Realty sector: A new pressure point
In his first full-fledged review of the monetary policy, Reserve Bank of India (RBI) Governor Raghuram Rajan stuck to the continuing hawkish stance of inflation control first, which has seen the repo rate go up by another 25 basis points. The repo rate is the rate at which the central bank lends money (liquidity) to the financial system, and is the key policy rate. After the RBI action on October 29, it stands at 7.75 per cent.
The most rate sensitive sector that always watches the central bank's action closely is real estate. Equated monthly instalments (EMIs) are the biggest expense for a typical household, and with the floating interest rate regime, any increase in the policy rate has a potential effect of pushing EMIs upward, although it is banks that take the final call.
This time, the RBI's review of the monetary policy has coincided with the festive season an important period for the real estate sector, for most home buyers seal the agreement for purchase typically during the second half of the calendar year, which is when most festivities take place.
The real estate sector is saddled with huge inventories, stretching up to four years — that is the time it would take to offload all those apartments at the current absorption rate.
"Pan India inventory is now well above the comfort level of 14-15 months. Mumbai has an inventory of close to 48 months, Delhi of 23 months and Bangalore of 25 months. These are close to the levels of 2007, when the residential real estate market inventories were at an all-time high," says Santhosh Kumar, CEO-Operations, Jones Lang LaSalle India.
Projects are routinely delayed and funding is starved as the cost of liquidity is high. As a recently released report by global property consultant Knight Frank put it, "The ailing real estate developers have been caught in the trap of ambitious expansion, decelerating sales, hardening interest rates and weakening cash flow."
Given this already bleak scenario, what is the likely impact of the latest inflation control measure of the central bank? As most industry players put it, not very good.
"Prospects for the real estate industry are already muted due to high interest rates and high cost of construction. This is acting as a dampener on consumer sentiment in the run-up to the festive season," says Brotin Banerjee, managing director and CEO, Tata Housing.
"Since the mid-quarter review in September, global economies have shown firming up of activities and as a result, Indian exports have shown an upward trend. Additionally, the exchange rate has shown stability and agricultural output is expected to improve even further, in the coming months. Keeping this in view, the central bank could have adopted a wait and watch approach by deferring the repo rate hike. This could have helped various sectors including real estate to capitalise on the positive consumer sentiment ahead of the festive season to propel growth," says Samantak Das, chief economist & director-research, Knight Frank India.
According to a just-released research report by global property consultant Cushman & Wakefield, during the six months from January to September, 1,32,084 residential units were launched across the country, which is a 5 per cent increase when compared with the same period last year. When compared on a quarterly basis, however, the three months ended September have witnessed a fall in launches by 7 per cent. As against this, the net absorption for the first six months have dipped 15 per cent across the country. For Mumbai the figure is negative 28 per cent and for NCR it is negative 41 per cent.
The fall in absorption levels are complemented by price levels that are trending towards moderation. The latest instalment of the Residex of the National Housing Bank that track home prices across 26 cities has shown that prices have moderated in key metropolitan markets while some tier II cities have shown a drop.
The RBI's own findings in its 'Macroeconomic and Monetary Developments' for the second quarter also point towards this trend. The RBI's house price index for the first quarter of the current financial year (April-June) was lower at 0.89 per cent at the all India level, when compared with the preceding quarter. For Delhi, the index stands at 0.79 per cent lower, when compared with the previous quarter, a steep fall for the index stood at 6.18 per cent in the December-March quarter of 2012-13. For Mumbai, the index is lower by 0.28 per cent.
Given this scenario, the latest increase in the policy rate would make the prospective home buyer adopt even greater caution.
"For the realty sector, the upward revision in repo rate by the RBI is likely to increase pressure on developers, who are already struggling to raise funds for construction amidst reduced lending from banks. From the consumers' perspective, this revision will also affect the sentiments, as retail loans may become costlier. Because of subdued sentiments, sales have already dropped across regions. This will impact the new prospective buyers too, as uncertain economic conditions have made them cautious. As a result, these buyers are already taking longer time to decide on a particular investment," says Sachin Sandhir, MD, RICS South Asia.
This festive season has seen subdued consumer sentiments overall. Footfalls at malls have fallen and crowds at markets have reduced to a trickle. Given the latest salvo from the central bank, enquiries at sales offices would drop further. For the consumer, it is once again wait-and—watch on interest rate and prices.
The developer, tough, is at the crossroads: freebies and discounts fail to entice if prices are high, and that can work only if the customer shows up, which in the current environment is more unlikely.
That time could stretch further for all eyes are on the moves by the banks. Thus far, there have been no indications that loan rates would go up. "The increase in repo rate will hopefully not result in an increase in home loan interest rates. Even a small rise at this point could dampen the festive sentiments of home buyers and will not auger well for the industry," says Anshuman Magazine, CMD – South Asia, CBRE, a property consultancy.
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