Rate cut Is Fine, it’s Prices that Matter

Feb 02 2013, 08:43 IST
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SummaryThe central bank’s slashing rates would offer the existing borrower a marginal benefit.

to what percentage, benefits can be passed onto the customers,” said VK Sharma, director and chief executive, LIC Housing Finance. When asked if the revision will only be for new customers or existing customers too, he said, “We will review the prime lending rate and the benefits will be passed to all.”

The rate cut, however, would not necessarily mean that the liquidity tap has been opened for the real estate sector. “Of course, each lender will have to take a view based on respective asset-liability management and margin position. However, one is not sanguine about increased funds flow to the real estate companies as the issue is not merely one of liquidity but related to the portfolio quality,” says Sridhar.

For real estate companies, the only way to attract liquidity into the system seems to be to pin their hopes on prospective buyers queuing up at the sales counter. “The signal will serve as a boost for the sector with sentiments of buyers turning favourable. Banks may pass on the benefits to the consumers by easing off the lending rates. Home loans may get cheaper, facilitating the buying decision of the consumers,” says Gaurav Mittal, Managing Director, CHD Developers.

“The industry expects more such steps to improve liquidity and reduce interest rates to increase investments,” says Anshuman Magazine, CMD, CBRE South Asia, a real estate consultancy.

Fund flows to the real estate sector are drying up. The much-touted investment avenues such as real estate investment trusts and real estate private equity have not taken off as expected. Recently, the RBI said it did not favour the granting of industry status to real estate — a key demand of the sector for that would enable funds to flow easily.

Which leaves the only avenue: the buyer who bears most of the burden of financing a project and the only channel for reliable cash flows for a developer. The rate cut would provide a marginal benefit, but can do nothing to address the core issue: high prices.

“A sharp revival in the fortunes of the industry will be accelerated if the demand resistance arising from high prices of housing can be addressed through more affordable prices,” says Pranab Datta, chairman, Knight Frank India.

Until that happens, the prospective buyer may have to remain a fence sitter on the lookout for a good investment opportunity.

(With inputs from Sandeep Singh)

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