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A TOUGH STANCE

The Times of India (Times Property) - 1 August, 2011

While it is important to control the threat caused by persistently high inflation, the RBI’s recent increase in interest rates – which is the 11th rise in the past 18 months – has evoked sharp reactions from the realty industry, says RAJIV DOGRA The Reserve Bank of India (RBI) recently raised the interest rates once again by a higher-than-expected 50 basis points (bps), stepping up its fight against persistently high inflation. The apex bank, in its quarterly review of the monetary policy, has also revised its fiscalend inflation projection to 7 per cent from 6 per cent earlier. It has retained the growth project for the current fiscal at 8 per cent. With a 50 bps hike, the repo rate (at which the RBI lends to banks) would be 8 per cent and the reverse repo rate (at which it borrows from banks) to 7 per cent. However, the cash reserve ratio (CRR), the amount all banks need to park with the RBI, remains unchanged at 6 per cent. Expectedly, the realty industry expressed its disappointment over the sharp increase in interest rates, saying the move would harm the home buyer’s sentiment. According to Sanjay Dutt, CEO - Business, Jones Lang LaSalle India, the increase in key short-term lending and borrowing rates by 50 basis points announced is viewed as harsh by most experts. “It was expected, though the magnitude still comes as a shock to the real estate sector. There is no doubt that inflation is detrimental to the growth of the economy, that it needs to be curbed and that the RBI’s intervention is necessary. However, the government has been consistently increasing the rate of interest over the last one year. The additional 50 basis point increase is expected to impact growth,” he says. B Muthuraman, President, CII, endorses his views saying that the 50 basis point hike in policy rates will seriously slowdown the growth rate of industry, which is already suffering from an increase in the cost of funds. “While it is important to control the threat caused by persistently high inflation, we cannot risk a collapse in growth, which will affect employment creation. Emphasis should now be given to easing supply-side bottlenecks, speeding up economic reforms and increasing investments in the economy. In the absence of non-monetary interventions, increasing interest rates alone may not help in containing inflation, particularly since it is being driven by increases in global commodity prices,” he says. Developers, meanwhile, maintain that the current trend of rise in interest rates is proving to be detrimental for the construction industry, which is witnessing less flow of funds as banks have adopted a tough stand while at the same time sales are dipping. Rohit Gera, Joint Managing Director, Gera Developments, says, “Firstly, a 50-basis points increase once again is extremely unfortunate. On one hand, there is shortage of homes, affordability is something which is not being considered because of inflation. However, to arrest food price rise, making home loans costlier will definitely have an impact on the construction industry.” Similarly, Ranjit Naiknavare, Director, Naiknavare Developers, says, “From the customer’s point of view, this rise is certainly bad. For example, if the value of a flat is Rs 100; at least Rs 36 is spent on taxes. At 12.5 per cent interest rate, a customer ends up paying two-anda-half-times more than the loan amount, which may be for 15-20 years. While in the commercial sector, a rise doesn’t make much impact as they’ll earn money. However, in the residential segment, the government needs to consider from a purely construction point of view.” One of the key concerns, which realty experts point out is that though the property rates have remained stable, there is a substantial rise in the cost of construction. Says Naiknavare: “Generally, a residential project takes about two years to complete. At the moment, developers have slowed down construction as we have no source of financing as banks have stopped lending and the only option for us is sales. Now, if we have to sell, slapped with EMI, plus service tax and VAT of such high value when the construction is on, a customer is reluctant to take a loan. It’s completely unaffordable. If the idea was to stymie price rise, the effect has resulted in a slowdown in the construction industry. Also, we have not increased the price since the last two-and-a-half years. Meanwhile, labour cost has increased by 25 per cent, 35 per cent is the rise in the prices of steel and cement per annum. This forms almost 60 per cent of the value of a flat under construction.” According to Dutt, demand for real estate is a factor of economic growth. “The sector has now taken a serious body-blow with the combined onslaught of increased cost of land and construction, eventually making finished real estate products more expensive. Increased mortgage rates will only compromise demand further. “A high-inflation, low-sentiment economic environment may send out signals of instability. All real estate stakeholders are now at a crossroad. Investors particularly will ask themselves serious questions about the right time, place and price to enter real estate. Their primary concerns will be about the possibility of decreased demand for and therefore decreased profitability of the projects they invest in. They will have to face the increased risk of having to exit at lower values.” He adds that home buyers in cities with higher purchase rates and ticket sizes will be impacted the most. “Bluecollar home loan borrowers who have extremely limited budgets and have already been struggling with the high cost of real estate will be hit severely because of this increase of interest rate,” he says. Developers point out that government needs to do a rethink if it’s keen to improve the present state. Says Naiknavare: “The realty industry has begun to show some critical indicators: there is suddenly a lot of labour, growth in the affordable segment has gone down as customers are not coming, new launches have taken a hit, projects which are in various phases of construction are facing myriad delays. The government certainly needs to look at some other options to combat inflation rather than merely raising interest rates.” Gera, however, seems to hit a positive note when he says that it’s certainly more of a psychological impact rather than actual as the economy is doing reasonably well and people do have the ability to absorb any rise in the EMI. “In fact, the impact would be for a shortterm till the time people learn to adjust. The fact remains that though interest rates are increasing, the need for a home hasn’t extinguished,” he says.

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