Lower Home Loan Rates Push Residential Demand

Demand for residential projects in major cities is picking up on lower home loan rates, property price cuts by developers and job market recovery, a study by Religare Capital Markets Ltd said. Indian real estate saw demand for housing collapse from 2008 amid a global credit crunch and buyers fearing job losses. “Now that property prices have climbed down and the risk of job layoffs has diminished, the service class is likely to participate actively in property absorption, leading to a strong recovery in residential demand,” Suman Memani, associate vice president, Religare Capital Markets, said on Monday, while releasing the report.
Correction of home loan rates from levels of 13 percent in early 2008 to around 8 percent now has also helped spur demand, he said. But prices in the residential segment, that make up about 70 percent of the real estate market in India, may only move up in 2 months, Memani said. “Rising demand for residential projects may spruce up prices only after October.” Religare expects residential prices in the premium and luxury space to rise 10-15 percent as valuations have bottomed out in a few locations with property registrations in cities like Mumbai and Pune rising about 20-22 percent in April-June quarter over January-March quarter, Memani said. Indian real estate developers like Ackruti City Ltd, Anant Raj Industries Ltd, Omaxe, Parsvnath Developers and Sobha Developers, saw a sales slump following the economic downturn. Their margins were also squeezed as many launched cheaper housing to boost unit sales.
Fund raising through the institutional placements route would help realty firms restructure thier balance sheet and many have focussed on execution of projects rather than creating a land bank, which is positive for the industry, Amitabh Chakraborty, president - equity at Religare Capital Markets, said. In April, the country’s second-largest listed developer Unitech sold shares worth $325 million to institutions, while founders of bigger rival DLF raised $780 million by offloading 10 percent. Third-ranked Indiabulls Real Estate sold shares worth $550 million in May and at least 9 more realty firms have got shareholder approval to sell shares worth more than $2 billion, according to Thomson Reuters data.
“This has helped us give positive ratings to real estate projects like Unitech, Puravankara Projects and Anant Raj Industries,” Chakraborty said. However, the commercial sector would see vacancy rates rising as much as 25 percent in 2009/10 with oversupply of about 30 million square feet of space in seven cities and IT companies showing slower employee growth of 2.5 percent, Memani said. Although rental values have started correcting from February 2008, capital values of the commercial properties have not eroded so far, he said. “We expect some correction in the commercial property valuations with deals going through post-October,” Memani said.