RBI rate hike will hit the industry says CREDAI

The RBI move to raise the repo rate by 50 bps comes as a shock to  the real industry as the burden  of increased interest rates will not only impact developers but home buyers as well, said Lalit Kumar Jain, National President CREDAI.
The cost of borrowings would be higher as banks are bound to increase their lending rates, said Mr Jain who is also the Chairman and Managing director of Kumar Urban development Limited (KUL) said.
The industry, he said, is facing a crunch and the fund gap over the next five years alone would be US  $70 billion. “The RBI announcement would therefore be detrimental to the growth of the industry and economy,” he said.
As per estimates, the housing requirement in the current five-year plan is 24.6 million which would be 37 million in the next five-year plan. The country would need US $3.2 trillion for this. The funding gap for existing developers in the next five years would be around US$70 billion.
In the context of increased material costs which have gone up by over 35 per cent and labour costs that have doubled over the last three years, the increased rate of interest will be counterproductive and would also give rise to inflation instead of curbing it, remarked Mr Jain.
The outcome of this would only be that buyers would continue to be wary of buying homes and developers would find it difficult to raise funds at reasonable rates of interest.
Mr. Jain appealed to the RBI Governor to see reality and provide relief to the stressed buyers and developers or else affordable housing and any kind of housing would remain a far cry.
He called for close coordination among various government departments such as finance, housing, urban development, commerce and environment to ensure that the real estate industry that supports over 200 other industries, comes into full swing and contributes to  the speedy growth of the economy.

Commenting on RBI’s first quarter review of the monetary policy for FY'12, Mr. Pradeep Jain, Chairman, Parsvnath Developers Limited and Chairman, Confederation of Real Estate Developers’ Association of India (CREDAI) said, “Yet again and quite unexpectedly, RBI has increased the repo rate and reverse repo rate by 50 bps each bringing  them to 8 per cent and 7 per cent respectively. He said it has been well established that unless the supply bottlenecks are addressed and adequate steps taken to ensure enough supply, the RBI moves to curb inflation will have a minimal effect.
This is 11th time in the last 17 months that rates have been increased and it is evident that it has not been material in taming inflation to the desired level. Instead, if measures had been taken to kick start production and manufacturing to support supply in the market, we might have seen a different scenario altogether. The move has come as a surprise to us. While we were expecting a moderate hike of 25 BPS,  hiking rates by 50 BPS is going to dampen growth.
 
The current rise in rates would only make the cost of funds expensive for both developers and buyers coupled with constant increases in input costs making the business environment very complex across industries.
 
The tightening in rates over the past 17 months has only resulted in growth moderation during Q1 of FY12. These were visible from deceleration in IIP (index of industrial production) during April-May 2011 and in the consumption of cement, steel and automobiles during Q1 of 2011-12. IIP has decelerated to a growth of 5.8  per cent  in April and further to 5.6 per cent in May, down from a rapid 13 per cent growth in April 2010 and 15 per cent growth in March 2010 respectively. The effects of slower growth have also been seen in sales from real estate to car sales. “We appeal to RBI to stimulate measures for an improved supply chain managemen,” he said.     
 
Raising its concern for home buyers, Maharashtra Chamber of Housing Industry (MCHI), expressed the fear that the RBI move to increase the repo rate by a whopping 50 bps will adversely impact the industry. While appreciating RBI for its steps to curb inflation, MCHI President Paras Gundecha said “Bankers have systematically raised home loan interest rates as and when RBI hiked the repo rate, and we strongly feel that they should consider the home buyers’ interest,”
 
This is the second rise in repo rate by RBI in a month and a half and this will have a major negative impact on the real estate industry which is already reeling under the impact of increasing cost of inputs and fall in demand due to increasing prices, he said..
 
 
Sanjay Dutt, CEO - Business, Jones Lang LaSalle India, said the increase in key short-term lending and borrowing rates by 50 basis points announced  by RBI is viewed as harsh by most experts. It was expected, though the magnitude still comes as a shock to the real estate sector. There is no doubt that inflation is detrimental to the growth of the economy, that it needs to be curbed and that the RBI's intervention is necessary. However, the Government has been consistently increasing the rate of interest over the last one year. The additional 50 basis point increase is expected to impact growth.
 
Demand for real estate is a factor of economic growth. The sector has now taken a serious body-blow with the combined onslaught of increased cost of land and construction, eventually making finished real estate products more expensive. Increased mortgage rates will only compromise demand further.
 
A high-inflation, low-sentiment economic environment may send out signals of instability. All real estate stakeholders are now at crossroads. Investors particularly will ask themselves serious questions about the right time, place and price to enter real estate. Their primary concerns will be about the possibility of decreased demand for and therefore decreased profitability of the projects they invest in. They will have to face the increased risk of having to exit at lower values.
 
Residential buyers in cities with higher purchase rates and ticket sizes will be impacted the most. Blue-collar home loan borrowers who have extremely limited budgets and have already been struggling with the high cost of real estate will be hit severely because of this increased interest rate.