Transmission of rate cuts to home buyers seen as crucial; more steps needed to enhance liquidity for better-placed NBFCs and HFCs
The real estate sector has welcomed the Reserve Bank of India (RBI)’s decision to reduce the repo rate — the rate at which it lends to commercial banks — by 35 basis points to 5.4 per cent in the August policy review, as the measure is expected to boost the demand for the affordable housing segment, but felt that this alone may not be sufficient to provide liquidity stimulus to the overall realty spectrum.
This is the fourth consecutive rate cut since February under Governor Shaktikanta Das. The central bank has lowered the key policy rate by a cumulative 110 basis points in the current easing cycle. The rate cut is expected to bring down interest rates on home loans.
Real estate experts, however, warn that RBI's rate cut is unlikely to do much for mid-income housing in tier-1 cities, where the main concern is the unaffordable levels of property prices, not interest rates.
Against the overall gloom, the RBI’s repo rate cut of 35 bps is obviously welcome, but for real estate, this is “insufficient to significantly improve buyer sentiment in the mid-income segment, which still has a staggering unsold inventory of 2.17 lakh units in the top seven cities,” said Anuj Puri, chairman – ANAROCK Property Consultants. “On the other hand, demand for affordable housing, which accounted for 2.40 lakh unsold units in these cities, may see improvement as this highly budget-sensitive segment already has the benefit of other incentives.”
If banks transmit this reduction in the prime lending rate to consumers, budget housing demand may improve. Likewise, housing demand in tier-2 and tier-3 cities, where property prices are relatively less prohibitive, may see an uptick, he felt. But tier-1 cities, where the high prices are the deterrant, not interest rates, the RBI move may not be of much help to boost demand, Puri said.
It may be noted that within a few hours of the policy announcement, the country's largest lender, SBI, cut its marginal cost of fund-based lending rate by 15 basis points across all tenors. Other banks are expected to follow suit.
RBI’s 35 bps rate cut is only marginal, especially so for the real estate sector. The NBFC liquidity crisis has severely choked credit availability for the industry, especially developers, as they struggle to raise even construction finance, said Shishir Baijal, chairman and managing director, Knight Frank India.
Ramesh Nair, CEO & Country Head, JLL India, felt that in tandem with interest rate reductions, improved market sentiments due to the tax deduction schemes, modified tenancy laws, focus on implementation of PMAY, and the investment in infrastructure announced in the Union Budget 2019-20 may combine to boost sales in the residential segment.
Moreover, credit re-structuring measures such as the introduction of repo-linked loans by some banks could sway purchase decisions of home buyers while enhancing transparency. However, the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers, he said.
This would lower existing borrowing costs to some extent but it needs to be followed up with increased lending to the sector as well as liquidity to the better placed NBFC’s and HFCs, said Gagan Randev, National Director, Capital Markets & Investment Services, Colliers International India.
“If bank are able to pass on this reduction in the prime lending rate to consumers, budget housing demand may also improve further. The rate cut aims to encourage consumer spending in a scenario which has been rather gloomy, given the economic slowdown and declining consumption,” said Niranjan Hiranandani, senior vice-president, ASSOCHAM and National president- NAREDCO.
He pointed out that the RBI has announced harmonisation of single counter-party exposure limit for banks to single NBFCs to 20% of their Tier-1 capital, as against 15% earlier. "NBFCs can now on-lend to the priority sector through banks," Hirandani added.
The rate cut has sent a strong indicator to domestic banks to cut lending rates before the festive season kicks off, which might prove to be beneficial to the sector, said Farshid Cooper, MD, Spenta Corporation.“The reduction in repo rate by another 35 basis point will bring down construction finance costs and ease out home loan rates, giving yet another boost to the real estate sector,” said R K Arora, chairman, Supertech Group. "This portends wells for the real estate sector. Lower interest rates along with the reduction in GST rates for under construction properties will provide a fillip to end-user demand."Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.