Property developers expect to boost sales of homes and borrow funds at lower rates after the Reserve Bank of India on Friday reduced its key benchmark rate and cut the cash-reserve ratio requirement in a bid to help banks lower interest rates and lend more to cash-starved sectors, including the real estate. They are hopeful of attracting more overseas investment in projects as demand revives.
Real estate companies were facing a tough liquidity situation as home buyers deferred new purchases due to high interest rates and banks stopped lending to real estate firms due to fear of mounting defaults.
"I expect more people to buy homes now. It will reduce cost of funds for developers and ease the liquidity pressure," said Ravi Ramu, director of Bangalore-based Puravankara Projects.
A reduction in lending rates may lure home-buyers back into the market. Rohtas Goel, chairman and managing director of Delhi-based Omaxe, said: "We are confident that banks will reduce interest rates for the housing sector, which will help bring back the end-user to the market. This move will further boost the confidence of investors."
Experts are still sceptical of banks passing on the entire benefit of the reduced rates to their customers. "The RBI has cut rates in the past but we have not seen much from financial institutions. Only when home loan rates come down to 8-8.5 per cent, can we see some difference," said Anuj Puri, chairman, Jones Lang LaSalle Meghraj.
Developers said the government's move to allow external commercial borrowings in development of integrated townships was a big step. Hitherto, realty developers were prohibited from raising funds through ECBs as foreign funds were considered the main trigger for the rapid increase in property prices.
"When we have land and demand for houses increase, we need liquidity. Interest rates are cheaper abroad and we can tap that now. Today's measure is great and akin to allowing FDI in real estate. If we can raise money abroad, it will supplement bank funds and customers' money," said JC Sharma, managing director of Sobha Developers.
Pradeep Jain, chairman of Parsvnath Developers, said, "When home loan rates are cut, liquidity is made available to developers and their cost of funds comes down. All these developments will help the common man," Jain said.
However, Hiranandani Constructions managing director Niranjan Hiranandani said the relaxation in ECB norms would not immediately help property companies as the liquidity situation abroad was tight. "Not much money is available in the international market. The benefits will come after a couple of months when liquidity improves," said Hiranandani.
Sanjay Verma, executive MD South Asia, Cushman & Wakefield, said the government could have relaxed ECB norms for the whole real estate sector instead of only integrated townships.
However, the country's biggest real estate company said the government had avoided taking some key steps to help revive demand in the real estate sector. "The government could have taken more steps like increasing the I-T exemption limit for home-loan borrowers, making bank loans of Rs 20-50 lakh (Rs 2-5 million) available at lower interest rates and increasing the age limit for eligibility of home loans. Each step matters as the government's intention is to fight the slowdown," said DLF Group executive director Rajeev Talwar.