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Builders help ease home buyers' EMI pains

Neeraj Thakur & Raghavendra Kamath in New Delhi/Mumbai | July 28, 2008

Unitech, the country's second-largest property developer, recently offered two- and three-bedroom apartments of 1,200 sq ft and 1,500 sq ft, respectively, at its Uniworld City project at Noida. The company used to usually offer two-bedroom flats of 1,450 sq ft and three-bedroom ones of 1,900 sq ft.

With interest rates rising and buyers withdrawing from the market, the company chose to reduce the size of its apartments instead of cutting prices. Importantly, Unitech also tied up with HDFC [Get Quote] to offer a scheme in which the equated monthly installment (EMI) begins 30 months from the date of booking at an agreed interest rate. The company claims the response was amazing -- of the 350 apartments on offer, 200 were sold within two weeks.

Delhi-based property company Parsvnath Developers [Get Quote] has also launched a similar scheme for projects in Sonepat and Moradabad that require buyers to pay only the booking charges upfront. The EMI kicks in once they take possession of their houses.

Similarly, Ansal API has launched a 24-EMI waiver scheme for most of its projects in a tie-up with HDFC Bank. The buyer has to pay 10-15 per cent as the booking fee and the EMI begins only after possession. Era Landmark is also planning to pay 50 per cent of the EMI of home buyers in the company's future projects till they take possession.

For such bonanzas, prospective home buyers have a downturn to thank. Property sales have fallen 15 to 20 per cent countrywide over the last six months, owing to rising home loan rates.

This has pinched the cash flows of developers, already reeling under higher borrowing costs and a range of anti-inflationary measures that restrict their flexibility to raise funds.

"Developers have to go in for such schemes to boost revenues when sales are declining in the country due to high interest rates," said Akshaya Kumar, managing director of Park Lane Property Advisors.

The country's biggest developers are increasingly veering to the view that EMI waiver schemes will help those wanting to graduate from rental homes to own homes, but are postponing home-buys due to higher interest costs.

Their target: middle income housing -- in the Rs 25-50 lakh (Rs 2.5-5 million) range -- in such cities as Gurgaon, Kolkata, and Chennai.

"Parsvnath will share the EMI with customers so that those who are graduating from rental to their own homes can happily afford to do so since they will not have to pay the EMI till their houses are ready," said B P Dhaka, chief operating officer.

Of course, such schemes are not cheap. For instance, in Ansal's EMI-waiver scheme, buyers have to pay one per cent extra interest to the company. And after 24-30 months, when the EMI kicks in, there is also a risk of further rise in interest rates.

Anshuman Magazine, chairman and managing director, CB Richard Ellis, South Asia, said, no bank will finance such a scheme without charging an extra amount on the EMI.

"But taking into account the savings that a buyer would make from the 12- to 18-month waiver, it would be a win-win situation for someone who invests that amount of money somewhere else to earn interest. Moreover, the developers would also be pushed to complete the project on time," he said.

In June this year, the Reserve Bank of India increased the repo rate, the rate at which the central bank lends short-term money to banks against government securities, 50 basis points and increased the cash reserve ratio, the proportion of deposits the banks are required to deposit with the central bank, by a similar margin to tame inflation, causing many of the country's top lenders such as SBI [Get Quote], ICICI Bank [Get Quote] and HDFC to raise retail lending rates sharply.

Thus, on average, the EMI on a 20-year, Rs 10-lakh loan is now Rs 12,070 (at 13.5 per cent interest) from Rs 8,060 (7.5 per cent interest rate) five years ago.

Developers are already reeling under a series of anti-inflationary measures launched by the central bank such as a higher risk weight on loans to developers, prohibition on external commercial borrowings, and restrictions on loans for buying land, among others.



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