This story first appeared in DNA Money edition on Thursday, October 04, 2012.
Two factors have revived the hopes of battered realty players: green signal for up to 49% FDI in multi-brand retail and high chance of interest rates falling.
While FDI is expected to stir demand for commercial space, any lower interest rates would reignite demand for homes. While actual creation of retail space may take 1-2 years, FDI news is a sentiment booster, said experts.
“FDI in retail will bring about a new approach to building retail spaces, just as the entry of firms such as IBM and Intel led to new architectural designs and world-class workplaces in India a few years back,” said Raja Kaushal, MD and India head of BNP Paribas Real Estate Advisory.
Better liquidity and lower mortgage rates are also creating sector tailwinds, said Puneet Jain and Aditya Soman, analysts at Goldman Sachs India, in a recent report. (mortgage rates have fallen 50 bps in the last six months.)
Sandipan Pal, analyst at Motilal Oswal Securities, said, “Favourable global liquidity, rising expectations of fiscal correction, 25 bps cut in CRR and likely interest rate downcycle are all positives.”
Given that several retail investors are struggling to service their home loans, interest rates are expected to fall, said Kaushal. His talks with banks and housing finance firms indicate that defaults among borrowers on equated monthly installments (EMIs) are up.
“From one in 2-3 years, defaults now happen within a year’s time. Job uncertainties and economic slowdown are worsening matters,” he said.
The current mortgage rates at 10.25-10.75% are at the higher end of the 7-11% range over the last ten years. Banks are keen to improve their loan books. A possible 150 bps drop in interest rates could result in EMIs for a Rs1 lakh loan drop from Rs1,032 a month to Rs932 a month for a 20-year loan, said experts.
Since up to 80% of home buyers take loans, and given the high loan-to-value ratios, banks have to go to the smaller towns and aggressively target home buyers in the Rs20- 40 lakh bracket, or reduce rates and improve their loan quality, said observers.
“Many people are yet to buy their first home. So interest rates will have to come down at least for them,” said Kaushal. Two-way pricing of loans where second and third home buyers pay a higher rate is also desirable, he said.
For, declining sales, liquidity concerns and mounting debts had led to shelved or delayed projects over the last three quarters, savaging realty firms.
The recent macro trends, however, will benefit companies such as DLF in terms of improving operating leverage and financial de-leveraging, analysts said.
Another reform area could be construction finance. “With demand slack, they sought financing. But lenders know such mega projects will take 10-12 years to complete whereas they want their money back in 3-5 years. So projects need to be phased,” said Kaushal.
Any fall in interest rates would revive buying and selling of residential apartments. This will help narrow the big gap of 5-7 years in real estate project financing. More and more lending will start to happen from mezzanine funds and state-owned banks,” said Kaushal.
Thus, any cut in lending rates would benefit property big boys such as DLF, HDIL, Godrej Properties and Unitech. Goldman Sachs analysts foresee a 50-100 bps cut in construction finance rates on account of better liquidity.
Two factors have revived the hopes of battered realty players: green signal for up to 49% FDI in multi-brand retail and high chance of interest rates falling.
While FDI is expected to stir demand for commercial space, any lower interest rates would reignite demand for homes. While actual creation of retail space may take 1-2 years, FDI news is a sentiment booster, said experts.
“FDI in retail will bring about a new approach to building retail spaces, just as the entry of firms such as IBM and Intel led to new architectural designs and world-class workplaces in India a few years back,” said Raja Kaushal, MD and India head of BNP Paribas Real Estate Advisory.
Better liquidity and lower mortgage rates are also creating sector tailwinds, said Puneet Jain and Aditya Soman, analysts at Goldman Sachs India, in a recent report. (mortgage rates have fallen 50 bps in the last six months.)
Sandipan Pal, analyst at Motilal Oswal Securities, said, “Favourable global liquidity, rising expectations of fiscal correction, 25 bps cut in CRR and likely interest rate downcycle are all positives.”
Given that several retail investors are struggling to service their home loans, interest rates are expected to fall, said Kaushal. His talks with banks and housing finance firms indicate that defaults among borrowers on equated monthly installments (EMIs) are up.
“From one in 2-3 years, defaults now happen within a year’s time. Job uncertainties and economic slowdown are worsening matters,” he said.
The current mortgage rates at 10.25-10.75% are at the higher end of the 7-11% range over the last ten years. Banks are keen to improve their loan books. A possible 150 bps drop in interest rates could result in EMIs for a Rs1 lakh loan drop from Rs1,032 a month to Rs932 a month for a 20-year loan, said experts.
Since up to 80% of home buyers take loans, and given the high loan-to-value ratios, banks have to go to the smaller towns and aggressively target home buyers in the Rs20- 40 lakh bracket, or reduce rates and improve their loan quality, said observers.
“Many people are yet to buy their first home. So interest rates will have to come down at least for them,” said Kaushal. Two-way pricing of loans where second and third home buyers pay a higher rate is also desirable, he said.
For, declining sales, liquidity concerns and mounting debts had led to shelved or delayed projects over the last three quarters, savaging realty firms.
The recent macro trends, however, will benefit companies such as DLF in terms of improving operating leverage and financial de-leveraging, analysts said.
Another reform area could be construction finance. “With demand slack, they sought financing. But lenders know such mega projects will take 10-12 years to complete whereas they want their money back in 3-5 years. So projects need to be phased,” said Kaushal.
Any fall in interest rates would revive buying and selling of residential apartments. This will help narrow the big gap of 5-7 years in real estate project financing. More and more lending will start to happen from mezzanine funds and state-owned banks,” said Kaushal.
Thus, any cut in lending rates would benefit property big boys such as DLF, HDIL, Godrej Properties and Unitech. Goldman Sachs analysts foresee a 50-100 bps cut in construction finance rates on account of better liquidity.
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