Developers set to see fall in sales post rate hike

Rate hike by the Reserve Bank of India (RBI) is going to impact the real estate industry with a possible fall in the sales volumes along with the squeezing of operating margins of developers in the near future.

Developers also expect that fund flow to the sector from financial institutions may be adversely affected after the rate hike.

“Whenever there is a rate hike by the apex bank, demand is definitely impacted. However, it is too early to predict anything at this point of time,” J C Sharma, managing director of Sobha Developers, said.

He, also, said that the demand environment would be dependent on the lending rates of the banks.

RBI hiked both repo and reverse repo rates by 50 basis points on Tuesday to contain the rising inflation rate. The apex bank also increased the savings accunt deposit rate by 50 basis points in its credit policy announcement.

As these steps are going to increase the cost of funds for banks along with the squeezing their margins, banks are expected to pass on these costs to end users.

“Though there is a lesser possibility of a drop in sales volumes, operating margins of real estate companies will be under pressure as the cost of borrowing will be higher,” Shama Sunder, general manager (finance) of Brigade Enterprises, said.

He also said that higher provisioning coverage for non-performing assets would decrease the corpus of lendable fund.

There are also concerns that some of the major lenders in the housing finance space like HDFC and State Bank of India may increase home loan rates that will negatively impact sentiment.

“Any increase in the home loan rates by SBI and HDFC, the two major players in the housing finance space, will dampen the overall sentiment,” Sunder said.

He, however, said that fund flows to real estate sector would not be impacted.

“Banks are always ready to lend to the right kind of project developed by good developers. So, funding will never be an issue for developers,” he added.

However, some of the other realtors said that fund flows to small developers are going to be hit after the rate hike.

Referring to this matter, real estate research firm-Jones Lang LaSalle said that developers are less likely to pass on the rising cost to end users.

“In a scenario where staying competitive and selling stock is of utmost essence, developers are unlikely to increase the cost of their units and thereby risk losing more customers,” Ashutosh Limaye, local director-strategic consulting of Jones Lang Lasalle (JLLM), said.

He also said that any home loan rate hike was expected to affect the purchasing decision of people falling under the low-to-middle income segments.