Indian real estate firms expect a hit on margins for the next few quarters as the central bank’s move to raise interest rates this week will push up costs and keep potential buyers away from the market.
Developers, already facing a demand slowdown, have refused to lower the price line as they seek to make up profits despite high land costs and curbs on funding. However, higher interest rates in the economy could push them to choose survival over pride.
The Reserve Bank of India late on 24th June raised its key lending rate and cash reserve requirement by 50 basis points each to curb price pressures. Inflation jumped to its highest in more than 13 years in mid-June to 11.42 percent.
As a result, lending rates of banks are seen close to 13 percent, levels last seen nearly a decade ago, while interest rates on home loans could go up by 50-100 basis points, putting off a large segment of middle-class buyers.
“Real estate prices had already started slackening, this move will lead to more slowdown,” said Ramesh Jogani, managing director at India REIT Fund Advisors, which has invested in several projects. “We see a 15-20 % fall in prices.”
Analysts say the slackening of demand is raising concern over future realizations, which is reflected in the performance of real estate stocks, with most close to their lowest level in a year and 40-60 % off their peaks.
“In the near term, we think affordability will be a bigger driver and a 20% correction in property prices will be needed by the year end to revive volumes,” UBS Investment said in a research note.