Borrowing costs of real estate cos plunges on liquidity

The physical market has not seen too much of a pickup but market like Bangalore has seen some amount of pickup with decent demand for the new launches. In markets like Gurgaon, there has been a lack of launches and a construction ban because of the water shortage while 40 projects are still awaiting final approval.

In Mumbai, there has been intense pressure in the real estate market. But despite all of this many analysts have started to get slightly bullish on this sector. They believe that now because of interest rates coming off mortgage rates have started to dip a little bit. So this will help in terms of liquidity for the entire sector and thereby improve the final borrowing cost or reduce the borrowing cost for many of these companies.

In a report, Goldman Sachs has mentioned that any additional decrease in borrowing cost will aid many of these companies like DLF , HDIL , Godrej Properties and Unitech . It believes that a 150 bps drop in interest rates could reduce the EMI for a Rs 1 lakh loan from Rs 1030 per month all the way to about Rs 932 per month for a 20 year duration.

It also adds that from a corporate point of view almost all Indian real estate companies are borrowing at high levels of about 14 percent plus and this will come down in the times to come and will aid the balance sheet of many of these companies.

Apart from that there is a lot of buzz about real estate reforms to come through. There are talks that the interest subvention on home loans which currently stands at about Rs 1.5 lakhs may go up all the way to about Rs 3-5 lakhs. So that will help save tax for buyers and will help improve the situation in the real estate market as well.

The improvement in the macro situation is what the analysts are betting on and not the physical market pickup. Infact many analysts believe that because of slow launches the festive season may result in heavy discounting across all markets like Gurgaon and Mumbai. Of course Bangalore is a different issue because Bangalore has been seeing a good pickup of its own.