'Banning 80:20 will squeeze realty players'

Sep 05 2013, 08:10 IST
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SummaryCost of funding for builders may go up by up to 350 bps.

Cost of funding for builders may go up by up to 350 bps

The RBI’s move on Tuesday barring banks from giving upfront loans for under-construction projects may not only tighten the liquidity situation of developers but also raise the cost of funding for builders.

Experts feel that the move may further dampen the real estate market that has already been witnessing a slowdown in transactions and lead to a correction in residential real estate prices across the country. Under the 80:20 scheme, the home buyer was required to pay 20 per cent of the property cost up front and was not required to pay anything till the time of possession of the property. However, through a tripartite agreement between the customer, developer and the bank, the lender would fund the remaining 80 per cent of the property value to the developer, on which the developer would pay interest till possession of the property.

“Through the innovative scheme developers were getting funds at home loan rate, which will now go up by 300-350 basis points, and thereby lead to a rise in cost of construction for them,” said the head of a leading housing finance company who did not wish to be identified.

Even though the country’s largest real estate player, DLF Ltd, said the move will have “negligible impact” on it, the broader view in the sector is that the decision by the RBI is likely to dampen the sales for developers in a market that is already tepid. The Residex data released by the National Housing Bank a couple of weeks ago showed that 22 out of 26 cities across the country have witnessed softening in the residential prices. However, experts feel that there has been more pronounced impact on the number of transactions and with the latest move by RBI, the demand and prices are set for a further dip.

“While the Residex data was already having an impact on the sentiments, this will have a multiplier effect,” said Gulam Zia, national director, research and advisory services, Knight Frank.

This is, however, likely to change the developers approach in the market and the market may witness more innovation in products. “The market is going to change. While developers were offering benefits to consumers through this scheme, they will now have to come with some other means to reward the consumer or will have to reduce the prices,” said the CEO of the HFC. “The scheme had become widespread in the recent past as developers looked to attract investors though this. The move will dampen the spirits,” said Pranab Datta, VC and MD, Knight Frank India.

“DLF does not make its sales forecasts based on subvention scheme, and therefore, it will have negligible impact on us. The linking of the scheme with the construction stages could impact those developers who are heavily dependent on the lump sum disbursals,” a company spokesperson said.

HOUSE THAT

*Experts say RBI’s move may dampen the real estate market

*This is likely to change developers approach and the market may witness innovation in products

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