RBI Ban Will Hike Housing Prices

A 5% increase is expected due to additional interest on approval costs.

Property developers' approval costs are likely to go up owing to the recent directive by the Reserve Bank of India to banks that they should not lend to builders for premium payment and transferable development rights (TDR).

This will put pressure on builders to raise their own funds. It could lead to an increase in prices of affordable housing projects, experts said.

The RBI is of the view that these payments are related to land buying and hence banks should not lend for those.

The issue could be more worrisome for developers in Mumbai because premium payment and TDR appertain more to the city, experts said.

Along with this, HDFC merging with HDFC Bank could pose challenges for developers in raising funds for purposes such as TDR because HDFC, being one of the largest lenders to real estate, will lose flexibility in lending to developers once it becomes part of the bank, experts said.

"Promoters have to bring in more equity or quasi-equity money. The impact will be higher in Mumbai than in other cities," said Amit Goenka, managing director and chief executive of Nisus Finance, a Mumbai-based fund manager.

Goenka expects a 5 per cent increase in input prices due to additional interest on approval costs following this move.

"In South Central Mumbai, total approval, FSI (floor space index) and premium costs are, say, Rs 15,000 a square foot. On that a 5 per cent rise means a Rs 750 impact. In Mumbai suburbs it may be Rs 300. I feel developers will absorb it for now as input costs have gone up and they have just increased prices."

In affordable housing projects, Goneka said developers might not be able to absorb this because margins were low at 11-12 per cent.

"In affordable projects, prices can further go up by Rs 150-Rs 300," he said.

Saurabh Shatdal, managing director (capital markets), Cushman & Wakefield, said TDR and FSI premiums formed a significant part of project costs, specifically in the Mumbai Metropolitan Region (MMR).

Now with new RBI regulations in place, developers will have to look for alternative sources like sales collection, equity or structured capital.

This might lead to some cash flow mismatches and a slight increase in overall project costs, he said.

"For cities where these cost do not form a major part of the development budget, prudent cash flow management will help developers navigate without much impact on profitability," Shatdal said.

In the coming days, he added, developers would look for equity platforms, which would create pools of capital.

Shobhit Agarwal, managing director, Anarock Capital, said promoters should fund payments such as premiums payable to municipalities with equity money.

"It will be challenging as any change in payment is not budgeted for. If you need Rs 120 instead of Rs 100, it will take time," Agarwal said.

Developers agree costs will go up.

Niranjan Hiranandani, managing director, Hiranandani Group, said as the regulator changed norms and regulations, the cause was macro in nature, but when executed, at industry level, some new norms resulted in enhanced challenges.

"The norms mentioned are similar, and will result in pushing up costs - both in terms of the cost of credit/finance; as also the time taken -- with the obvious impact on project viability," he said.

A senior fund manager said: "HDFC is the largest financier to developers. Being a housing finance company it had a lot of flexibility in financing developers. When it merges with the bank, that flexibility will go."