By: Ravi Sinha
Track2Realty: Real estate has expressed disappointment over the decision to hike key policy rate by the Reserve Bank of India (RBI). The developers and analysts say this would lead to increase in finance cost and also affect housing demand during the festive season.
RBI on Friday, Sep 20, raised the short-term policy rate by 0.25 per cent to keep “worrisome” inflation under check, a move that may increase EMIs for home and auto loans in the medium term.
The sector maintains that it is not a good signal for the industry which is about to enter the festive season. Banks have already started raising their rates. Housing demand generally goes up during the festival season and developers’ major part of sales take place during this period.
Jones Lang LaSalle India Chairman and Country Head Anuj Puri says the hike in repo rate would lead to increase in developers’ finance cost and affect their profit margin.
“In the current monetary policy, RBI has increased the repo rate by 25 bps, which will increase the borrowing cost. However, with reduction of MSF by 75 bps (0.75 per cent) and reduction of minimum daily maintenance of CRR from 99 per cent to 95 per cent, it has relaxed tightening norms,” Puri says.
Appreciating the Reserve Bank of India’s concern over inflation and prudent monetary management of RBI, developers apex body CREDAI Chairman Lalit Kumar Jain has called for concentration on growth as well, looking at a promising fourth quarter.
“It is equally important for the RBI to promote economic growth by encouraging real estate and infrastructure development even as the new Governor has inflation on his mind” says Jain.
Jain appealed to RBI to take a fresh approach towards real estate, particularly from the home buyers’ point of view. He also expressed that long pending demand to give Industry status to the sector.
Anshuman Magazine – Chairman & MD of CBRE South Asia says the present policy move is expected to further dampen investor sentiments, especially in the residential real estate sector. The State Bank of India took cues in advance from the present economic situation and hiked its base rates for home and auto loans yesterday. The burden of inflated EMIs may deter buyer sentiments in the upcoming festive season too, perhaps prolonging the demand stasis in the real estate sector.
“As a long-term policy move, however, the government must intervene to address supply side constraints that are leading up to inflationary trends. Such a policy structure—relying entirely upon influencing demand side trends by hiking interest rates—could result in long-term stagnation in investments in the economy,” says Magazine.
Pankaj Bansal, Director of M3M India says real estate industry is going through a tough time due to overall slowdown in economy. The absolute purchasing capacity has decreased substantively.
“RBI decision to increase the repo rate by 25 bps will further increase the cost of borrowing and owning home will become more costly. This will put the real estate industry in more difficult situation. It is a signal for the industry to be ready for to be well prepared to face a tough situation before the festive season. In the last few days bankers have already started raising their rates and due to increase in the repo rates , bankers may further increase the interest rates. This is going to hurt both buyers as well as developers,” says Jain.
Nikhil Jain, CEO, Ramprastha Group says he expected a significant change in the policy which would encourage the borrowers and investors to lend money. The beefing up of the repo rate will squeeze the bottleneck for availability of fund having a ripple effect on cost escalation on projects.
Abhay Kumar, CMD, Griha Pravesh Buildteck says in a bid to anchor the inflation, the RBI has increased the repo rate by 25bps. It was an unexpected move by RBI and will disappoint the banking industry and millions of consumers who are struggling under the burden of high Equated Monthly Installments (EMIs). It would also dampen sentiments ahead of the peak festival season, when developers expect the demand for houses to go up. This is going to hurt both buyers as well as the developers.
Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield says, today’s review of monetary policy would have disappointed most people as many were looking at the new RBI governor to make radical economic changes. However, high expectations from the new RBI Governor – Raghuram Rajan to provide all the solutions to the ailing Indian economy are grossly misplaced and unrealistic.
“The Governor has stuck to his mandate of managing the monetary risks which continue to be highly prone to inflationary and currency devaluation risks. For the real estate sector, the increase in the repo rate is going to have some downside in a stressed environment that is already plagued by slowdown in sales, increasing input costs, liquidity issues and high costs of capital, etc. However, it is the Government’s job to tackle these issues by implementing necessary reforms that ensure speedy development of infrastructure necessary for growth of the markets, improvements and more transparency in the regulatory processes, improved access to funding sources for both developers as well as buyers and better regulation of the industry on the whole and better management of the economy by Government of India,” says Dutt.
Gaurav Gupta, Joint Secretary, Raj Nagar Extension Association says the sentiment of real estate sector has been low for the past few months. Expecting a change in the policy by the Apex bank, he says this would infuse liquidity in the market. By beefing-up the Repo Rate, it has further de-escalated the funding. The policy would compel the end users and developers to shell out more money compared to before.
“In this scenario customers and developers will prefer borrowing from non-banking options or decelerate the development process due to lack of fund thereby increasing the costs of the projects. RBI’s rate hike will surely disappoint the real estate industry and millions of consumers who are struggling under the burden of high Equated Monthly Installments (EMIs). It would also dampen sentiments ahead of the peak festival season, when we expect demand for houses to go up,” says Gupta.
Brotin Banerjee, MD & CEO, Tata Housing says the decision to increase repo rates comes as a surprise, although the Governor has pledged to balance this going forward. In the short-run, banks can be expected to increase interest rates which will impact consumer sentiment in the real estate industry. Potential home-buyers are already reeling under pressure of income erosion due to inflation and rupee depreciation.
There is a general feeling within the sector that the exposure to the real estate industry also stems from high borrowing cost for projects with long gestation periods. If not through the monetary policy, the industry needs to be provided immediate relief through other fiscal measures. The Government needs to have policies to drive real estate growth as this is the second largest contributor to our GDP.
