The liquidity-starved real estate sector has been holding on prices in both the commercial and residential segments, hoping that the tide would turn sometime soon. Unfortunately, it has proved to be a chimera as macro economic factors, which have a direct bearing on the sector, seem unlikely to improve at least for now.
Samantak Das, Director-Research & Advisory Services, Knight Frank India, a global real estate advisory, said, “we are no doubt in a high interest rate regime which seems difficult to correct. Rates are unlikely to come down for another quarter at least.”
The Reserve Bank of India (RBI) has increased the repo rate (rate at which it lends money to banks) from 5.25 per cent in the fourth quarter of 2009-10 to 8.5 per cent in the fourth quarter of 2011-12, and this has impacted sales of realty companies and their interest cost.
Consequently, for the top 25 real estate companies, interest cost as a percentage to sales has built up, and in the March 2012 quarter, it stood at 15 per cent, almost double over the March 2010 quarter, according to Knight Frank.
“For most listed entities, interest costs in 2012 alone rose 37 per cent while net profit fell 27 per cent. Such a high borrowing cost scenario is likely to continue till there is a significant improvement in the overall Indian economy.
Till then, developers are expected to absorb the hike in construction cost which, in turn, will impact their profitability,” said Mr. Das.
Lalit Kumar Jain, National President, Confederation of Real Estate Developers’ Associations of India (CREDAI), an industry lobby, pointed out that there was a problem of approvals from the environment ministry. “And due to this, stock is not coming in, and the sentiment is down.” He felt that the factors which could re-kindle activity in the sector were “a strengthening of the rupee, single-window clearance for realty projects, and, most importantly, a cut in interest rates.” There are, however, pockets of optimism. “Chennai has remained the most stable market with no major supply overhang,” Ganesh Vasudevan, Vice-President, Indiaproperty.com, said.
