Amravati’s Real Estate Fortunes – Cruise Mode or Free Fall?

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Prashant Thakur, Director & Head – Research, ANAROCK Property Consultants

“It sometimes takes over 100 years for cities to come to life” – Vadim Rossman

In 2015, Amaravati became the capital city of Andhra Pradesh. As a city with great historical significance, which translates to a ‘mythological city of immortals,’ Amaravati was touted to become the best city in India. The state government soon embarked on a journey to create the capital city of their dreams.

With such a vision, Amaravati basked in the glow of positive developments. New infrastructure projects were announced and the World Bank and Asian Infrastructure Investment Bank (AIIB) promised investments. Property values rose and investors increasingly looked at Andhra Pradesh with renewed interest.

And then came the recent state assembly elections. There was a change of guard in the state’s government. That grand vision has stuttered since then. With the new government at the helm, has the old vision hazed? We analyse.

 

A Vision Re-envisioned

Under the previous government, Amaravati was envisioned as a green and blue city with 50% green space and 10% water bodies. Modelled on the lines of Singapore, the government roped in two consultants appointed by the Singapore government for drawing up the master plan.

As per the master plan, nine theme cities and 27 townships were envisaged in an area of 217 sq. km. This city had a projected population of 3.5 million residents, 1.3 million jobs, and 0.9 million resident families residing by 2050. One of the primary objectives was to connect Amaravati with six neighbouring towns, including Vijayawada and Guntur.

The estimated budget originally was about INR 1.09 lakh Crore, for which a detailed project report was submitted to Niti Ayog. Out of this, INR 17,500 Crores was tied up with Union Government-owned PSU Housing and Urban Development Corporation (HUDCO), the World Bank, and Andhra Bank. The remaining funds were expected from public-private partnership, bonds, a collective investment firm and lease rental discounting.

The Winds of Change

Things started to change when the World Bank announced that it was pulling out of the Andhra Pradesh Amaravati Sustainable Infrastructure and Institutional Development Project. It cited several environmental risks involved in the implementation. Following the footsteps of the World Bank, Beijing-based AIIB also withdrew its funding for the Amaravati Capital City Project.

Both the financial institutions together were to pump in $500 million into the project, while the state government was to fund the same with an additional $200 million. These developments have understandably raised some question marks over the future of this ambitious city.

New Initiatives

The present Chief Minister of Andhra Pradesh has completed 100 days in power and has initiated several measures to enhance transparency and the financial situation of the state, including reverse tendering of the Polavaram project, renegotiation of solar and wind PPA (power purchase agreements.

Though some of these announcements are intended to improve transparency in the system, it has created an environment of uncertainty among industrialists, investors, and real estate developers. Some believe that these measures are only going to delay the execution of several major projects.

In its budget for 2019-20, the government allocated INR 500 Crore for Amaravati. But given the grand scale of the earlier vision, this may not be enough to complete the existing and upcoming projects. Looking at the current economic scenario, getting funds to execute projects seems like an arduous task for the government.

 

Real Estate Impact

Over the last five years, the real estate markets in Amravati, Vijayawada and Guntur region witnessed heightened real estate activity and evoked investor interest. The announcement of the capital city led to a two-fold rise in property values. However, there has been a visible slowdown, and demand is currently tepid. The change in guard has also impacted prices with a few areas seeing a dip in land prices. Investors have now gone into a wait-and-watch mode.

The ongoing capital values in Amaravati are in the range of INR 3,000-5,000 per sq. ft. while land rates hover between INR 13,000 – 27,000 per sq. yard.

Impact on the Hyderabad Market

It is still too early to predict the immediate impact of the slow development in Amravati on the Hyderabad market. The City of Nawabs – as a standalone – is already on the radar of institutional investors and has been witnessing immense activity over the last few years. Regardless of whether or not development takes place at Amravati, Hyderabad will continue to thrive on its own unique advantages.

AP’s Strong Fundamentals

In the Ease of Doing Business (EODB) ranking by the Department of Industrial Policy and Promotion, Andhra Pradesh was ranked second with a score of 70.12% (only after Gujarat) in 2015.

With an impressive performance on the fronts of the single window system, tax reforms, construction permits and advance automated solutions to deal with the environment and pollution-related applications approvals, it secured the top ranking in the EODB ranking for 2017 and 2018.

The state’s gross value added (GVA) grew by 31% from INR 2,70,964.5 million in 2013-14 to INR 3,54,067.2 million in 2016-17. Further, per capita net state domestic product witnessed a significant jump from INR 82,870 in 2013-14 to INR 1,42,054 in 2017-18, a whopping growth of 71%.

Bridging the Gap Between the Old and New Vision

Over the past five years, Amaravati has created a brand name for itself globally. At present, a lot of administrative and legislative services are operated from the city.

To bridge the existing budget gaps, the government is actively looking for investments for several projects. These include the state’s 972 km coastline, six operating ports and airports, 123,000 km of the road network, and 2,600 km of rail line network for opportunities in maritime, logistics, and processing sectors.

Recently, the Chief Minister also hosted a diplomatic outreach program in Vijayawada to showcase the potential of the state, which was attended by 35 countries. His visit to the United States of America saw the possibility of investment opportunities with members of the US-India Business Council (USIBC) and Atlantic Council’s South Asia Centre. These developments signify a pro-business approach from the new government.

Additionally, despite the World Bank’s pull-out from the Amaravati project, it continues to support Andhra Pradesh with over $1 billion approximately (INR 6,900 Crores) in areas that cover the health, agriculture, energy and disaster management sectors.

 

The Way Forward for Amravati

The original development plan of Amaravati was spread across three phases – the first phase from 2015-2025, second from 2026-2035 and the third from 2036-2050. Cities are not built overnight, and developing a new city from scratch is especially time-consuming.

Vadim Rossman, a Russian author, explains this process in his book ‘Capital Cities: Varieties and Patterns of Development and Relocation”. He writes, ‘building new cities is always a long-gestation, intergenerational project, and it sometimes takes over 100 years for cities to come to life.” Citing the example of Washington DC, he explains that the master plan for the capital city of the United States was completed only about 100 years after the city was founded.

In the transition from one government to another, even the best-laid plans sometimes go awry. There has been a dip in the focus on Amaravati – but the present government reviewing the master plan for Amaravati, this city may still achieve some of its vision of becoming a model for India’s future.

No doubt, development in Amravati has slowed and investors are in a wait-and-watch mode with even the World Bank and AIIB backing out from the project. While the current government is re-strategizing the development and reviewing the plan, one major silver lining in this slow growth is that speculative real estate price trends will remain curtailed.

This is a good thing. Since the time the capital city was announced, prices there saw two-three-fold jump – a similar dynamic was seen in certain pockets of NCR at some point. With speculation receding, more genuine market trends will follow.

The debate about Amravati and its eventual fate continues, and the situation remains fluid. Only the time will tell whether headwinds or tailwinds blow for the star-crossed Amaravati market.