The eastern metropolis is likely to be the least impacted by the interest rate hikes as the supply side has been very weak
Whenever some monetary policy is announced, one sector that closely scrutinises it is the real estate sector, it is said. However, going by recent trends, policy announcements have hardly bought any cheer to the sector.
The Reserve Bank of India (RBI) very recently raised interest rates by a higher-than-expected 50 basis points, stepping up its fight against the persistent high inflation. The central bank also increased the repo rate to 8 per cent. But the market had expected the hike to be around 25 basis points. Annual headline inflation accelerated to 9.44 per cent in June 2011. The inflation rate measured by the wholesale price index (WPI) stood at 9.06 per cent in May and 10.55 per cent in June last year. This is way ahead of the comfort zone of the government.
Real estate developers and homebuyers will feel the pinch of higher interest rates, which could slow down home sales. Higher interest rates will push up monthly instalments for home loans for existing as well as new homebuyers.
According to Jones Lang LaSalle India, purchasing activity which had seen a drop during the last tranche of interest rate hikes will see a further drop with ebbing buyer interest. Owing to the last ten rate hikes by RBI, EMIs for housing loan have risen 25 per cent to touch Rs 980 per Rs 1 lakh of borrowing, and consequently loan eligibility for homebuyers has declined 20 per cent.
The move did not go down well among the developer fraternity. Lalit Kumar Jain, national president, Confederation of Real Estate Developers’ Association of India (Credai), said, “RBI should give clear guidelines if this will be the last raise this year. In the last six months, just the repo rate has been increased over three times. The sentiments are already low in the real estate sector. The markets have reacted negatively to the rate hike announcement. It’s a double whammy for the real estate sector, which is already reeling under the weight of high input costs. The increase in interest rates will further add to the burden, which will add to the woes of the sector.”
As if this were not enough, the next bad news came by way of the US credit rating of AAA being cut. Anuj Puri, chairman & country head, Jones Lang LaSalle India, said, “The US credit rating cut and uncertainties about Europe’s debt situation are certainly a cause for concern. Potential negatives would be: a reduction in foreign institutional investment monies, including those targeted at real estate. Besides, a reduced spend on IT by the US given the slackness of its economy, may have an impact on the IT outsourcing business and affect Indian real estate at various levels, and a likely decline in overall market sentiments.”
However, there are possible upsides to the situation as well. Puri said, “Commodity prices – especially in terms of crude oil – are likely to come down, and this will help curb inflation. Under the circumstances, the Indian business lobby may now be able to make a stronger and potentially successful case against further interest rate hikes with the RBI. We can reasonably expect a reverse exodus of funds from the US into India and boosting the country’s potential to effectively capitalise on the inevitable rebound.”
Any analysis of the real estate sector, be it Kolkata, Delhi, Mumbai or Bangalore or the country as a whole, has to be done in the backdrop of these factors. If most of the metros and large cities are likely to be impacted hugely in the wake of these factors, Kolkata, interestingly, is likely to the least impacted. At least that’s what Mayank Saksena, managing director – Kolkata at Jones Lang LaSalle India, feels.
Saksena told FC Build, “The supply side has been very weak in Kolkata’s realty market for the last one year or so. There has been no major launches, neither in residential nor in commercial segment. There was an inherent demand and therefore the offtake recently has been good. And because there has been no fresh supply, Kolkata is in a somewhat comfortable situation and the impact of negative factors will be the least on this market.”
The supply side weakness has not been without a reason. The state was going through an election as a result of which all necessary permissions were kept on hold. The new government is yet to settle down and get down to serious business; therefore, these permissions are still pending. The developers were jittery as well. They followed a ‘wait and watch’ policy. They wanted to see how the new government performs before making any fresh investment decision. Besides, there has been no clarity on the state government’s outlook towards land acquisition.
Post ‘Urbana’, which is a premium housing project, and ‘Avidipta’ by Bengal Peerless Housing Development Company, which is mostly a LIG and MIG housing (with a portion reserved for HIG buyers), and ‘Eden Court’ in Rajarhat by Tata Housing, the eastern metropolis did not witness any major launch.
In the commercial segment, ‘Eco Space’ at Rajarhat by Ambuja Realty has been a significant launch. Be it in the SEZ space or non-SEZ space, there is no space available as the offtake has been very high. The city’s much-hyped tallest residential tower Urbana – the G+40 and G+45 towers spread over 67 acres, being developed by Bengal NRI Complex, a joint venture between Emami, Shrachi, Sureka Group, Nahata, MKJ and JB Group in association with the West Bengal government – is nearly sold out.
On the price front, at Rajarhat, for instance, rates in the residential segment have gone up from Rs 2,800 per sq ft in 2009 to Rs 3,500 per sq ft now, which unfortunately does not even take care of the inflation, Saksena said. “The positive vibes are only seen in the high bracket, that is, in the price range of Rs 15,000-18,000 per sq ft. In this segment, buyers’ decisions do not depend on loans,” he added.
Saksena further explained, “One peculiar thing about Kolkata’s realty market is that unlike other cities, foreign money does not come to Kolkata, thanks to the Urban Land Ceiling Act. Kolkata is possibly the most famous cash market in the country, when it comes to the real estate market. Developers in this part of the country don’t get FDI because of this Act. If the state government wants to give a push to this important segment of the economy, it should immediately do away with this Act. That will usher in a new era in Kolkata’s realty space.”
Unlike in many other cities, Kolkata’s realty market would be dominated by MIG apartments and the affordable housing segment in 2011. As of now there is no indication that luxury or premium apartments will play a crucial role in the city’s realtyscape, said Ritwik Das, managing director, Blue Chip Projects. “There will be a continuous focus on MIG and affordable housing – a segment dominated by end-users. I don’t see many luxury projects coming up in Kolkata, West Bengal or in eastern India. In fact, a number of developers have postponed the launch of their proposed luxury residential projects. Besides, there are ample indications that a number of 3-star and business hotel projects will come up mostly in tier II and tier III cities,” said Das.
Traditionally, Kolkata did not have too many options in the luxury or super-luxury residential segment, but the demand for such property is growing today. “Having said that, one must appreciate that luxury living by Kolkata’s standard is certainly different from what one sees in other metros. In Kolkata, super-luxury living is defined by the presence of swimming pool, sauna, Jacuzzi, shower cubicle, terrace, central AC, state-of-the-art club facilities, use of Italian marble, etc. Of course, since location is always a status symbol, it adds to the super-luxury status. Anything above Rs 13,000-14,000 per sq ft comes with a super-luxury tag,” Nilesh Biswas, director, Calcutta Skyline, told FC Build.