Interest rates are moving up, as a result of which, many sectors are shrinking on fears of collateral damage out there. The one sector, which has got huge derating over the last few months is the real estate sector.

Some of those stocks have started stabilising and moving back, but generally the sector is down by about 20-50% in stock price terms over the last one month. So, what is exactly happening in the realty sector?

Director of Unitech, Sanjay Chandra believes that with income levels and economy, both rising, the end-users or buyers are still there in the market and very actively still buying and does not expect any slowdown.

Excerpts from CNBC-TV18's exclusive interview with Sanjay Chandra:

Home loan rates have gone up between 200-250 bps over the last 6-12 months. Is that likely to impact real estate as a sector and prices in the market you operate in?

Not quite yet. In real estate we work in multiple sectors; commercial real estate and retail real estate is still booming because of lack of supply and organised retail growing, growth of BPO industry and other industries. Housing is a one, which has interest rate sensitivity, but today with the rising economy and with the rising income levels the end-user buyers are still there in the market and very actively still buying, we are not seeing any slowdown.

If you look at the wages across the country in markets where economic activity is happening have actually risen far more than interest rates, so we are not seeing any slowdown at all in the housing demand in the real genuine or the markets where economic activity and employment generation is happening.

It seems strange though that amidst such worries of inflation interest rates that there is no problem in the real estate market with the pockets because our channel checks in several markets seems to indicate that maybe there is a fear that in some markets prices are overheated and they could be going in for a correction now?

Definitely there would be some markets, which would be overheated, and those would be markets where the prices are rising faster than employment generation and economic growth, or I think we are concerned about the fear with tier-II cities.

But if one looks at the metros or suburbs of metros where lot of economic activities are happening, the demand is very healthy and we as a company tend to operate mostly in those areas; so, we carefully choose markets, which do not have much of a speculation. So if you are in speculative markets there could be some formation of bubbles in those areas.

Many banks and big ones at that have come out and said that they are expecting loan growth to temper down to about 20%. Realistically you do not see the residential segment demand cooling off just a bit in the next few months?

We are not seeing any cool down yet in this market but if interest rates continue to rise it would be of concern; the other reason being that as a home is still an aspiration product, people would still maybe possibly reduce the ticket size or the home. So we may see apartments going a little smaller because the homes might still be bought; people still need to live in a house, so the market is still very large.

Which are these tier-II markets that you mentioned about and are already seeing prices cooling off a bit?

I think many tier-II cities such as Jaipur and Indore, where economic activity as well as employment creation have not happened and too much of development is happening where a product has been sold and not delivered though yet, so there are concerns on those markets.

What about markets, which you operate in like Gurgaon and not so much for you but central Mumbai. Do you think these are overheated markets?

I think Gurgaon still is seeing a lot of employment creation, lot of new companies are moving in, so we will see it as a strong market. We are not active in Mumbai but we do definitely follow it; central Mumbai obviously because of no good supply, the prices are definitely going to rise further and the suburbs of Mumbai also because with the salary increases and economic activity and employment generation happening has a big future still and I think New Mumbai looks very exciting.

What about cost of funds for developers like yours because the RBI also seems quite intent on making it difficult for banks to lend much more at least at the same pace -- the real estate sector. Do you sense any kind of pinch or cost of funds escalating there for you?

The cost of funds definitely escalating, they have gone up about 200 bps over the last seven-eight months. But we are able to pass on that impact to our customers but its actually helping few of us large organization plays because the restrictions which RBI has earlier there was a lot of lending to developers who did not have the right credentials etc. So I think it will help large organised real estate companies to be in a better platform.

How tight is the demand supply situation in areas like the NCR (National capital region) that you operate in?

The demand supply in terms of offices in the NCR for the next about eleven-twelve months there is no supply available, everything has been absorbed, partly the Delhi ceiling drive definitely helped this region in both retail as well as office space. In housing, still the demand is very large for affordable housing and a lot of people are operating in the luxury segment, we tend to operate in the middle to luxury segment, that is where we are seeing a lot of growth. I think we are seeing a lot of housing demand and the 70-80 lakh brackets in this region.

I know it is difficult to quantify for you but what proportion of the total supply that you have brought to the market over the last couple of years and are brining to the market with the newer properties, are you split up between real time inhabitance of house owners and investors?

About two years ago, whatever projects we would launch, initially 70% of it would be investors, 30% of it would be end-users, today the split is actually totally different, it is about 20% investors and 80% end-users.

As the project lifecycle progresses closer to possession is when actually a lot of end-users want to buy homes because that is when they can actually afford to pay the rent and the EMI at the same time, because a lot of the end-users cannot afford that double hit of rent and EMI at the same time, so they want the product closer to delivery.

Is there any fear though that investors, even if it is 20% or 25%, they may start unwinding because of fear of rates going up, could that likely put pressure on the overall real estate rates in those pockets?

I think that in some of the markets, it definitely has put, there have been pressures by investors getting out of the market but now what we are seeing is that the investors who are coming in are more long-term guys who want a second home for either rental income or for family security as a culture, we see a lot of families in India, if they have two children they want two houses for each, so we are seeing a lot of that kind of investment.

So that is a new breed of buyers who is in because the income levels are rising and I think that with the economy the way it is growing, we will definitely see a lot of investments still coming into real estate.

Even though demand is strong, would you say that for many of these key markets, prices have plateau out?

I think we may not see a steep price as we have been seeing in the last couple of years but we still believe that the market should appreciate atleast 15-20% a year in markets where we see economic activity and employment generation.

Let me rephrase the question to you, you are confident as a management that all the supply you are bringing to the market over the next two-three years, you will be able to sell all of it at rates comparable to today's rates?

Definitely, what we are still doing is any project, which we start typically before we actually complete maybe the fifth floor of the building, which is twenty floors high; we are sold out of the project. When the investors were coming in hordes, it used to sell faster but you were competing with yourself because your investors, within a month, you should start flipping out to your end-users.

Now we are seeing that the end-users demand is very healthy, they still want to own homes and it is an aspiration product, people are wanting to upgrade a lot also, so we are seeing a lot of housing upgrades happening, people wanting to improve their lifestyles, moving out from the city centres into the new better suburban locations with better environments.

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