New Delhi/Bangalore: Home prices may not rise sharply despite an increase in provisioning norms on loans to the real estate sector by the central bank, reversing a stimulus measure and seeking to nip the formation of another asset bubble in the bud.
Shares of property companies slumped, with the Bombay Stock Exchange Realty Index, which has risen 78% this year, dropping 6.24% on Tuesday compared with a 2.31% decline in the benchmark equity index, the Sensex.
Back in business: A DLF construction site in Gurgaon, a Delhi suburb. Due to improved sales in the last quarter, real estate developers in Mumbai and Gurgaon increased prices of residential properties by 5-15%, signalling that the drop in prices seen during the slowdown had been arrested.Rajkumar/Mint
The Reserve Bank of India (RBI) increased the provisioning for real estate loans to 1% from the earlier 0.4% at its quarterly monetary policy announcement on Tuesday. In November, RBI had reduced the provisioning requirement to 0.4% from 1% to boost the real estate sector, which saw residential sales fall as much as 50% during the downturn amid the global financial crisis.
In April-May, this year, the sector started to see an improvement in sales as developers launched homes in the affordable Rs15-30 lakh range and interest rates on home loans came down.
In the last quarter, however, due to the improved sales, developers in Mumbai and Delhi suburb Gurgaon increased home prices by 5-15%, signalling that the price drop seen during the slowdown was over.
“There is no asset bubble in the making but the market has turned around so significantly that the RBI is saying that last year we reduced provisioning norms in the interest of developers, so now that they are pricing products high, why should we give them leverage,” said Shobhit Agarwal, joint managing director, capital markets, Jones Lang LaSalle Meghraj.
Developers say that while the tighter provisioning norms will impact margins, they will hold prices.
DLF Ltd, India’s largest developer by market value, said the changed provisioning norms will not lead to an increase in the prices of homes, though an increase in the risk weightage for real estate will send out a negative signal to the sector.
“This is perhaps not required so early in the economic revival process,” said Rajiv Talwar, group executive director, DLF.
Agarwal agrees that the impact on the sector will not be significant. “This policy will impact developers, which we have seen in the way realty stocks have gone down, and not so much home prices,” he said. “There might be some developers who may want to increase home prices but the increase in provisioning is not so significant that home prices will shoot up.”
Not everyone is so sure. According to Mumbai-based Housing Development and Infrastructure Ltd (HDIL), the third largest developer by market value, home prices may increase depending on the liquidity levels of companies.
“The new provisioning norm will make lending more expensive for developers, squeezing their profitability, and so those in need of cash flow may pass it on to buyers, leading to a rise in prices,” said Hari Pandey, vice-president, finance and investor relations, HDIL.
HDIL has in the past one year borrowed Rs400 crore from banks, at an average lending cost of 12%. The company has repaid about Rs200 crore to banks in the same period. DLF shares fell 6.4% to Rs401.70 each at the close on Tuesday, Unitech Ltd fell 7.71% to Rs85.60, HDIL fell 8.8% to Rs339.45 and Parsvnath Developers Ltd fell 7.61% to Rs114.20.
RBI’s signals favouring a tighter monetary policy could have a knock-on effect.
“Interest rates may also go up, and then the cost of lending will move up and developers will be affected,” said Pandey. That may not happen until the end of the fiscal, according to banks.
“I do not see any change in the interest rates till March. There is no liquidity problem in the system and credit offtake is less than expected,” Corporation Bank executive director Asit Pal told PTI.
M.V. Nair, chairman and managing director, Union Bank of India, told Reuters that he doesn’t expect rates to change in the near future. “There is a concern of low demand from industries,” Nair was cited as saying. “We expect demand to pick up from the second half of the (fiscal) year. The cost of funding for banks is coming down and lending rates have also come down over time.”
M.D. Mallya, chairman and managing director, Bank of Baroda, agreed with his colleague. “I don’t see any change in rates at this point of time. I think stable rates will prevail for the time.” Home prices are largely dependent on the demand-supply situation in the sector and the RBI measure will not affect them, said Pujit Aggarwal, managing director of Orbit Corp. Ltd, a Mumbai-based real estate firm.
“Considering that bank loans to the real estate sector are already expensive, at a premium of 150-300 basis points, it is likely that banks themselves will absorb this cost,” he said. Orbit’s consolidated debt (from bank borrowings) is about Rs450-470 crore.
Developers such as the Bangalore-based Ozone Group also said that new projects that have not tied up funds for construction finance and have not received a commitment from banks are the ones that will be directly affected.
“Just when the sector was heading for a complete turnaround, this comes as a setback to the overall sentiment,” said K.S. Sudarshan, chief executive of Ozone Group. “It has to be seen how banks react to this change and shoulder it themselves or changes interest rates.”