Slow real estate sector may come to fast-track again

Reserve Bank of India’s (RBI) latest round of interest rate cuts together with the government’s fiscal stimulus package may prod some home buyers to return to the moribund housing market, but industry officials say the steps may not be enough to revive the market.

Some developers say the moves do little to specifically address the realty sector’s main source of troubles credit flow to developers.

The central bank on Friday reduced repo and reverse repo rate by one percentage point and banks’ cash reserve ratio (CRR) by 50 basis points, which is likely to enhance liquidity in the system and make lending to home buyers and developers easy and less expensive.

“Rate cuts will definitely have positive impact on demand for homes. RBI’s actions in the past have eased liquidity in the system, but credit flow to developers still remains an issue,” says Gera Developers chairman Kumar Gera, who is also the chief of real estate industry body Credai.

Developers were expecting that the government would raise the limit on homes loans classified as priority sector lending for banks to Rs 30 lakh from Rs 20 lakh now; and raise exemption limit for tax benefits on interest paid on home loans to Rs 3 lakh from Rs 1.5 lakh now.

The real estate sector has been in the grips of a sharp slowdown since the beginning of last year, with sales having fallen drastically in the last quarter. Lower sales hit developers’ cash-flows, while unavailability of bank credit and funds from private equity squeezed them further, forcing most of them to delay projects and lay off employees. The realty sector is a big employer and a key source of demand in a variety of other sectors, and the government has been keen to lift this industry to spearhead a wider economic recovery.

The RBI has repeatedly cut CRR and key rates in the past two months, but banks have not been very forthcoming in lending to developers because of the high risk perception of the sector. This is because several house-builders find difficult to service debt and pay for the land already acquired amid slowing sales.

The government’s move to allow builders to raise foreign loans or external commercial borrowings (ECB) to develop townships is also being seen as a significant move, although again having a limited impact.

“The government move will not flood Indian real estate with funds, but in today’s time, every step counts. This is a signal to the developers to locate money wherever it is sitting,” says DLF group executive director Rajeev Talwar. DLF, India’s biggest property company, is developing a handful of townships across the country and may potentially benefit from the government’s move.

Residential projects outside proposed townships are unlikely to benefit from government’s latest stimulus package, officials say.

The government also announced that it will work with state governments to make land available for low and middle-income segments, although industry officials say this move is unlikely to have any impact in the short-term.

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