No solace for India’s real estate sector

With affordability and safety of investment, being the key for home buyers, the latest round of repo rate cut by the Reserve Bank of India (RBI) may see only a marginal improvement in demand. Moreover, it may not act as a catalyst to stimulate sales in this festive season.

After the announcement of a 50 basis points cut in repo rate by the RBI on September 29, it was expected that the move would improve market sentiment, leading to increased demand and more sales especially as only a part of the multiple rate cuts amounting to 75 basis points effected this year before September 29, was passed on to the consumers by the banks.

But now, within a week of RBI announcement, the hopes of real estate developers and home buyers seem to have been belied as the banks have not transmitted the cut to the consumers. The State Bank of India (SBI), which earlier announced 40 basis points cut in its base rate, has now revised its decision by reducing the base rate cut by 50 points to protect its margins.

Few other banks had announced 20-30 basis points cut in their base rates and home loan rates are still hovering well over nine percent. What is more confusing is the SBI’s new policy to offer home loans at 20 basis points higher than the base rate for women and 25 basis points higher than the base rate for men in contrast to its earlier policy of offering home loans to women at base rate and to men at five basis points above base rate. In this scenario, the inability of the banks to transmit the RBI rate cut to home buyers is sending negative signals.

This has worried both the industry chambers like Assocham and Credai, the apex body of real estate developers who have demanded stimulus in the form of tax incentives and supporting measures like introduction of teaser loans besides passing on the RBI rate cut to consumers. They feel that things have hardly changed during the last one year with home sales taking a beating.

Despite trying all kinds of marketing gimmicks including subvention schemes with upfront payment as low as 5 percent of the home price, interest waiver for 2-3 years and freebies, sale velocity has not picked up. Rather, it is a matter of concern that during the first half of this year, the sales have plummeted by 50 percent.

Both investors and end users have deserted the residential property market - investors due to slow moving market with stagnant or dipping prices and end users due to unaffordable prices and concern about the safety of their investment because of massive delivery defaults.

These investor-led markets have the largest number of delivery defaults and highest unsold units. NCR tops with 232,000 lakh unsold units, followed by Mumbai with 170,000 units while Bangalore, Pune and Chennai have 111,000, 70,000 and 60,000 unsold units respectively.

The extraordinarily high inventory and muted sales call for price rationalisation. RBI Governor Raghuram Rajan had asked developers to cut prices to spur sales given the high unsold inventory.

Immediately after taking over, even Credai Chairman Irfan Razack advised developers to offload high inventory by rationalising prices. But developers are holding on to prices on the ground that low margins due to a steep rise in input costs and the high cost of loan servicing, do not give them enough leg room to bring down prices.

But what they are ignoring is that the latent demand is not getting translating into sales due to affordability concerns. Today, considering the median house price to average annual income ratio, the affordability is quite low.

In Delhi NCR and Mumbai markets, it is double the ideal ratio of 5-6, though, in cities like Bangalore, the ratio is more or less favourable. Instead of offering direct price discounts, developers are offering indirect discounts in the form of club fee, registration and stamp duty waiver.

Besides unaffordable property prices and high-interest rates, long delays in project completion are proving to be a home buyers’ nightmare. It is a double whammy for them as due to delayed delivery; they are forced to bear the burden of both EMI and house rent, especially when the job market is unfavourable.

There is no price relief to home buyers even for newly launched projects. During the festive season, it’s been a standard practice with developers to launch new projects at attractive prices.

Developers are also banking on NRIs. They are reaching out to them through many property portals and property fairs at their doorstep. After the devaluation of rupee against dollar, followed by a cut in interest rates, NRIs are taking an interest in residential property in India.

Also, there are attractive financial deals and allied services like property management, PIO card, bank finance and assistance regarding fund repatriation to woo them. Quite a few developers focusing on NRIs are attributing 10-20 percent of their total sales to them.

However, domestic home buyers, especially end- users who form the bulk of customers, are not enthused enough to jump into the fray. They still seem to be waiting for prices to fall. And in the backdrop of interest rate damper, it looks unlikely that this festive season will turn out to be a saviour for both developers and home buyers and the realty sector may take longer to ride out the current slowdown. IANS