Lower interest rates must for revival: DLF

BLOOMBERG SPECIAL

Reduction in property prices and home loan rates could boost demand.

DLF, India’s biggest real estate developer, said a recovery in the property market in the next six months hinges on lower home loan rates to lure first-time buyers. DLF, India’s biggest real estate developer, said a recovery in the property market in the next six months hinges on lower home loan rates to lure first-time buyers.

“Mortgage rates in India are at 12 percent to 13 percent, about twice what they are in China. That is unrealistic,” Rajiv Singh, vice chairman of DLF, said in an interview. “If rates are cut, the domestic demand itself will carry the country through this difficult period.”

DLF lost four-fifths of its market value this year as the highest interest rates in seven years sapped demand for homes and apartments. Finance Minister Palaniappan Chidambaram said this week there is scope for lower borrowing costs after two reductions in a month failed to unlock credit markets.

“It’s tough to say if a cut in interest rates will change the sentiment,” said Hugh Young, who manages $2 billion for the India Opportunities Fund as managing director at Aberdeen Asset Management Asia in Singapore and holds DLF shares. “In the current environment, people in India will be wary of buying property and stretching themselves.”

Real estate, automobile and steel companies have cut output and deferred projects to cope with a drop in demand in the world’s second-most populous nation. India has relaxed overseas borrowing rules and initiated a process to allow higher foreign ownership of domestic insurers to ease a credit crunch and infuse confidence.

Price cuts
DLF and Emaar MGF Land, the Indian unit of West Asia’s largest real-estate developer, are also cutting prices to revive demand. Goldman Sachs Group this week forecast some property prices in India will drop 30 percent. Singh said some of the fall has already taken place. The Confederation of Real Estate Developers’ Associations of India, a lobby group, has called for a fall in prices.

The association is “urging and advising its members across the country to make every effort in lowering prices to the levels possible,” it said in a statement. “This will have a desirable impact and a cascading effect on employment in the industry, as well as on more than 170 other industries and the economy and country as a whole.”

India faces a shortage of about 25 million houses, a figure that may rise to almost 27 million by 2012, Housing Development Finance Corp. estimates. HDFC, the nation’s biggest mortgage provider, plans to increase lending more than 20 percent this fiscal year, Managing Director Keki Mistry said.

Completing projects
DLF is focused on completing projects that need to be delivered and holding back spending on those that have yet to be built, Singh said.

The company has raised Rs 2,000 crore ($400 million) and plans to borrow another Rs 1,000 crore in the year ending March 31, securing funds against lease rentals from its office and retail space, he said.

“It is a safe form of financing because you basically discount your lease rentals,” said Singh. “We have been quite successful, firstly in generating an operational surplus and raising long-term money.”

Singh is following a similar strategy for DLF Assets, whose investors include D.E. Shaw & Co. and Symphony Capital Partners. DLF Assets is majority owned by Singh and his family and buys commercial space from DLF Ltd. About 37 percent of DLF’s second-quarter sales came from DLF Assets, according to India Infoline analysts Bhaskar Chakraborty and Param Desai. DLF Assets may raise about Rs 4,000 crore by July against assets that yield lease rentals, Singh said.

It is also considering selling shares through an equity placement to raise about Rs 2,500 crore by the middle of next year with help from JPMorgan Chase & Co., he said.

“DLF Assets will be in a position to meet a large portion of its commitment to DLF,” said Singh. This will happen “by equity placement, or by debt raising against the assets it has, or against assets from which lease rental is flowing.”

The authors are Bloomberg News columnists. The opinions expressed are their own