Funds just got costlier for builders

Pallavi Mulay & Supriya Verma Mishra,


The RBI’s credit policy announced on Tuesday appears intended
to rein in an incipient bubble in the real estate sector. The provisioning
requirement for loans to commercial real estate has been increased
from 0.40% to 1%, implying costlier bank loans for the sector.

As most of the realty companies rely on bank funding, especially
in times of financial crisis, this move could have an impact on the sector.

“As banks often keep a cushion for any regulatory changes in
provisioning, this measure is more for bringing moderation in
the realty sector. Since necessary reduction in prices has still
not taken place and there is fair amount of money available
for the sector, this step is to avoid creation of another asset bubble,”
says M Narendra, executive director of Bank of India.

Not unexpectedly, industry officials differ. According to Rajeev Talwar,
executive director of DLF, “Stability in major parameters is a good sign,
but increasing the risk weightage for commercial real estate is a negative
signal, which is perhaps not required so early in the economic revival process.”

It remains to be seen whether this latest measure has the desired
impact of curbing any further rise in property prices.

Since there is a huge latent demand to be fulfiled,
some builders are confident of sales being unaffected
by any increase in prices. Indeed, in some cities property
prices have gone up by 5-15% in past 2-3 months.

But other industry officials doubt whether any price increase
can be passed on. “Property prices are a function of demand
and supply and it will not be easy for developers to pass on
this extra cost to buyers as many places, especially in central
Mumbai and parts of Delhi, have already seen a significant price run-up,”
says Keki Mistry, vice-chairman and managing director of HDFC.

Sudhir Reddy, managing director of IVR Prime,
a south-based builder, says: “It is easier said than done
that companies will pass on the incremental cost of funds
to homebuyers. One must not forget that increase in market
price will result in additional construction costs for builders.
This will not be possible when places like
Hyderabad, Chennai and Pune are still facing a glut in demand.”
Sunil Malhotra, CFO of Delhi-based Omaxe, says:
“As demand is still price-sensitive, it will not be easy for
developers to pass on that extra cost to consumers.”

In short, the current measures may not have significant
impact on the financials of real estate companies or prices.
Tuesday’s policy pronouncements show that the apex bank
has become vigilant. Hari Pandey, VP-finance, HDIL, says the
increased provisioning will not cost more than 30-50 bps at present.

(With inputs from Sanjeev Chaudhary)