Realty: Interest rates woes - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Realty: Interest rates woes

Aug 30, 2008

The real estate sector is currently going through a tough phase as it is caught between the sluggish housing demand and the rising cost of capital. The demand for real estate significantly depends on the prevailing interest rates offered by the banks. As such, due to poor cash flows, the developers have to resort to higher cost borrowings. Since most of the banks have increased their lending rates by 0.5% to 1% in the months of July and August, the scenario for companies from the real estate sector looks grim for the medium term. With inflation (as measured by the wholesale price index, WPI) hovering above the 12% level, curbing the same has been the main priority of the government. As such the Reserve Bank of India (RBI) has resorted to interest rates hikes thrice during the current fiscal. This in turn has led the major banks to increase their lending rates as a move to protect their net interest margins (NIMs).

Interest rate despair Firm interest rates have had an adverse impact on real estate firms, as the residential segment is highly sensitive to the same. The lower the interest cost, the lower will be the EMI and vice-versa. If we observe the adjacent chart, the housing loans have increased in absolute numbers, while the actual year on year growth has considerably slowed down. The compounded annual growth (CAGR) over the last two years was 19%. Now, on the other hand, if we look at the year on year growth, the same has drastically fallen over the same period. During FY06, the housing loans had increased by 34% YoY as compared to its previous year, however, in FY08, the growth has slowed down to 12% YoY.

Rising cost of capital The recent US sub prime crisis and the liquidity tightening measure by central banks across the globe has had a significant impact on the real estate developers. Banks have lowered their exposure towards the real estate sector due to the higher risk weightage attached to the same, the impact of which can be viewed from the adjacent chart. In FY06, the banking sector lent nearly Rs 238 bn to the real estate sector. This lending grew by 79% YoY the year after. As on February 2008, the total outstanding amount lent to the real estate sector stood at Rs 529 bn. Again, while the amount of exposure did grow on an absolute basis, if one were to view the year on year change in FY08 it was comparatively lower at 27% YoY.

The high interest rates have thus had a double impact on the real estate sector. The future of the sector in the short to medium term is expected to remain bleak. However, the larger players are expected to survive this phase because of being relatively well capitalised. A quote from the economic research agency, CMIE describes this aptly - "Many small and medium sized realty companies are currently facing severe liquidity crunch on the back of lackluster sales and rising costs. With external funds hard to come by, smaller companies could face execution risk on planned projects. However, we believe that larger and well capitalised companies would be better positioned to manage this risk as they have access to banks/financial institutions and private equity companies."

Equitymaster requests your view! Post a comment on "Realty: Interest rates woes". Click here!


More Views on News

SUNTECK REALTY Share Price Up by 6%; BSE REALTY Index Up 2.2% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

SUNTECK REALTY share price is trading up by 6% and its current market price is Rs 278. The BSE REALTY is up by 2.2%. The top gainers in the BSE REALTY Index is SUNTECK REALTY (up 6.2%).

SHANKARA BUILDING PRODUCTS LTD Share Price Up by 5%; BSE REALTY Index Up 1.9% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

SHANKARA BUILDING PRODUCTS LTD share price is trading up by 5% and its current market price is Rs 350. The BSE REALTY is up by 1.9%. The top gainers in the BSE REALTY Index is SHANKARA BUILDING PRODUCTS LTD (up 5.0%). The top losers is OMAXE LTD (down 0.7%).

Mindspace Business Parks REIT IPO - Should You Apply? (IPO)

Jul 27, 2020

Should you apply for the IPO of Mindspace Business Parks REIT?

How Modi's Affordable Housing Focus is a Real Game Changer for the Economy (Views On News)

Jul 10, 2019

Government's push to affordable housing will revive the real estate sector.

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...


Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms


Sep 28, 2020 03:14 PM