Rate cut may not rev up the property market

The 50 basis point repo rate cut by the RBI has brought cheer to real estate players. The sector, especially the residential property market, has been passing through tough times. Would this new round of interest rate reduction help catalyse the much-awaited turnaround? Samantak Das, Chief Economist and National Director at Knight Frank India, shares his views on the impact of the rate cut on the property market.

Do you think the residential realty sector will turn around with the recent rate reduction?

The rate reduction is like Diwali before Dussera for the realty sector. The rate cut is substantial as a sentiment booster. In my view it should help build traction in the residential property market. We have been witnessing a negative sales trend in major metros. Sales halved in the first half of 2015, compared to a year ago, in the National Capital Region (NCR). There has been over 30 per cent sales drop in Mumbai. Even Bengaluru, which seemed immune to the slowdown, is seeing softness. So, the rate cut would certainly help. That said, it will take time and I don’t see any improvements in the next three months. In fact, the year may turn out to be worse than 2014. But after three-six months, we can expect things to turn around.

From past data, what is the co-relation between interest rate and realty sector growth?

There are many distortions in the property market and it is not easy to spot theoretical demand-supply trends. There is also a lag of one to three quarters between lowering the interest rate and sales growth.

Growth depends on the consumer’s confidence in (overall) economic growth and their confidence that the developer will complete the project. Delays in handing over homes have been very rampant and buyers are frustrated. They have no recourse even if the project sees inordinate delays of over two years. These issues weigh on buyer demand, even if interest rates are benign. Developers are aware of these issues and they are focussing on handing over properties in time.

The rate cut may not lead to material improvement if developers, financial institutions and buyers do not act. For one, banks must aggressively transmit the rate cut to home buyers. There has been a reduction of 75 basis points since January 2015. But banks have only passed on about 30 basis points. Passing on the savings to consumers, over time, should help push up demand.

Developers have to find ways to rationalise sale prices as housing affordability is very low. The ratio of median house price to average annual income in major cities, such as NCR and Mumbai is over 10 times, much higher than our estimate of 4-4.5 times being affordable.

The ratio is slightly better in Chennai and Bengaluru, at 6-6.5 times, but it is still not affordable. There may be limitations for developers to reduce prices in projects that are already launched, but new launches must be priced competitively.

Also, making the ticket size small, by reducing the unit size without compromising liveability, is another way to help bring houses within a buyer’s purchasing range. We are seeing these trends in the last two months, but this needs to continue.

Home buyers are feeling the comfort in the economy. There is also government focus on infrastructure projects. The office market is picking up, implying strength in business. Buyers expect interest rates will continue to ease. They, however, need to regain their faith in the developer’s on-time delivery capability. There must be accountability by the authorities as well, if delays are due to slow approvals.

Are there any other policy measures that are required to boost the sector?

There is certainly a perception issue about the sector in the eyes of consumers and investors. Having a regulator for the sector will aid growth. For example, TRAI brought a lot of price rationalisation to the telecom sector. The financial sector saw fantastic evolution with SEBI and IRDA watching over.

'The Black Money Act will also help bring disciple in the economy and in the sector. Higher transparency will make it easy for developers to take lower-cost loans from banks and pass on the benefits.

As an asset class, what sort of returns can one expect from real estate?

Property investors cannot expect their investments doubling in two-three years, as was seen prior to 2008.

The push for better connectivity to business districts from peripheral locations and steps to create business centres outside city centres means a shift in the real estate market.

We can expect competitive returns, comparable or beating other asset classes, but cannot hope for speculative gains.