PE real estate fund, lenders don’t see much impact from rate hikes on home sales

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By Raghavendra Kamath

According to real estate fund managers and lenders to property developers, the rise in repo rates and the subsequent increase in mortgage rates should have a marginal impact on residential sales.

The Reserve Bank of India (RBI) has raised interest rates cumulatively by 90 basis points in the last two MPC meetings to control inflation.

However, fund managers believe that the rate hike would not have much impact.

“With RBI raising repo rates to control rising inflation, we may see an impact on demand in the near term, but we believe the fundamentals of the sector remain strong and the sector is on track for a structural recovery,” said Sharad Mittal, Director and Managing Director of Motilal Oswal Real Estate.

A confluence of factors, such as rock bottom prices, watered down offers from developers, interest rates at their lowest in a decade and, above all, the strong feelings and emotional value around home ownership , have led to a sharp increase in new launches and absorption rate in the residential real estate segment over the past two years, Mittal said.

Among the residential real estate segments, the major impact is expected to be in the low cost housing segment, as increases in interest rates will lead to increased EMIs, which will impact affordability, a- he declared.

Amit Bagri, CEO of Kotak Mahindra Investments (KMIL), said that a 100 basis point (bps) increase in the mortgage rate translates to an increase of `5,000 per month (for a 20-year loan) for a loan amount of `1 crore. This may not have a significant impact on the purchase decision.

“At the same time, a decision to buy a house does not only depend on mortgage rates. A buyer who has made the decision to buy and is in the process of identifying a property may be less impacted than the still ‘undecided’ buyer,” Bagri said.

Considerations for first-time home buyers differ from those for someone looking to upgrade their home. That said, a further increase in interest rates could limit developers’ ability to increase home prices, as a combination of higher home prices and higher mortgage rates will impact affordability and therefore housing growth. home sales, he said.

However, Amit Goenka, managing director and managing director of Mumbai-based fund manager Nisus Finance, said larger EMIs will dampen buying sentiment as revenue growth is expected to be moderate. “So while home sales are expected to slow, this year may not yet show a massive decline or slowdown,” Goenka said.

He said sales have increased nearly 100% since last year. An estimated 300,000 homes were sold across India in FY22 compared to 150,000 in FY21. This figure is expected to drop by 15% to less than 250,000 homes in FY21. exercise 23.

“Developers need to be careful with specifications and perhaps cut down on frills. Buyers will start to become more cost-conscious. Configurations had become larger, which now may require including smaller functional units as well. size,” he said.

Goenka changed its strategy to adapt to the new environment. “The fund’s return expectations have increased. Although developers may not be able to commit to higher interest rates, an equity incentive element is introduced. Project margins are also being stress tested more cautiously when approving investments,” he said.

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