The Hindu Business Line : `RBI moves may not impact property prices much'

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Chennai Feb. 16 The recent moves by the Reserve Bank of India aimed at slowing bank exposure to the booming real estate market may have little impact on property prices or on real estate developers, leading consultants and real estate developers say.

Mr Pritam Chivukula, National Director, Colliers International, a property services company, says, "The demand-supply mismatch in the residential market may start stabilising in the next 6-8 months but we don't estimate any significant correction in prices during this period. Only certain micro markets, which are largely investor-driven and speculative, may witness a correction."

Roughly 15 per cent of the total bank credit of nearly 18,00,000-crore rupees goes towards funding the real estate sector. Of this, the bulk, more than 80 per cent, goes for lending to individual borrowers for residential housing and the balance for commercial real estate.

Loans to the real estate sector are considered part of lending to "sensitive" sectors and the recent moves by RBI — including raising risk weights, increasing provisioning and hikes in policy rates — have only made banks more cautious. According to Mr M. Balachandran, Chairman and Managing Director, Bank of India, "90 per cent of our real estate exposure comprises loans given to first-time house owners. So there is no fear of an asset deflation because people acquire houses for shelter and they are going to live there and repay. As a bank we'll exercise a lot of care and restraint in funding commercial real estate. The RBI has not stipulated any ceiling. It has left it to individual banks to decide to what extent they would like to expose themselves, keeping in view the risks. We'll keep this in view and allocate resources accordingly."

Commercial funding

How important is bank finance for the commercial real estate sector? If banks do turn off the tap, what can commercial real estate developers do?

Anuj Puri, Managing Director, Trammell Crow Meghraj, real estate consultants, points out both the advantage as well as the dispensability of bank finance. He says "Bank finance is very important because it assures structured returns for investors. However, it is not the only source. One has recourse to private equity, mezzanine funding, FCCB (foreign currency convertible bonds). Corporates can always issue these quasi equity bonds and also list themselves on the Indian and foreign stock exchanges. There are always avenues as long as one can support the higher cost of borrowing."

So, although interest costs may go up slightly for builders, they are not going to be paralysed. Adds Mr Pritam, , "Considering the high margins of the developers, a slight rise in the interest rates can be well absorbed."

Foreign investment

What do the developers say? They just tap other sources. Mr Sunil Mantri, Chairman, Mantri Realty, a leading real estate developer, says a significant part of the fund flow for the real estate sector was coming from foreign direct investment — through high net worth individuals and private equity.

He says, "It is easier to raise money from foreigners. Their interest is for a particular project and they are ready to take exposure in one of the fast growing markets in the world." He says that with the confidence of having recently secured funding of $100 million from Liberty Financing, a group of investors based in US & Canada.

High GDP growth, favourable investment climate and the prospect of quick returns are drawing a number of investors in. According to Mr Pritam "Apart from huge borrowings by the real estate developers and housing buyers, realty investors have also pumped in huge sums of money to speculate and reap the benefits of higher returns.

In the last one year the average rate of return on commercial real estate has risen to nearly 11 per cent per annum, whereas residential/housing returns have been in the range of 4-5 per cent."

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