Soaring interest rates have come as a blow to real estate developers, who are now facing high cost of servicing debt, even as sales dry up with buyers postponing house buys because of expensive home loans.
The RBI has hiked repo rate for the seventh time in the past one year and just about every bank is toeing the high interest path. Leading the pack is the country’s largest bank, SBI, announcing an increase of 75 basis points in its lending rates, after increasing it by 25 basis points on April 25.
The figures get more stark if we consider the debts of some big real estate developers (as on September 2010)? DLF?s Rs 14,640 crore, Unitech?s Rs 4,481.49 crore, HDIL?s Rs 4,133.32 crore, DB Realty?s Rs 4,133.32 crore, Sobha Developers Rs 1,267.5 crore.
But Amit Bagaria, research head (real estate), Angel Broking, warns of a more grim picture ahead when he says the real impact of interest rates will start playing out now. ?With heavy investment and unsold inventory, real estate isn?t doing well. And, it will slow down considerably from here on and can even become negative in certain pockets. Real estate players who are heavy on the debt side will have to shell out more to pay loans because of which margins will suffer. The coming 12-15 months will be tough for the sector.?
Other experts also agree that the high interest rates will only keep going up from here, spelling no respite for both the consumer and developers. Says Abhishek Kiran Gupta, head (research & REIS), Jones Lang LaSalle, ?A scenario of high property prices and higher interest rates are dampening buying behaviour of the consumer. Every 100 basis point increase on a loan of Rs 30 lakh translates into a substantial 9-10% increase in the interest factor for the buyer. This will impact future sales and hurt developers, making it more difficult for them to sell property.?
Sample this: in NCR-Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata and Pune, the net absorption rate of residential property fell from 21.4% in the first quarter of 2010 to 17.5% in first quarter in 2011.
Even Navin M Raheja, chairman, real estate committee, Assocham, and CMD, Raheja Developers, admits that developers will have to bear the brunt as cost of capital goes up, as servicing this debt will remain a problem for the developer. He said, ?Developers essentially add up the debt cost to the project, so they cannot sell the inventory below a certain price point, resulting in unsold inventory. At times, debt constitutes 50% of the project cost. Players who have less loans in their kitty can play with the prices to attract customers, who will also have to shell out more for home loans. Highly leveraged developers will have to seek a rollover from banks till the market gets better or liquidate their stocks or get rid of NPAs. The overall market is placed in such a manner that the developer cannot load this cost to the customer.?
However, Niranjan Hiranandani, managing director, Hiranandani Group, feels developers have no choice but to pass on the burden to the consumer.
?Already, taxes are steep for developers. As much as 32% of the money goes in servicing taxes and if interest rates rise, the overall cost for the developer shoots up too. There is no scope for the developer to absorb the rising interest factor any more. So, the burden will be passed on to the consumer.?
No wonder then that several developers are re-christening projects, tweaking specifications and re-positioning them in an effort to find new takers, continuing the trend that was triggered during the slowdown of 2008-09. Experts point out that the idea is to get the price right to stimulate demand but whether it works remains to be seen.