Real estate companies observes their cost of borrowing rising by 1% age point as the central bank has increased the repo rate by 0.5 % and cash reserve ratio by 0.25 %.
The rate hike will push up the corporate lending rates. This, in turn, is anticipated to further strain the balance sheets of realty companies, already reeling under a fund crisis in the wake of slower property sales, higher lending rates, increase in input costs and the central bank’s measures to check conventional sources of funding.
“The borrowing rates will be 1% higher. The rate hikes will ultimately hurt the balance sheets of real estate companies. The cost of funds for our upcoming power projects will go up drastically,’’ said Ajith Mittal, president, corporate affairs, Indiabulls Group.
Indiabulls’ property arm Indiabulls Real Estate is into residential, commercial and retail realty development. It has ventured into power and is setting up power projects in Jharkhand and Maharashtra.
Hitesh Agrawal, head of research, Angel Broking, said, “We deduce the rate hike impact to be visible not only on the rate sensitive sectors like banking, realty and auto, but also on corporate profitability as a whole as most sectors and companies have embarked on huge capacity growth plans.
Property transactions in the major Indian cities such as Mumbai and Delhi have fallen 10 – 15 % because of higher lending rates in the previous 6 months, limiting the cash flows and execution skills of developers.
“Developers need to think in the hike in lending rates, which will lead to a dip in demand. Nevertheless, a rectification in real estate prices will make up for the dip in demand caused by increase in rates,’’ said Mittal.
The majority of real estate companies have been watchful in buying land and beginning new projects, given the tight monetary picture. Akruti City, another Mumbai-based developer, is concentrating on housing projects.