Indian Property prices expected to fall

The Reserve Bank of India’s decision to revise the repo rate and cash reserve ratio is another blow to the Indian real estate industry — which is already burning under a slowdown and price correction.

Loans for housing will almost certainly become more expensive 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 yesterday raised its prime lending rate by 100 basis points to 14% from August 1. Other public and private sector banks are expected to follow suit.

Bank of India chairman and managing director T S Narayanasami said banks would look at revising interest rates. “We expect an increase of minimum 50 basis points of prime lending rates (PLR),” he said. This, however, would be done after the RBI’s new rates come into effect on August 30, he said.

According to data obtained from the Indian Banks Association, the PLR for state-owned banks vary from 12.75 to 13.25 percent and over 14 percent for private banks. The largest private player, ICICI Bank, has a PLR of over 15 percent while Kotak Mahindra bank revised its interest rates earlier this month to 17.25 percent.

ICICI joint managing director Chanda Kochhar said her bank would wait and watch to assess the impact of the RBI’s measures on market rates. “Markets tend to react conservatively when faced with such tightening policies from the central bank. So, it is not entirely surprising to find the interest rate structure of the banking system going through a dynamic review and adjusting to the evolving market realities,” she said in a statement.

Echoing a similar sentiment, Bank of Baroda chairman and managing director M D Mallya said: “It is too early to comment on a rate hike but the pressure seems inevitable. We will have to analyse this soon before taking any decision.”

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 said. 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. An analyst with a leading Mumbai-based brokering firm said: “Developers will now have to look to other sources of funds like foreign direct investments and so on.”

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 K C Chakrabarty said the pressure seems inevitable. “Bankers would pass on the burden to customers.”

A 0.5% increase in home loan rates — which appears most likely — will increase the tenure of a Rs3m, 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 percent 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 Bombay (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 Bombay.

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