The real estate market is hanging on the razor’s edge and multiple triggers are slowing the market down. This article examines the current trends in the realty market.
Funding pressures
The sector is facing funding woes in the current environment of rising rates. The Reserve Bank of India had raised interest rates in June 2011 for the 10th time since March 2010. Further, inflation as measured by the wholesale price index rose 9.44 per cent in June, up from 9.06 per cent in May, thus smashing hopes of a pause of a further rise in interest rate.
This has led to higher costs for the buyers. According to analysts, purchasing activity which had seen a drop during the last tranche of interest rate hikes will see a further drop in buyer interest now. Owing to the last 10 rate hikes by the central bank, EMIs for housing loan have risen 25 per cent to Rs 980 per Rs 1 lakh of borrowing, and consequently loan eligibility for home buyers has declined 20 per cent.
Not only buyers, but even the real estate companies are also in troubled waters. Cost of funds for developers ranges anywhere in the range of 14.5-16 per cent depending on the credibility of the borrower. The rate hike is only making it more expensive. Also the banks have been skeptical about lending to the real estate sector in the recent past. The Reserve Bank of India has laid out strict and tedious due diligence standards for banks in sanctioning loans to the real estate sector. The banks have to verify the documents, including cross verification with the local administration to ensure that frauds are eliminated. The central bank has also asked banks to independently verify the authenticity of the chartered accountant’s certificate, property valuation certificate, legal certificate, guarantee/line of credit or any other third-party certification submitted by the borrower.
This could delay loan sanctions at all levels and may lead a further blow to the real estate sector that is witnessing slowing sales and rising losses.
Selective lending, higher rates and stricter verifications have forced many developers to tap other sources of funds, which are much more expensive than bank lending.
Higher costs
The rise in prices of steel, cement, bricks and labour are causing worries for the real estate sector. There has been an 18 per cent gross rise in construction costs over the last two years. Steel and cement alone make up to 40 per cent of the cost of construction and civil costs (i.e. steel, cement, labour) constitute around 70 per cent of total costs. High global demand for commodities, higher production and transportation costs partly due to higher fuel prices has led to the rise in prices of commodities. Further, demand for skilled labour has led to the labour cost seeing a rise of 25 per cent in the past decade.
While some developers believe that input costs have peaked or are close to peaking, some think that inflationary pressures could continue in the near term. This would cause margin erosions for few players, or delays in old projects, changes in product mix and one-time cost adjustments. Some developers have even indicated passing the increases in costs on to customers, which may see some slowdown in sales.
On the sales front, Mumbai, Bangalore, Pune and Kolkata witnessed a further slowdown, while Gurgaon and Chennai gained. Also the new launches were at slightly lower numbers across pan India. Launches declined to 13.5 million square feet in March 2011, from 21.5 million sqare feet a month ago as cautious developers faced regulatory and funding hurdles.
On the price front, the movement has been in a narrow range in the past few quarters as developers have held on and buyers have been playing a waiting game. The past few months have puzzled property buyers. On account of conflicting signals on realty prices, the buyers are confused: whether to wait for prices to fall or rush to buy before they appreciate. The trend of higher prices was followed by the correction in the market.
Now the question is whether this trend will continue, or will there be an upsurge?
While in the current situation of tight liquidity conditions, increasing inventories, rising interest rates and construction costs, buyers may stand to gain as the real estate developers may have to opt for distress sale to improve their cash flows. However, rising interest rates (expected to go up further as inflation continues to remain high) may make the home loans expensive for the buyers. Even the rental yields are expected to rise as residential prices correct and owners compensate by increasing rental rates.
[Source]
0 comments:
Post a Comment