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Home > India > Business > Business Headline > Report

Get ready to pay more for your house

Raghavendra Kamath & Neeraj Thakur in Mumbai/New Delhi | June 26, 2008 13:45 IST

A day after the Reserve Bank of India [Get Quote] (RBI) raised the benchmark repo rate and cash reserve ratio (CRR), leading property developers said they are mulling hiking prices of apartments and focusing on the affordable housing segment to counter the impact of a high interest rate regime.

"We will pass on the entire burden to the end user. So, houses will definitely cost more. The customer should be ready to shell out more money," said Pradeep Jain, Chairman of Parsvnath Developers [Get Quote], adding, "We will not compromise on our profits to absorb any increased cost of the project.

RBI has raised repo rate, or the rate at which it lends to banks, by 50 basis points to 8.50 per cent and CRR, the proportion of deposits kept with the central bank, by 50 basis points to 8.75 per cent. The increase in CRR is expected to suck out Rs 19,000 crore from the system and the hike in repo rate would make bank loans, including home loans, more expensive. Commercial banks may also go in for a lending rate hike.

According to analysts, the hike in interest rates will make borrowings costly for home buyers, hit sales of properties and delay projects. "While the existing home loan borrowers will have to bear the higher cost, new borrowers may postpone their plans," said Suman Memani, Research Analyst, Religare Securities.

"Overall, it is negative for the property sector. Property inventories are piling up, projects are getting delayed and buyers are delaying their buying plans," he added.

Developers also agree with the suggestion that tough times are ahead of them. "It cannot get worse than this. Already we have seen 20 to 30 per cent dip in fresh sales and a further rate hike will not make much difference," said a senior executive with Omaxe, a Delhi-based developer.

Unitech, the country's second largest property developer, is focusing on mid-income or affordable housing category to offset costlier loans and rising inflation.

"Any interest rate hike is expected to have negative impact on demand for houses. Though investors have turned away, first-time buyers are still buying apartments in today's market and we have to tap that latent demand.

Hence, we are focusing on the affordable segment," said R Nagaraju, General Manager, Corporate Planning, Unitech. "Our new product is targeted at the segment where we see maximum demand. Affordability may vary from city to city. For instance, in Gurgaon, there is a good demand for flats with a price tag of Rs 50 lakh."

Unitech is developing nearly 35 million sq ft of residential properties in the country and most of it is in the mid-income category. Indian developers have been hit by a series of anti-inflationary measures, including the higher risk weightage on lending to property developers, curbs on external commercial borrowings and stock market regulator's clampdown on real estate IPOs and a fall in the primary market.

"Hike in interest rates will affect credit offtake and result in lower sales for developers," said Shailesh Kanani of Angel Broking.

According to industry sources, developers are already raising funds through ICDs (inter-corporate deposits) and NCDs (non-convertible debentures), which entail interest rates in excess of 18 per cent, to meet their fund requirements. The hike in repo rate is expected to further increase these already high interest rates.

"If developers fail to execute projects on time, they will not be able to deliver on schedule. If they don't, then they have to pay hefty penalties to buyers. All these factors are interlinked and further affect the credit situation," said Memani.

Banks set to hike loan rates

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