Hope returns, interest rate remains key

Express news service Posted online: Saturday, Dec 21, 2013 at 0000 hrs
The stage seems to be set for the real estate sector to take a turn for good times again. When everyone expected a rate hike in the Reserve Bank of India's policy review on December 18, the central bank surprised all with a status quo on rates. Another bonanza soon followed: State Bank of India and HDFC, the top two home loan providers, slashed home loan interest rates between 30-50 basis points.

Both these unexpected moves have rekindled hopes in the struggling real estate sector at a time when housing demand remained largely stagnant across major urban markets in India. The sector of late has been witnessing end-user perceptions of inflated housing prices, as well as high borrowing costs that kept off home buyers. In fact, subdued demand levels have even led to a price correction of around 10-15 per cent across some markets in India.

According to an estimate from Knight Frank India, owing to weakening demand, new launches in Mumbai, the largest market in India, plummeted over 40 per cent compared to peak levels in 2010 as developers shifted focus on liquidating current inventories.

"Mumbai's unsold inventory level is almost 44 per cent in comparison to NCR (New Delhi Capital Region) which stands at 26 per cent even with twice the number of units under construction. Nearly 2,90,000 residential units are under construction in Mumbai while unsold inventory levels are close to 1,30,000 (ready as well as under construction)," it says.

"We are pleased that major banks in India have decided to lower the home loan interest rates to new customers. This is a positive move to boost property sales and spur industry growth. Home buyers who were earlier waiting for rates to come down will now certainly look at buying their dream homes," said Lalit Kumar Jain, Chairman, Confederation of Real Estate Developers' Associations of India (CREDAI).

"From the perspective of the real estate industry, high inflation coupled with muted income growth has already made a dent on consumer affordability. At least a status quo on key policy rates will serve as a breather for households and leveraged developers alike," said Samantak Das, chief economist and director-research, Knight Frank India.

Industry veterans say that the cut in home loan rates by banks has occurred after nearly a year, and will augur well for investment sentiments in the market. "If home loan interest rates go down further, home buyers and realty investors especially in the housing market will be encouraged to make purchase decisions. Going forward, the RBI may be expected to maintain stability or reduce base rates. All in all, a positive signal for the investment climate in India's realty sector; and a likely indication of a gradual economic recovery," said Anshuman Magazine, Chairman & MD, CBRE South Asia.

However, a big worry for the real estate sector is will the good times last? The RBI Governor has said the central bank was waiting for more data, which means if inflation rises, it could start hiking again. "It is good that RBI has decided to resist the temptation of raising the rates. This may provide a temporary relief. It still leaves a hanging sword by postponing the decision to next month. It has been established that the government has not been able to bring down the inflation, particularly the food inflation despite bumper food production. We believe that emphasis needs to be given to initiatives that will result into growth," said Sunil Mantri, president of the National Real Estate Development Council (Naredco).

Real estate players are keeping their fingers crossed with a prayer on their lips that inflation should come down and the RBI should not raise rates again.