Realty PE funds, lenders don’t see much impact of rate hikes on home sales

The Reserve Bank of India (RBI) has raised interest rates cumulatively by 90 bps in the last two MPC meetings to control inflation.

RBI repo rate
Fund managers feel the rise in rates would not have much impact.

By Raghavendra Kamath

Rise in repo rates and the subsequent increase in mortgage rates is likely to have a marginal impact on residential sales, according to real estate fund managers and lenders to property developers.

The Reserve Bank of India (RBI) has raised interest rates cumulatively by 90 bps in the last two MPC meetings to control inflation.

However, fund managers feel the rise in rates would not have much impact.

“With RBI raising repo rates in order to control rising inflation, we might see some impact on demand in the short term, however we believe that fundamentals for the sector remain strong and that the sector is well on its path towards a structural recovery,” said Sharad Mittal, director and chief executive at Motilal Oswal Real Estate.

A confluence of factors, such as bottomed-out prices, sweetened deals from developers, interest rates at decadal lows and above all, the strong sentiments and emotional value around home ownership, resulted in a robust rise in both new launches and rate of absorption in the residential real estate segment during last two years, Mittal said.

Among the segments of residential real estate, major impact is expected to be in the low-cost housing segment as the interest rate hikes will lead to higher EMIs which will impact affordability, he said.

Amit Bagri, CEO, Kotak Mahindra Investments (KMIL), said an increase of 100 basis points (bps) in mortgage rate translates into an increase of `5,000 per month (for a 20-year loan) for a loan amount of `1 crore. This may not materially impact the buying decision.

“At the same time, a home-buying decision is not only dependent on mortgage rates. A buyer who has made a decision to purchase and is in the process of identifying a property may be less impacted than the yet ‘undecided’ buyer,” Bagri said.

Considerations for first-time homebuyers differ from those for someone looking to upgrade their house. Having said that, a further increase in interest rates may limit the developers’ ability to increase home prices as a combination of higher home prices and mortgage rates will impact affordability and hence home sales growth, he said.

However, Amit Goenka, chief executive and managing director at Mumbai-based fund manager Nisus Finance, said larger EMIs will dull buying sentiment with income growth expected to be muted. “So while the housing sales are likely to slow down, this year may not still show a degrowth or massive slowdown yet,” Goenka said.

He said sales have grown nearly 100% since last year. An estimated 300,000 homes were sold pan-India in FY22 against 150,000 in FY21. This is expected to drop by 15% to below 250,000 homes in FY23.

“Developers need to be cautious about specs and maybe taper down the frills. Buyers are going to start getting more cost sensitive. Configurations had become larger which may now need to also include smaller functional unit sizes,” he said.

Goenka has changed his strategy to suit the new environment. “The yield expectations of the fund have gone up. While developers may not be able to commit to higher interest rates, an element of equity kicker is being introduced. Also projects margins are being stress tested with more caution going into approving investments,” he said.

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