Impact of Repo Rate Hike on Real Estate Companies
The recent hike in repo rate by 0.5% and cash reserve ratio by 0.25% is anticipated to increase the cost of borrowing for real estate companies by 1% age point. This increase is expected to further strain the balance sheets of realty companies, which are already reeling under:
- Slower property sales
- Higher lending rates
- Increase in input costs
- Reduced conventional sources of funding
Expert Insights
- Ajith Mittal, President, Corporate Affairs, Indiabulls Group:
“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.”
- Hitesh Agrawal, Head of Research, Angel Broking:
“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.”
Market Impact
- Property transactions in major Indian cities like Mumbai and Delhi have declined by 10-15% in the previous 6 months due to higher lending rates, limiting developers' cash flows and execution skills.
- Developers are advised to factor in the lending rate hike, which may lead to a dip in demand. However, a rectification in real estate prices could offset the demand dip caused by the rate increase.
Developer Strategies
- Many real estate companies, including Akruti City, are being cautious in land acquisition and new project launches due to the tight monetary environment.
- Some developers, like Akruti City, are focusing on housing projects amidst the current market scenario.