Hyderabad Real Estate Market Amid the Pandemic

American billionaire fund manager Ray Dalio has written extensively about economic cycles, especially debt cycles, and how empires have come and gone in the realm of long-term and short-term cycles. Similarly, almost every industry goes through its own cycles.

The real estate industry is no exception. There are big cycles and within them smaller cycles. Because of the ongoing pandemic, economies and industries are going through a suddenly induced down-ward cycle. Everything that goes up will come down and will again go up. 

As per renowned real estate professor Dr. Glenn Mueller’s model, there are four phases of real estate cycles: Recovery, Expansion, Hyper Supply, Recession. Phase 1 of Recovery is defined by declining vacancy and no new construction. This was the period around 2014 in the Hyderabad market. Phase 2 of Expansion is defined by declining vacancy but the beginning of the new construction of commercial offices. 

In Hyderabad, one can identify with this phase starting around 2015 when many built-to-suit and pre-committed projects were launched. Phase 3 of Hypersupply is defined by increasing vacancy and continued new construction. The last phase of the Recession takes over with higher vacancy and more projects reaching completion. 

How long this phase lasts depends on both local and global factors around the pandemic like finding the vaccine to cure the illness or even how quickly demand comes back post-COVID. Most of the office complexes are wearing a deserted look with less than a quarter of the traffic on roads as work-from-home becomes mandatory in most tech majors.

Despite zoom fatigue and depleting social capital creating exasperation among tech workers, the fear of infections is holding back many enthusiastic office goers from stepping out of their homes. 

Amid the uncertainty, companies are on a wait and watch mode in terms of their real estate strategies - be it expanding the office space or triggering alternate workplace norms. This has led to slowing down of office leasing due to which we expect the overall office space uptake up across the city to dip by more than half compared to last year. 

While the lockdowns have initially caused the stoppage of construction work, many sites are now buzzing with activity across the city. There are more than 50 large construction sites with hectic activity in HITEC, Gachibowli, and other financial district technology hubs where work has resumed. However, there is a measured pace of construction progress given the health and safety concerns among workers and other site crews apart from a muted demand for space from occupiers. 

As of now, ongoing projects are delayed by around 3 to 6 months due to various pandemic-related factors. With the loan moratorium getting over, there is palpable stress on the investors and developers to make up for the lost time. Developers are, however, modulating the supply to ensure that the market does not end up with a glut and further softening of the rentals.

Markets have steadily expanded in Hyderabad since the formation of Telangana state in 2014. At that time, Hyderabad was characterized by low supply and high demand for office space leading to several developers launching speculative buildings for over 3 years. This also resulted in making Hyderabad one of the high growth markets with high quality and ready to occupy stock across HITEC city, Gachibowli, and financial districts.  

With several projects at near completion stage and despite a potential oversupply situation, the availability of good quality stock in the city will continue to make Hyderabad attractive for large corporates that are looking for expansion. It can also offer companies that are present in other parts of the country to diversify into Hyderabad and take benefit of the growing availability of talent pool and favourable government policies for doing business in the state. 

However, what we are seeing now is a temporary pause and the pace of construction in the city will depend on how long the current cycle lasts. Whether it’s going to be a long-term or short-term cycle, the market will surely see some very hectic activity.