Jan. 10: Soaring property prices and rising interest rates are likely to crimp consumer interest in housing during 2011, says rating agency Fitch. In some cities such as Mumbai, Delhi and Kolkata, realty prices have soared by 40 per cent over the levels of January 2008 – the pre-meltdown peak. Analysts tracking the sector say the sales of residential properties are down in centres such as Mumbai and Delhi, because of the high prices.
Apart from the prices, increasing interest rates are also playing a part. In December 2010, ICICI Bank and HDFC had withdrawn the special interest rate schemes — termed as teaser rates. There is also an expectation that the Reserve Bank may hike policy rates —pushing up interest rates further, in a bid to control spiralling prices.
The Reserve Bank had earlier tightened the norms for lending to realty firms by increasing the risk weight of real estate loans, and limiting the value of home loans to 80 per cent of property values. Ironically however, developers are likely to see increased sales and margins — because of the higher prices.
One concern expressed by Fitch is on the high debt levels of many of these realty firms. If there is a slowdown in sales, some of these firms may not have enough cash flows to repay their loans. In that case, smaller developers may start bringing prices down, in an effort to improve sales and cash flows.
In the short run however, that is not very likely. For the December quarter, the consensus is that real estate companies are likely to see a strong growth in sales and profit numbers. Brokerage house Prabhudas Lilladher expects the sales and profit figures to exceed last year’s numbers by about 20 per cent each. Margins are also expected to be better than last year’s figures as prices have risen much more than costs.
While real estate firms are expected to do well financially, they have been underperformers in the stock market. Stock prices of realty players have been hit by a series of scandals, including the 2G scam and bribe for loan scam which have hit valuations of the sector.