challenging times for Hyderabad's residential market. After this lull, sales had just started to look up in 2019 but again slipped by Q12020. On the back of a slow first quarter1 in 2020, Covid-19 has been a major blow to this segment.
• Recovery of the market to 80-90% of pre-covid level may not be ideal as Q12020 was itself slow in sales and price growth.
• Data reporting in this segment has always remained controversial. This is probably a great opportunity for developer groups to create acceptable yardsticks for data reporting on sales and price movements. The biggest challenge is what constitutes a sale, does giving a booking amount amount to a sale or signing of agreement of sale seal a deal or registration of the sale document is when sale should be reported. In our experience whenever we approach a client for instalments each stage is a sales pitch again. Client needs to be reassured of the sale and price movements. Any lack of confidence in the sale process leads to cancellations.

Some Do's and Don'ts for buying residential real estate:

• Price of inputs like steel, cement, labour etc have gone up post lockdown and resultantly quoted prices are 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. Softening of land prices coupled with pressure of construction costs will get reflected in apartment quotes in future.
• Projects which are still under construction from the last recession period of 2008-10 might 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 -4 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. In such projects clients should look at the advanced stage of construction and take a call.
• Projects developed by builders affiliated to CREDAI / TREDA should be preferred. Work only with RERA approved brokers. A broker needs to be registered with RERA plus the developer has to approve them 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

This article was printed by Times of India's edition of Realty Rises Independence Day Special and possibly covers some portion of my previous article.