While higher land prices and raw material costs could put profitability of companies under pressure, a steep rise in borrowing costs is likely to hurt demand.
The BSE Realty index fell 11 per cent over the last month and eight per cent over the week as real estate companies reported margin pressures in the September quarter. To add to the problems, the Reserve Bank of India (RBI) toughened stance on rising asset prices. Also, doubts are being expressed about a pick-up in volume due to high prices.
"A drop in volumes due to high prices could lead to working capital issues for some players", said an analyst. The RBI's measures lowering the loan to value ratio and higher provisioning for luxury home and teaser loans are likely to have a minor impact, say analysts. The sector also faces spiralling costs, which have dented the profitability of India's largest listed players. High land prices, construction costs and muted sentiment could hurt plans of companies such as Emaar MGF which are looking to come out with initial public offers (IPOs).
New woes
Though the credit policy was negative for the sector, some realty experts, such as Sanjay Dutt, CEO, Business, Jones Lang Lasalle Meghraj, believe it will have a moderate impact. According to them, most conservative financial institutions and banks have already become cautious on home loans. Analysts say key urban markets such as Mumbai and Delhi will be impacted by higher provisioning for home loans of Rs 75 lakh and above.
Given the price increase and higher construction costs (due to labour shortage and rising cement and steel prices) and lower sales in markets such as Mumbai, the norms will be an additional burden for the builders.
With developers withdrawing the 10:90 (10 per cent upfront and the rest on possession) schemes, analysts believe they are likely to bring down the size of the houses or look at lowering prices. While banks have not yet raised rates, analysts believe home loan rates may rise 50 basis points, increasing the borrowing cost. Overall, higher prices and rising costs could hurt demand.
According to analysts, Mumbai-based developers (Orbit etc) and others such as DLF, Unitech and Sobha will be impacted given their exposure to premium housing.
