Thursday, February 14, 2008

Jilted real estate sector looks forward to RBI rate cut

The real estate sector that has been rocking in recent times, is now in news for the wrong sentiment. The Reserve Bank of India’s decision, not to cut interest rates has shattered the dreams of real estate companies that are already facing the brunt of a housing industry slowdown. The high cost of mortgage financing is stifling the sector.

RBI decision to keep interest rates unchanged in its third-quarter monetary policy review has left some developers and investors alarmed. A larger chunk of real estate companies was expecting a cut, especially in the backdrop of slowing home sales in major cities in the past few months.

Developers, however, differ regarding the depth and reach of RBI’s move. “The slowdown in transactions in residential sector is seen majorly in metros where the prices had gone fairly high. The small cities i.e. Tier II & Tier III cities, are not seriously affected by the bank rates, as the demand in the cities is much higher than the metros,” says Sanjay Mathur, Head Marketing of Pearls Infrastructure Projects Ltd

Interestingly, Avnesh Sood, Director, Eros Intercontinental, has a completely different take on this. “Slowdown is far from the metro cities. This is being seen more in non-metro cities. Speculation is minimal in metros as there are genuine end-users. In smaller towns, small and medium developers have already resorted to price correction but they cannot go any further on corrections due to their scale of operations”.

There is no doubt that the residential segment is seeing a fall in sales and a price correction. But large developers with good cash reserves, will not resort to price correction. It is the suburban & non-metro locations that are facing a slowdown. Unchanged rates will trigger another round of correction and developers will have to come up with innovative schemes like “Book now & pay later on possession” etc.

But opinions differ. “A severe price correction is still far off and may not happen at all. Demand is not exactly non-existent. As developers, we are quite optimistic that rate changes in the future will trigger increased sales activity and there will be decent growth between 2008-2010, as endusers continue to pickup property,” adds Sood.

The way forwards would probably be to focus on the affordable quality housing segment for the lower middle class, in the next 2 years. Developers and government bodies should join hands to focus on devising ways to increase the supply of middle income group housing.

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