The recent rate cuts by the Reserve Bank of India (RBI) may not be sufficient to rejuvenate the sluggish residential market. Experts suggest that in order to entice buyers back into the market, developers may need to make further price reductions. The significant drop in home sales, coupled with increased capital and construction expenses, has led many developers to report revenue declines in the September quarter.
"We are not very sure, but hope that RBI rate cuts will encourage banks to lower interest rates for home loans. A lower home loan rate will increase home buyers’ interest in the market," stated Omaxe CMD Rohtas Goel.
On the other hand, international property advisor DTZ director Abhilash Lal notes, "The lower rates may enhance enquiries from potential home buyers, but may not necessarily result in a higher number of transactions." He is joined by Centrum Broking real estate analyst Rupesh Sankhe, who adds, "Affordability is the major issue for any home buyer. Today, the affordability is much lower compared to 2003, when both interest rates and property prices were lower. The property prices too need to come down along with interest rates if people are to be lured to the realty market."
An analytical breakdown reveals that a buyer's decision relies heavily on interest rates (60%), property prices (30%), and other less definable sentiment factors (10%). While there is an expectation for home loan rates to decrease, thus lowering the EMI for buyers, these rates would still remain elevated in comparison to those from 2003-04. Therefore, the significant property price increases—averaging almost threefold in many markets over the last five years—also require adjustment. "Initially, we anticipated a property price correction ranging from 30-35%. However, with the prospect of lower mortgage rates, a correction in the range of 20-25% could pull home buyers back into the marketplace," remarked Mr. Sankhe.
In recent months, the residential sector has witnessed a price correction of about 20-25% in various areas, yet sales remain stagnant. Beyond high interest rates and property prices, concerns over global financial instability, stock market declines, and potential job cuts are also dampening home buyer confidence.
This tightening in the real estate market is being reflected in the earnings statements from realty firms. For instance, DLF, India’s largest real estate company, reported a 4% drop in net profit, amounting to Rs 1,935 crore. In contrast, the second-largest player, Unitech, experienced a 3% decrease in sales at Rs 983 crore alongside a 12.6% profit fall to Rs 358 crore. Parsvnath's sales plummeted by 45% to Rs 217 crore, with profits shrinking 78% to Rs 22 crore, while Omaxe’s revenue tumbled 70% to Rs 204 crore and its profit dipped 87% to Rs 20 crore.
Currently, the primary challenge confronting realty firms is the liquidity crunch resulting from dried-up sales, coupled with banks' reluctance to lend, and private equity funds taking a cautious approach. Mr. Lal from DTZ commented, "Rate cuts may not actually help ease the liquidity situation for real estate firms. Unless the RBI revises the lending guidelines applicable to real estate, no significant changes are anticipated."