Realtors still stuck in house of correction

The RBI’s rate cuts alone may not stimulate the sluggish residential market. Experts feel that developers may have to further cut prices to bring buyers back into the market. Meanwhile, as a result of drastic fall in home sales, higher capital and construction cost, most developers have reported decline in revenue in 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,” says Omaxe CMD Rohtas Goel.

“The lower rates may enhance enquiries from potential home buyers, but may not necessarily result in higher number of transactions,” says international property advisor DTZ director Abhilash Lal. Adds Centrum Broking real estate analyst Rupesh Sankhe, “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 realty market.”

According to an analysis, a buyer’s decision depends 60% on interest rates, 30% on property prices and the rest on sentiment or other unexplained factors. Now, home loan rates are expected to come down, bringing down EMI for buyers, but would still remain high compared to 2003-04 level. Therefore, property prices, which have gone up almost thrice in most markets in the past five years, also need to rationalize. “We earlier expected property prices to correct by 30-35%. Now with expected lower mortgage rates, a correction of even 20-25% may have the desired impact on home buyers,” says Mr Sankhe.

Residential market has seen price correction in the past few months to the tune of 20-25% in several pockets, but sales haven’t picked up. Besides higher interest rates and property prices, global financial turmoil, stock market crash and fears of job cuts too are worrying home buyers.

The squeeze in the real estate market is now getting reflected in realtors’s earnings figure. India’s largest real estate developer DLF reported a 4% decline in net profit at Rs 1935 crore. The second largest realty firm, Unitech, reported 3% decline in sales at Rs 983 crore and 12.6% lower profit at Rs 358 crore. Parsvnath’s sales fell 45% to Rs 217 crore, and profit dropped 78% to Rs 22 crore. Omaxe’s revenue declined 70% to Rs 204 crore and profit fell 87% to Rs 20 crore.

The biggest issue for realty firms today is liquidity crunch, as sales have dried up and banks are refusing to lend while private equity funds have slipped into wait-and-watch mode. “Rate cuts may not actually help ease liquidity situation for the real estate firms. Unless RBI relaxes lending norms to real estate, nothing is going to change,” says Mr Lal of DTZ.