Hyderabad Metro - Impact on property prices

Real Estate values have a positive impact on micro markets through which Metro routes pass. An analysis by Centre for Environment and Technology (CEPT) on the impact of Delhi Metro on real estate in three phases i.e., pre-construction phase, under-construction phase and post-construction phase has found that property prices jumped significantly after the Metro began its operations. The study has established that property prices around stations that are at the peripheries of the city have considerably closed the gap with those at city centre. Further, the prices are highest within 500 metres of Metro routes.

Currently, the impact of Hyderabad Metro on Hyderabad Real Estate market (which is still in the bidding stage) is insignificant. With the new metro developer likely to be identified in the last quarter of FY 2010 i.e., by March 2010, real estate prices along the metro routes may inch up in the next one year or so on account of Hyderabad Metro.

However, the impact of Outer Ring Road (after the implementation of its first phase) has been significant on Hyderabad Real Estate Market (land rates) along the alignment and the route of Outer Ring Route. In certain areas, Land rates have more than doubled and in some cases jumped by more than six times in a time-frame of 2003-2009.

Asset bubbles - Indian Real Estate Market

In a rational market, real estate rates could be linked to buying power of users and the investor interest. However in today's time, markets are exhibiting irrationality and are becoming very difficult to predict.

Capital flows into the emerging markets have been phenomenal. In the last six months over US $ 16 billion has flown into Indian stock markets. Further, there is talk that US $ 4 billion has flown into the real estate market. I believe that these heavy capital flows could destabilize the Indian market by creating asset bubbles across asset classes including real estate .

My concern is that this is not foreign direct investment, but money flowing because of a carry trade i.e., money being borrowed at a very low rate in the west and then being invested in the developing markets such as India. While markets growing at a moderate rate is good, but what we are witness to is irrational exuberance - beyond normal in the Indian stock markets and that will lead to a bubble. With an ear on the ground, builders locally have already started increasing prices, ahead of pick up in demand and in spite of steep reduction in input prices. I do wish that investors/builders will be more cautious and the asset bubbles will not touch the Indian property market this time around.

RBI could announce a rate hike in Dec/Jan

The strong surge in the GDP figures for the July-September period at 7.9% as compared to 6.1% in the previous quarter. The growth in the GDP was mainly driven by the manufacturing and services sector. With the economy responding to the various policy measures taken by the government, we can expect that RBI would withdraw its stimulus measures slowly. It is expected that RBI would announce a hike in interest rates in the months of Dec/Jan as against the previous time frame of March 2010 so as to contain the rising inflation.

Strong rebound in Emerging Markets

On the last day of November, Indian shares rebounded strongly, as GDP data for the quarter ending September 2009 was better than expected and also because of easing of concerns about debt failure in Dubai. Emerging Markets stocks across the world too rallied as Abu Dhabi announced its intention to support Dubai banks. Investor concerns of the last week, proved to be a small blip, with dollar declining against other leading currencies and commodities rising higher. While realty stocks too rebounded in India, investors will still be cautious about investing in the forthcoming IPOs at current valuations.

Indian Real estate IPOs may lie in cold storage for some time

The impact of the Dubai World debt crises will not only be felt in the Middle East markets, but also on the Indian Real Estate Market. The Indian Real Estate initial public offerings such as Emaar, Lodha, Sahara and slew of others will find the going tough in the next few months. The global liquidity boom has driven stock valuations higher as compared to earnings in the Indian Real Estate sector and we might witness a downward correction in the Indian Market in the coming weeks.

Why property prices will rise

Foreign funds have pumped in about $ 16 billion into Indian stock markets this year. After the negative inflows last year, the FII investments are reaching the peak 2007 levels. The stock markets are reaching for the stratosphere and valuations are defying the stock fundamentals. Meaning today's valuations are way ahead of earnings.

The next asset class in the scheme of things of global fund houses after speculation in gold this year, is likely to be property. With banks slush with funds and no incremental domestic demand, liquidity in the banking system is high. We expect that land prices will rise in the coming months as a result of money flow into the system. Meaning, land rates are likely to be at inflated levels, and the excess committed by the builders and the banks in the previous cycle could very well return soon. In the fast changing global economic environment, business cycles, which earlier used to last for about 5-7 years are likely to get shorter to 2-5 years.

Liquidity Inflows driving the markets

Read an interesting interview with Ravi Kapoor, MD, Head South Asia Capital Markets of Citi - on the current state of the markets.

http://www.business-standard.com/india/news/liquidity-inflow-may-make-valuations-uncomfortable/371775/