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On a positive note

The surprise 25 basis points rate cut by the Reserve Bank of India (RBI) on Thursday may be a mood lifter for the beleaguered real estate sector hoping for a revival. But the deeply embedded and complex problems plaguing the industry may take their own time to settle down.

On a positive note


Sanjeev Sharma

The surprise 25 basis points rate cut by the Reserve Bank of India (RBI) on Thursday may be a mood lifter for the beleaguered real estate sector hoping for a revival. But the deeply embedded and complex problems plaguing the industry may take their own time to settle down.

Announced on the auspicious day of Makar Sankranti, the real estate sector has reacted very enthusiastically to the first rate cut by the central bank in almost 20 months. Furthermore, it is hoping that it is only a precursor to a series of rate cuts as indicated by a shift in monetary policy stance of the RBI.

The primary reason for the repo rate cut is the consistent easing of the inflationary pressure, as indicated by the recently published government data. Confirming this, RBI Governor Raghuram Rajan in his statement said, “Since July 2014, inflationary pressures (measured by changes in the consumer price index) have been easing. The path of inflation, while below the expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank’s bi-monthly monetary policy statements.” The wholesale price index rose by 0.11 per cent in December compared with zero change in November. Inflation based on the consumer price index also came in below expectation at 5 per cent according to the recently released data.

The real estate sector along with auto and consumer durables form what is called is the interest rate sensitive category. Many experts including the central bank have said that interest rates are only one factor in an economic decision. Interest rates tend to be a factor in consumers’ decisions regarding home purchase but more important than that is the outlook about the future in a big -ticket purchase.

Consumers bet on their economic and financial well being in the future when they make decisions to buy homes worth lakhs and crores.

However, benign interest rates tend to boost economic activity and soothe concerns over high EMIs on loans.

Banks have started to reduce rates following the announcement with the United Bank of India, the first off the block with a 25 basis points cut. SBI and ICICI Bank also indicated similar moves.

Analysts say that this will result in cheaper loans and lower EMIs. Rishi Mehra, Co-Founder, deal4loans said banks are likely to cut rates for home loans especially for new customers and rates are expected to come to single digit after a long period of time. He added that banks are expected to lower rates minimum by 25 basis points for new borrowers and this can go up to 50 basis points also. Rates will come in the range of 9.5-9.8 per cent in coming few days for new home loan borrowers, he added.

Sachin Sandhir, Global Managing Director, Emerging Business and MD, South Asia, RICS, said, “With the rate revision, it is likely that there will be a surge in corporate lending. This would benefit the real estate and construction sector firms too”.

Pradeep Jain, Chairman, Parsvnath Developers said, “The real estate sector has been struggling for the past three quarters due to low demand and increasing inventories. The rate cut decision would help in reducing EMIs thereby encouraging fence sitters to conclude deals. Developers would also get funds at comparatively lower rates”.

Industry players have been saying that while the buyer sentiment had improved in the past six months, inquiries are still not leading to conversions. The impact of a 25 basis points rate cut is not very high in terms of a monthly budget. On a Rs20 lakh loan for 20 years at 10.15 per cent it works out to Rs265 a month in terms of savings.

Consequently, industry is anticipating many more cuts to make a difference. Amit Modi, Director, ABA Corp said easing interest rate will help revive health of businesses like real estate which are highly sensitive to interest rate movements, but while it is indeed a step in the right direction, 25 basis points cut may not be enough to spur the investment cycle, there is definitely a need for more cuts, and lending rates will have to further come down by at least one or two percentage points to improve the general sentiment towards investments in the country.

Aman Nagar, Director, Paras Buildtech said this repo rate cut, though insufficient, is a timely dose to revive and revitalise the consumer sentiment. The real estate sector, along with other areas of economy, now has a reason to cheer, not merely because of the rate cut, but the underlying positive message sent out by the RBI.

The repo cut comes at a time when the widespread perception is that the realty sector in the country is down in the dumps. The Knight Frank-FICCI real estate sentiment index showed that stakeholder sentiment dropped for the first time in five quarters and investors are cautiously optimistic.

The survey said stakeholder sentiments across all zones have witnessed a major dip during Q4 2014. Subdued festive sales have dented future sentiment levels of developers, investor confidence has taken a hit owing to oversupply within the residential space and number of stakeholders expecting a price hike have also reduced by over 50 per cent in Q4 2014 compared to the preceding period.

Developers say that the economic indicators are improving and the RBI has changed its stance in favour of growth. Mohit Goel, CEO, Omaxe Limited said the move clearly showed RBI’s shift in stance in favour of growth. “This is also the right time to usher in a slew of out-of-policy measures like allowing banks to lend more to real estate, easy funding norms so that the real estate sector plays the role of a catalyst in driving the overall economy”, he added.

The sector is hoping for more rate cuts to the tune of 75-100 basis points to make an impact on sentiment. Nitesh Kumar, COO, TDI Infracorp, said, “ RBI has room to give more cheer and industry expects more rate cuts up to 75-100 basis points”.

Kushagr Ansal, Director, Ansal Housing said, “The effects will be quickly visible for the commercial real estate category and leasing; as the housing demand will pick up by the end of this year”.

The results are likely to show in three more quarters. Mahipal Singh Raghav, CMD, MMR Group said although, a 25 basis point reduction won’t be much, but it has set the ball rolling for positive sentiment in the market. The effects will become visible by third or fourth quarter this year, as customers will now be gearing up for investment.

Manoj Gaur, MD, Gaursons India and President CREDAI Western UP says, “The existing and prospective buyers were eagerly waiting for this to happen since last year. Now with this move we expect the sales to improve as more potential customers will think of buying homes as the interest rates will be reduced”.

The hope for the sector is that in 2015 more people will change their mind about home purchase with a change in the interest rate cycle.

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