The recent move by the Reserve Bank of India (RBI) in its annual Credit Policy has generated optimism for investors in the affordable housing sector. This development is widely regarded as a positive step for the overall property market. While investors remain cautious, awaiting banks to communicate lower interest rates, realtors express optimism, hoping that inflation remains in check.
Om Ahuja, CEO – Residential Services, Jones Lang LaSalle India, remarked, "While the rate cut of 50 basis points is definitely a ray of hope, it does not dispel the shadows nearly as much as may be initially supposed. It should be borne in mind that the Reserve Bank of India (RBI) has hiked interest rates 13 times between March 2010 and October 2011."
Ahuja further elaborates, "Given the on-going concerns over inflation and liquidity in the market, the spate of rate hikes has created a compounded problem for the residential real estate sector. The series of hikes in the past have also affected the price that builders put on their properties, since their own costs of borrowing have increased. It is unlikely that property prices will come down because of this rate cut. In fact, it is very likely that there will be an upward bias on property rates because of the anticipated improvement in sentiments of buyers who have so far been sitting on the fence, waiting for some signals of relief."
Shrinivas Rao, CEO, Vestian Global Workplace Solutions, believes the reduction in repo rate will boost economic growth and improve business sentiments, ultimately strengthening buying activity. However, the impact will vary across sectors depending on implementation of the cut by leading banks.
He explains, "Leading lenders are likely to cut interest rates on deposits and loans. Home loans are likely to turn cheaper. For instance, a 25 basis point cut could lower home loan EMIs by Rs 16 per Rs 1 lakh. A cut in the repo rate will also reduce the interest on commercial loans which in turn will favour developers to avail cheaper loans, thereby providing traction to real estate activity. Cheaper loan rates are expected to attract more end-users, impacting the residential sales positively."
With banks offering loans at cheaper rates, developers are likely to prefer the bank loans as against private equity funds. However, an increase in market demand in the short term will drive capital values, thereby benefitting retail investors, adds Rao. According to Ganesh Vasudevan, Vice President and Business Head, IndiaProperty, the cut of 50 basis points by the RBI is a move that will have a positive effect on the real estate segment.