Funds just got costlier for builders

Funds just got costlier for builders
The Economic Times, October 28, 2009, Page 13

RBI move to hike provisioning for realty loans aims to avoid creation of another bubble

Pallavi Mulay & Supriya Verma Mishra ET INTELLIGENCE GROUP

THE RBIs credit policy announced on Tuesday appears intended to rein 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 fulfilled, 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 two-three months.

But other industry official 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 this extra cost to the 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 southbased 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 that extra cost to consumers.

In short, the current measures may not have significant impact on the financials of real estate companies or prices. Tuesdays policy pronouncements shows 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.