RBI rate cut may boost demand for real estate

The rise in demand will be mainly in tier II and tier III cities where prices are still affordable, say analysts

Banks have a 67% share of the housing finance market, estimated at `7 trillion as of 31 December. Photo: Hemant Mishra/Mint

New Delhi: The Reserve Bank of India’s (RBI’s) monetary easing could prompt a rise in real estate demand, leading to prices firming up after having dropped around 4% in the recent past, said R.V. Verma, chairman and managing director of National Housing Bank (NHB), the regulator for housing finance firms.

Builders with unsold stock may raise home prices, Verma said on Thursday.

“The Residex (index of property prices in various Indian cities) for January-March could reflect this trend. We are watching it closely,” he said.

RBI cut the key policy rate by 25 basis points (bps) in its 29 January review of monetary policy, and analysts expect it to follow an easy money policy to boost economic growth. Following the RBI rate cut, many banks announced cuts in lending rates, fuelling expectation of a pick-up in retail housing demand. NHB also reduced its prime lending rate, or the rate at which it it lends to other banks, by 25 bps to 9.75% the same day. One basis point is one-hundredth of a percentage point.

The rise in demand will be mainly in tier II and tier III cities where prices are still affordable, said Verma.

“There has been a position of oversupply, which has had a moderating effect on prices. Prices are down 3-4%, primarily in tier II and tier III cities, because this is where the demand for housing loans is concentrated under the slab of Rs.10-25 lakh,” Verma said. “However, because of the increase in positive sentiments and the likelihood of lending rates going down further, the demand may pick up again leading to a price rise in houses by developers which have been under pressure till now.”

Banks have a 67% share of the housing finance market, estimated at Rs.7 trillion as of 31 December. In the Trend and Progress of Housing in India 2012 report released on Thursday, NHB said the housing finance industry could see around 20% growth in 2012-13 from the previous year.

Industry experts said prices are likely to rise in some areas.

“In markets like National Capital Region (NCR) or Mumbai, there have been fewer launches, but pricing has not taken that much of a hit. Prices have been stable or have seen a marginal increase,” said Neeraj Bansal, director, real estate, KPMG. “However, in other parts, where demand has gone down significantly, the developers have been offering good discounts on available prices for ready properties.”

The outlook has become more positive following the cut in interest rates. “There is an increase in positive sentiment, which may lead to an increase in prices in select cities,” he said.

The industry also expects the budget will contain steps that will boost the industry.

“If the industry receives a stimulus, the following quarters post the budget can see more buying from end-users, which will invariably lead to a rise in housing prices,” he said. Bansal said Andhra Pradesh, Mumbai, NCR, Chennai and Bangalore may see house prices increase in the near future. According to some industry estimates, house prices could rise 5-10% in the next few quarters .

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Industry welcomes RBI’s move allowing ECBs in real estate

The decision of Reserve Bank of India (RBI) allowing developers to raise funds through external commercial borrowings (ECBs) via approval route for low cost housing has been welcomed by the real estate industry. The idea was proposed this year, in the Union Budget for the year 2012-13 and was one of the most awaited policies of the RBI. It is expected that the move would give boost to the industry, which is already witnessing severe liquidity crisis.

“It was a much awaited guideline and we all have been looking forward to it. It would help in creating a stock for low-cost housing in the country,” says Manoj Goyal, director, Raheja Developers.

The provisions of the RBI’s notification say that ECBs can be availed by developers for affordable housing projects and Housing Finance Companies (HFCs)/ National Housing Bank (NHB) financing prospective owners of low cost housing units. The developer must have a proven track record, five years experience in residential projects and must have fulfilled all his previous financial commitments. Further, the project must be free from any litigation.

Further RBI has defined affordable housing project as a project, which has 60 per cent of permissible floor-space-index (FSI) for units having maximum carpet area of up to 60 square meters. In addition there is a limit of USD 1 billion that can be borrowed. “Going forward, the limit of USD 1 billion will need to be looked at if we are to overcome the housing shortage of 26 million units,” says Brotin Banerjee, MD and CEO Tata Housing and Development.

However, some industry experts believe that there are risks too. For instance, there is always a risk of currency fluctuation involved while borrowing from an international market. Expressing this concern Sanjay Dutt, executive managing director, South Asia, Cushman and Wakefield says, “Domestic finance is available at an interest rate of 13 per cent while rates is much lower at 4-8 per cent abroad. However borrowing funds internationally involves risk of currency fluctuation and hedging cost. Moreover not every lender in the international market may want to give loans for real estate in India and funds may be available to credible few developers only. ”

However, it is certainly a positive step by the government as there are limited funds available in the domestic market. “It is always better to have a global capital pool than being restricted to sources at home,” adds Dutt. The policy will provide an impetus to the industry and assist developers in accessing funds.

Sruthi Kailas, MagicBricks.com Bureau