Cheaper home loans may not cheer realty sector

The real estate sector is unlikely to see any movement even after measures like bringing Rs 20 lakh and below loans under the priority sector. However, it will trigger demand in the tier II and tier III cities.

Since the beginning of the year, realty prices have fallen by 10% to 15% across the country. Analysts expect a further price correction of 20% to 25% followed by a time correction. But real estate cost in metro cities like Delhi and Mumbai continue to be high. In September 2008, the rates prevailing in south Mumbai was higher than what it was in November. The September rates for the residential segment in Churchgate, Cuffe Parade and Colaba in (Rs/sqft) was 15,000-32,000; 15,000-35,000; 14,000-40,000 respectively. The November rates for the same areas have however fallen. In (Rs/sqft) the current rate in Churchgate is 15,000-30,000; Cuffe Parade and Colaba are12,000-30,000.

In Delhi a lot of areas have experienced a dip. During September, 2008 the rates in (Rs/sqft) in areas like Golf Links, Greater Kailash and South Extension were 6,000-10,000; 6,500-12,000; 7,000-12,000. Prices have dropped since then in all these areas. In (Rs/sqft) the current rate in Golf Links is 5,200-9,000; in Greater Kailash it is 4,500-9,000; in South Extension it is 4,500-10,000.

Though much activity is not expected in Mumbai and Delhi, suburbs like Thane, Virar, Vashai and Panvel will see movement in the housing sector. Similarly, while places in the heart of Delhi will not beaffected, places like Rohtak and Sonepat will feel an impact.

Even after the current decline in prices housing accommodation in metros are still on the higher end and beyond the purview of Rs 20 lakh loan. So even if home loans become cheaper in this category metro accommodation is unlikely to come within its gamut and hence spur demand here.

“In the tier II and tier III cities there may be an impact with Rs 20 lakh loans becoming cheaper, but it will hardly affect demand in the metros where prices continue to be steep,” said Hitesh Agarwal, head of research, Angel Broking. The reason for demand to pick up in these cities is that here most of the buyers are end-users and hence genuine buyers, whereas in major metros investors majorly drive the demand. For the demand to start picking up in metros a price cut for the properties is essential.

Currently the interest rate of the priority sector hovers around 9% to 10%. PSU banks are likely bring it down by 2% to 3%. Banks are even looking at waiving off processing fees and reducing money margins.

Developers also think a further reduction in home loans to 6% to 7% for the priority sector is going to trigger demand.

With banks being more apprehensive about lending to this sector and chances of PE deals happening in the near future being equally grim, industry experts feel that developers will have to be realistic about the situation and bring prices down to drive demand.

“The bubble has gone bust in this sector. There is a slowdown in the global economy. Realtors cannot expect to maintain profit margins of the boom era. They will have to cut prices and set realistic targets for the future,” Agarwal pointed out.