Looks like the real-estate industry’s cup of woe is not full yet! If rising input and land costs have not already hit the industry enough, the recent move by the Reserve Bank of India (RBI) to increase the repo rates and the cash reserve ratio (CRR) only make things more difficult for the industry.

This means banks will have lesser money to disburse as loans and, consequently, they might pass on the additional costs of borrowing to the customers, by increasing the interest rates on loans offered, including home loans. Since 2004, the rates have increased at least 3 per cent for home loan borrowers.

Experts feel the 0.5 per cent hike would not impact the industry drastically, as it would not increase the costs for borrowers in a significant way. The increase translates into a hike of anywhere between Rs 30 and Rs 50 per lakh on the equated monthly instalments (EMI). To a segment of buyers in the industry, “this hike will not be a deal breaker,” they say.

The inflationary pressure and interest rate hike could make people more cautious on investments. Besides, the overall market sentiment — moving from bullish to bearish — could have a negative impact on the market, some developers feel.

A conducive environment in the real-estate industry is where there is good demand thanks to better affordability. “The short-term environment looks challenging now. High interest costs will affect demand,” says Mr J. C. Sharma, Managing Director, Sobha Developers.

According to Mr A. Balakrishna Hegde, President, Confederation of Real Estate Developers Associations of India (CREDAI) – Karnataka, a serious buyer, who wants to go in for that much-needed ‘home’, will not put off the decision to buy one. Looking at the off-take in home loans, Mr Subba Rao, Managing Director, CanFin Homes Ltd, feels that there is no reduction. “Only some of the investment buyers have vanished. Off-take from genuine borrowers still continues, despite the increased rates,” he says.

If at all, genuine buyers would only defer their decision, or might opt for smaller units. “Either way, it is a loss for developers,” Mr Sharma says.

According to Mr Raminder Grover, Managing Director, HOMEBAY, a wholly-owned subsidiary of real-estate services company Jones Lang LaSalle Meghraj, the current market for residential real-estate is not defined solely by rising interest rates, but also by higher disposable incomes among buyers. Today’s young home-buyers are not so easily discouraged by the rise of a few interest rate basis points as the previous generations, he adds.

The interest hike could result in higher input costs for developers — which has already hit the roof, says Mr Hegde. “This will definitely impact our margins.” Mr Grover says that most of the major developers are now launching affordable housing projects to leverage their business potential via a game of volumes. “This means that there will be no real lacuna in overall demand and sales of residential real-estate, but only realignment. Moreover, this shift will be gradual.”

High input costs, a bearish market and high capital costs… the real-estate fraternity is facing a tremendous amount of pressure right now, admits Mr Hari Menon, Vice-President-Marketing, Mantri Developers. Despite increased costs, developers have no plans to hike apartment prices again, which saw an upward revision of 3-8 per cent from June 10 this year. “We will watch the scenario for at least a month,” says Mr Hegde.

“Banks will now become cautious of the amount of loans they disburse,” says Mr Prakash Gurbaxani, Founder and Chief Executive Officer, QVC Realty. Under these circumstances, the cash-strapped developer, usually a small/marginal developer, dependent on bank credit, will feel the pinch, he adds.

Developers might have to operate on thinner margins now, says Mr Menon. Though the impact will not be seen across segments, the mid-market segment — Rs 25-45 lakh — is where “there is bound to be an impact,” he feels. It is buyers in this segment who are dependent on home loans. “People buying premium apartments don’t usually depend on bank loans; they make their own arrangement for the deal,” he adds.

“In a broader sense, the move is not conducive to growth,” Mr Gurbaxani adds.

Developers say the RBI move will not impact real-estate supply much, but add that it will create some bargains in the market. Eventually it is those with deep pockets who can wade through the vagaries of the economic cycle, says Mr Gurbaxani. “Development is risky business. In a boom market, development looks easy. However, in a bearish market, people who do not have the means and skills to develop high-quality developments will fade out.” But even in these market conditions, there are companies “beating the trend by playing the price game,” points out Mr Menon.

The way forward for the industry would be “consolidation”, says Mr Sharma. Even before the RBI move, the consolidation trend had started, he points out. “Organised players have the advantage of a good brand, could source raw materials at a better rate, attract more customers, etc. Small players will be at a disadvantage, because some of them, even prior to the RBI announcement, were finding it difficult to raise money from banks. The trend of consolidation will continue now,” he adds.

However, despite the current economic crisis, “I feel that the India story is quite intact,” Mr Sharma says. He is optimistic that inflation will not go up further, and interest costs will start coming down in a year. According to him, there will be more opportunities waiting to be explored for developers who are able to manage efficiently in these trying times. “By next June, the uptrend will start again,” he adds.

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