It is, however, imperative for banks to facilitate a faster transmission of these rate cuts to ensure that the measures reap results for the real estate sector, said experts.
The Reserve Bank of India's fifth consecutive rate cut this year is in line with expectations and could probably go some way in improving consumer sentiments ahead of the festive season, which is a crucial quarter for the real estate sales. However, it is insufficient to support the flagging consumer demand, said real estate experts.
The central bank on October 4 slashed the repo rate — its key lending rate — by 25 basis points to 5.15 percent, triggering hopes for cheaper loans during the festival season. The repo rate is the rate at which banks borrow from the RBI. It is now at its lowest level in nine years.
"The timing of the cut is crucial as it is expected to spur real estate demand and consumption ahead of the festive season as it is an important period for investment/ consumption across sectors. While the RBI has done its bit, it is now critical that banks facilitate a faster transmission of these rate cuts to ensure that the measures reap results," said Anshuman Magazine, Chairman & CEO, India, South East Asia, Middle East & Africa, CBRE.
Besides, much would depend on how efficiently banks transmit the benefits to the borrowers, they said.
"An efficient transmission will lower the cost of capital not only for consumers but also for developers, making room for price revisions and further discounts. Some banks have agreed to link their lending rates to the Repo rates, but all major lending institutions need to follow suit," said Anuj Puri, Chairman – ANAROCK Property Consultants.
As has been witnessed so far, a cumulative 110 bps REPO rate cut over the last 6 quarters has failed to stimulate consumer demand as well as private investment in the economy.
"A slew of factors such as slowing economic output, rising unemployment rate and low consumer confidence have hindered the percolation of these small quantum rate cuts to the economy at large. On this backdrop, another 25 bps rate cut by Reserve Bank of India (RBI) comes as a disappointment, more so for the real estate sector," said Shishir Baijal, Chairman & Managing Director, Knight Frank India.
Real estate developers agree. Niranjan Hiranandani –National President –NAREDCO says thatIndia’s Monetary Policy Committee has continued with its accommodative stance for the fifth consecutive time this year by reducing the repo rate by 0.25 bps which now stands at 5.15 percent.
"The paring of repo rate is a move inclined to revive economic growth, ensuring inflation remains muted and spur up the consumption and investment. With the short term liquidity squeeze prevailing in the economy, even positive net worth companies across the industries are turning into the negative balance sheet. The current economic scenario makes it the right time for RBI to announce its one time roll over scheme similar to that was rolled out during the Lehman crisis in 2009 under the global slowdown scenario, which shall act as remedy to the ailing companies," he said.
People who have been on a look out for buying a property will now invest, which is a ray of revival to the diminishing sector. Not only real estate but the manufacturing, FMCG, education, auto sector will be benefited with this decision, said Ajit Panda, founder & CEO, Spaciya Advisors.
"Those keen on investing in affordable housing may now benefit from the fifth consecutive rate cut as their EMI burden would get reduced to a large extent. We welcome the rate cut by the RBI," said Pradeep Aggarwal, co-founder and chairman, Signature Global and Chairman - ASSOCHAM National Council on Real Estate, Housing and Urban Development.
On a macro level, the overall stress that Indian real estate is in cannot be remedied merely by reduced lending rates – the sector has been reeling under subdued demand for many years. Even if we ignore the euphoric pre-2010 era, new housing project launches in 2018 across top 7 cities were 64 percent below the previous peak of 2014. Likewise, sales were down by 28 percent.
The sector is currently still saddled with 6.56 lakh unsold housing units (as of Q3 2019) across the top 7 cities, and developers are struggling to raise funds to complete projects and launch new ones, said Puri.
The rate cut comes close on the heels of the recent announcement of setting up a stress fund of Rs 20,000 crore to provide last-mile funding to projects stalled due to lack of capital."This fund needs to get into action soon and demonstrate meaningful results to improve the sentiments of industry stakeholders like FIs, PEs, developers - and most importantly, homebuyers. An announcement regarding the real-time deployment of the stress fund during the festive season can dovetail well with this rate cut and yield a positive consumer response," said Puri.