A couple of days ago country’s apex bank-RBI hiked repo rates by 50 basis

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points, making home loans dearer. This has sent kind of shockwaves across the realty sector as it has come at a time when the sector was just showing signs of an upturn. Mind you, many people in the industry think that real estate is a sentiment-driven industry and any onslaught on that sentiment can potentially bring the growth process to a halt.

“It has always been axiomatic that when financial institutions raise their lending rates, there are bound to be ripples on the highly cost-sensitive Indian real estate market. The latest rate hike obviously means that the cost of construction has gone up for developers, and this move by the RBI certainly does not come at the best of times for them. Banks have already taken a cautious approach to real estate lending and reduced their exposure to the sector, and most developers are now prevailed upon to raise a larger component of their construction costs from the private sector. The fact that such funds come at a higher cost of borrowing has already increased their construction costs significantly,” Ashutosh Limaye, local director, strategic consulting, Jones Lang LaSalle India,

told FC Build.

He said it would be logical to assume that hoping to maintain their profit margins under such circumstances developers would not hesitate to mark the incremental burden to buyers. This would certainly happen if buyer sentiments and resultant market activity were high enough to accommodate such a move.

However, the market for residential real estate is far from effervescent at the moment. In a scenario where staying competitive and selling stock is of utmost essence, developers are unlikely to increase the cost of their units and thereby risk losing more customers. While this will certainly impact their revenues to an extent, most developers do see a sufficient profitability quotient to make a strategic decision on this count.

On the buyer side the low-to-mid income segments are invariably the most affected by a hike in home loan interest rates. Having said that, the impact of increased cost of borrowing is not as severe as that of the decreased allowable percentage of borrowing, said Limaye. While this used to be at a steady 85 per cent of the overall cost of the property, most banks are not extending more than 75 per cent now. The fact that the salaried class now has to supply a higher contribution to the cost of their homes is having a very tangible impact on demand.

Forget about what the analysts or industry experts say. What does this move mean for the builder community?

Pradeep Jain, chairman, Confederation of Real Estate Developers’ Association of India (Credai) told FC Build, “The 50 bps hike in repo rate and reverse repo rate by RBI bringing them to 7.25 per cent and 6.25 per cent, respectively, is harsh. This will intensify the cash crunch scenario which industry is facing right now. Along with this it also increased the saving bank deposit interest rate to 4 per cent which will add pressure on cost of funds for banks.”

There is no denying the fact that the RBI move has pressed the panic button in the industry across the length and breadth of the country. The apex bank must think about the industrial growth, which has moderated in last few quarters. Taking fund out of the market cannot be the only solution to tame inflation. The current pressure on prices is global in character and reflects supply side bottleneck. The solution is not monetary tightening. Realty sector apprehends that this step by RBI will further affect the demand-supply matrix of industry, which is so far going good.

Brotin Banerjee, MD & CEO, Tata Housing Development Company, said, “Demand has already been drying up over the past six-seven months. We have seen a significant impact on demand due to the constant interest rate hikes. There has been a steady fall in the number of (home) sales across the country, and this further rate hike is bad news. The end user has already seen a significant impact of the earlier interest rate hikes, and this move may only worsen the situation.”

But which segments will be affected most?

Banerjee clearly said low-to-mid income segments would invariably be the most affected by a hike in home loan interest rates. But at the same time, the impact of increased cost of borrowing is not as severe as that of the decreased allowable percentage of borrowing, he added.

Tata Housing, however, does not plan to cut back on any upcoming projects as consumers prefer to invest in the projects developed by Tata Housing as against any local developers. Being customer focused, transparent and quality driven developer pays in such difficult times.

The fear psychosis notwithstanding, there is some hope and some positive sentiments by some developers.

Venkata K Narayana, CFO of the Bangalore-based Prestige Group, for one, said, “In the short run, it would play a psychological impact on customer’s mind. But, in the long run, it does not make much difference for two reasons. One is home loan tenure is normally for 15-20 years, increase in interest rates for one or two years like this will get averaged out. Second is, assuming today that the home loan rates are 8 per cent or 9 per cent, there is no guarantee that in the next 15-20 years it is going to remain the same. If you see it analytically, there would not be any impact.”

Quite like Tata Housing, Prestige has no plans to reshuffle its plans due to the recent development either.

For RK Arora, CMD, the Noida-headquartered Supertech Ltd, the positive sentiment stems from the genuine demand, which still exists in the sector. “There is genuine and real demand of housing in India, housing prices too are within reach of buyers, I am therefore positive with the real estate sector,” Arora said. Although from a business point of view, hike in policy rates will result in increase in lending rates by banks, which, in turn, will have the twin effect of further slowing down capital investments and hiking rates of consumer finance.

Lalit Kumar Jain, chairman and managing director of Kumar Urban Development and also the national president of Credai, on his parts said this was the least that was expected of the Reserve Bank at a time when everyone is concerned about the high cost of inputs that is leading to high cost of property.

“It is really a paradox that the government talks of housing for all and affordable housing for the middle class families, while on the other hand the cost of funding is hiked,” he said.

In Kolkata, Ritwik Das, managing director, Bluechip Projects, said, “So far there has been no negative impact of interest rates hike on home buying particularly in the MIG and upper MIG segment. This is primarily because these segments are absolutely demand driven. The homebuyers in this segment are more concerned about whether their loans will get sanctioned than the rate of interest. Besides, these home buyers are only bothered about the prevailing interest rates at the time

of their buying.”

He, however, sounded a word of caution. “If the upward trend of interest rates for home loans continues for sometime then it will certainly have some negative impacts on the residential property market,” said Das.

(With Inputs from N Vasudevan in Bangalore)

ritwikmukherjee@mydigitalfc.com