Rising interest rates may delay real estate recovery

Rising interest rates may delay real estate recovery

Recent uptick in interest rates is bad news for the real estate sector which is struggling to come out of slowdown in last few months. Reserve Bank of India’s decision yesterday to hike REPO rate by 25 basis points will further increase the interest rates thus making home loans (and all other loans) costlier. Thus, the uptick in interest rates has proved to be a dampener for the realty sector.

Lower interest rate regime of the past few years along with stagnant property prices had been a key driver for improving affordability of home buyers. However, this conducive scenario has been marred by rising interest rates which has raised concerns about impact on future recovery of the realty sector.

However, some real estate experts see an opportunity for recovery for the sector in the coming months. According to them recent trend reversal in interest rates may hurry up the home buyers to buy homes who may fear further rate hikes in the coming months. This fear may force many home buyers to prepone their decision to buy houses than to wait for some more time. Also, increasing interest rates will provide an opportunity in disguise for the organised players who are benefiting from RERA-driven consolidation in the sector.  They are better placed to cope with higher requirements as well as rising cost of funds.

The residential realty segment in India has been witnessing tough times in past couple of years, characterised by sluggish demand, mounting inventories and declining prices. While FY16 and FY17 were in general bad in terms of sales, FY18 saw market disruptions due to introduction of RERA and GST. As a result, most of the realty companies have had weak cash flow profiles in past few years due to sluggish pre-sales, increasing working capital intensity, inability to monetise legacy land banks and rising investments in the rental business.

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