Real estate developers can look forward to more than improved buyer sentiment and better sales after new Reserve Bank of India (RBI) Governor Urjit Patel reduced the repo rate by 25 basis points (bps) on Tuesday. Lower interest rates will also help developers of real estate in India who have seen rising debt in the past few years.
For a home buyer, a lower repo rate would mean that his bank can borrow from the RBI at a cheaper interest rate. When the bank’s cost of raising funds comes down, the lender will pass on the benefit to the end user by charging a lower rate of interest on the loan it offers. As a matter of fact, even a slight change in the repo rate has a huge bearing on a home buyer’s loan re-payment.
With the festive season around the corner, developers were already lining up attractive schemes to boost their sales. The repo rate cut is further expected to help their sales by reducing borrowing cost for buyers. We hope banks will quickly pass this benefit to home loan customers, and bring cheer to home buyers looking to finalise their property during this festive season. For a home loan of Rs 40 lakh for a 20-year tenure, this will reduce EMI by Rs 650 on monthly basis.
Traditionally, real estate companies use deposits from early buyers to take a project off the ground. Yet, developers need bank loans to buy land, acquire assets and to plug gaps in the deposit and construction costs. The need for short-term loans rises as the cost of construction rises, especially to developers who have a difficult time selling under-construction projects in India.
The most comfortable developers are those who sell at least 60 per cent of the project during construction, releasing funds in many phases. After the slowdown in sales for the past two years, things have been less than ideal for the sector, with developers borrowing more, inventory piling up in both under construction and completed projects.
The repo rate cut the RBI announced will lower interest rates to a six-year low at 9 per cent. This may change the fortunes of real estate companies in India, who are finding it difficult to complete projects as the sales have been slow. If real estate developers are able to raise sales in the current low-rate regime and get banks to soften their stance with accommodative interest rates, the sector is in for a better growth.
Not to mention the fact that buyers may have more reasons to cheer this Diwali.
Credits Business World