RBI move adds to real estate sector’s woes

July 31, 2008	(Be the first to rate this story!)  Loading ...
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The Reserve Bank of India’s decision to raise repo rate and cash reserve ratio is expected to add to woes of the real estate sector.

The realty industry — which is already smarting under a sluggish demand and price correction — feels that RBI’s move would tighten the liquidity crunch for developers, and dampen end user demand by putting pressure on home loan rates.

“The hike in repo rate and CRR will negatively impact real estate sector. The hike would mean flow of money to the sector would be tighter than before.

The developers will now have to look towards other sources of funds, which could be on higher rates thus impacting the cost-benefit ratio of each company.

However at Omaxe we may not feel slowdown in the company’s investment plans and they stay as announced earlier,” Mr Sunil Malhotra, Vice-President (Finance), Omaxe Ltd, said.

Delay projects According to Mr Sanjay Verma, Executive Managing Director (South Asia) of Cushman & Wakefield, the credit policy has set the stage for hardening of interest rates.

“This is bad news for developers. Already, the credit crunch is hurting project financing, which is leading to delays in residential and commercial projects. Projects could now get delayed further,” he said.

Real estate players are currently grappling with dwindling sales, correction in land prices, tepid demand, and rising input costs, even as they face a liquidity squeeze. In such a scenario, if banks hike the interest rates on home loans further, the residential demand is likely to get hit, said industry observers.

Mr Pradeep Jain, Chairman, Parsvnath Developers Ltd, agreed that increase in cost of borrowing (for developers) would escalate the cost of the real estate project — the burden would ultimately be passed on to consumers. “The cost of borrowing goes up not only for builders but for all ancillary and input industries as well, leading to a higher price tag for the real estate product.

Moreover, it has an impact on home loans,” he said, but pointed out that foreign direct investment still remained a viable option for the players to raise capital.

Mr Jain also opined that end users or first time home buyers are unlikely to get deterred by a marginal hike in the home loan rates.

The board consensus in the industry is that increase in home loan rates would certainly have a detrimental effect on the mid and upper-end segment of home buyers. Mr Kunal Banerji, President, Marketing, Ansal Infrastructure and Properties Ltd, said “Although, we do not predict any drastic change in the overall robust demand for quality housing at this stage, there could be a long-term effect on the speed of the overall growth, particularly in the residential real estate category.”

Echoing the sentiments, Mr Ajay Mangal, Director (Finance), Uppal Group, felt that demand will surely be hit once the home loans become costlier.

News Published Under:   Real Estate India |

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