What does 2009 holds for the sector?

Good news for both industry and buyers! Inflation has come down from its October high of 13% to 8%. RBI since then has announced a series of rates cut- Repo rate has been reduced by over 200bp, while Reverse repo rate saw a 100bp decrease. CRR too was reduced by 150bp to inject liquidity in the market.

Today, which is December 15th 2008, as I write this article, public sector banks hold a press conference to announce major rates cut and other measures to boost real estate sector. The highlights of today’s meeting were:

• Rate for home loans up to Rs 5 lakhs will not be more than 8.5%
• Five-year fixed rate terms on up to Rs 5 lakhs home loans
• Banks to take 10% margin on home loan of up to Rs 5 lakhs
• No process, prepayment fees for home loans
• Home loan rate under package can fall if rates fall more, which is likely to happen
• Home loan of Rs 5-20 lakhs for maximum 20 years at 9.25%
• India banks’ margin for Rs 5-20 lakhs loan will be 15%
• India state-run banks will offer free life insurance cover for home loans

These new home loan rates will be effective Monday, December 15, 2008 and expire on June 30, 2009. This has come as good news to some developers while rest felt disappointed. DLF and Unitech have good presence in sub-20 Lakhs housing segment, which is also called “Affordable Housing”. Those operating in “affordable housing” hailed these rates cuts. Sanjay Chandra, MD of Unitech, said “It is a big benefit — the rates coming down, no processing fees as well as the fixed nature of it because a lot of people didn’t like the uncertainty with the way interest rates were moving. So I think the fixed rate and also the only option possibility of downward revision is a good thing for the sector and for us in general.” This might force and encourage other developers to focus on affordable housing. But the existing home loan borrowers felt dejected because these rates are applicable to new loans only.

However, these measures may not revive the flagging sector conditions because a majority of residential projects cost above Rs. 40 Lakhs i.e. where loans are above Rs. 25-30 lakhs. Industry insiders say that unsold property to the tune of Rs 20,000–25,000 Crores remains stuck in the country. Unless these properties are sold first, developers may not launch new projects or finish the under construction ones. To give a boost to this, developers are demanding an interest rates in the range of 7-8% i.e. back to the days of 2005.

With falling crude prices and global recession, Inflation should come down to the level of 5-6% by June 2009 end. So expect RBI to cut rates further by 100-150bp which we will bring the interest rates in single digit. This will give the much needed boost to the industry. Buyers, who are right now playing wait and watch game, will go for cheaper home loans. Expect another cut in prices in the month of January or February by developers who desperately want to flush out their inventories. More so costs of construction have come down by 10-15% due to decrease in prices of cement and steel. This cost should be passed on the customers as well. I will surely bet my money on real estate companies, especially bigger ones like DLF, Brigade and Unitech.