Realty projects, home loans set to get costlier

The Reserve Bank of India's decision to revise repo rate and cash reserve ratio is expected to bite the realty industry, which is already burning under a slowdown and price correction.

Loans for housing will get dearer and interest sensitive sectors like real estate will be hit hard, said Mallinath Madineni of Arthaeon Financial Services.

"We expect banking and real estate stocks to under-perform in the near term," Madineni added.

Punjab National Bank on Wednesday raised its prime lending rate by 100 basis points or one percentage point to 14 per cent from August 1. Other public and private sector banks are expected to follow suit.

Nahar group chairman Sukhraj Nahar said an increase in the cost of borrowing would in turn raise the cost of a real estate project.

"The cost of borrowing goes up not only for builders but for all ancillary and input industries as well, leading to a higher price tag for the real estate product," Nahar told IANS in Mumbai.

He said the rate hikes would eventually hurt the balance sheets.

Sunil Malhotra, vice-president (finance) at real estate firm Omaxe Ltd, said the flow of money to the sector would be tighter than before.

"Developers will now have to look towards other sources of funds, which could be on higher rates," he added.

Agreed an analyst with a leading Mumbai-based brokering firm, who wished to be unnamed. "Developers will now have to look to other sources of funds like foreign direct investments and so on," he said.

Parsvnath Developers chairman Pradeep Jain said the cost of funds for the company's upcoming power projects would go up significantly.

"This will in turn be passed on to the buyer," he said.

Echoing a similar sentiment, Punjab National Bank chairman and managing director KC Chakrabarty said the pressure seems inevitable. "Bankers would pass on the burden to customers."

A 0.5 per cent increase in home loan rates - which appears most likely - will increase the tenure of a Rs 3 million, 20-year loan by nearly three years.

Real estate demand in major Indian cities has been hit this year as urban middle class buyers, fretting over a five-year high in property prices, have stayed away from investing in property as interest rates climbed rapidly.

"Demand has slackened 10-15 per cent since the beginning of the year," Sarang Wadhawan, head of HDIL, India's third largest developer, said last week.

However, a few real estate agents said the rate hike could cause a possible softening of property prices, even in markets such as Mumbai.

"Developers are sitting on unsold stocks of completed apartments. But potential buyers are sitting still in anticipation that prices will come down," said a real estate agent in Mumbai declining to be named.

(via Hindusthan Times)