Uncertain looms over realty values

Home prices are unlikely to see any fall, with property developers saying they plan to pass on the increase in cost of borrowing to home buyers following the recent raising of bank interest rates.

Yesterday, the Reserve Bank of India increased the repo rate (at which banks borrow from RBI) and reverse repo (the rate at which RBI borrows from banks) by 50 basis points.

IDBI Bank, Indian Overseas Bank, Punjab National Bank and YES Bank have already announced increases in lending rates.

The cost of funds for most developers had gone up by 200-250 basis points over the past year, after RBI raised repo rates by 200 bps and reverse repo by 250 bps since October 2009 to tame inflation.

Banks have also tightened lending to realty companies after the 'bribe for loan scam' broke out last year, in which senior banking executives and others were arrested for allegedly accepting bribes for clearing loans.

Last year, RBI increased the risk weightage on loans for commercial real estate, making loans to developers expensive.

Most developers say the increase in rates come at a time when they are already seeing sharp spurt in costs of inputs such as cement and steel. Steel prices have risen a little over 10 per cent and cement by 20 per cent since January.

Pass-on issues

"We are in the affordable and mid-income housing segment. If rates go up and our cost of borrowing increases, we will definitely pass it on to the customers," says Hari Prakash Pandey, vice president, finance, HDIL, the country's third largest property developer.

However, consultants say passing on the burden and increasing the prices is easier said than done, given the stagnancy in property sales in key markets. Home sales in Mumbai are almost at a standstill due to high property prices.

Says Ashutosh Limaye, local director, strategic consulting, Jones Lang LaSalle: "This (passing costs) would certainly happen if buyer sentiments and resultant market activity were high enough to accommodate such a move. However, the market for residential real estate is far from effervescent. In a scenario where staying competitive and selling stock is of utmost essence, developers are unlikely to increase the cost of their units and thereby risk losing more customers."