In a double whammy for real estate developers, banks are likely to raise lending rates to builders by up to one percentage point while consumer interest fades with home loans becoming more expensive.
Home buyers are expected to hold back on purchases as there are clear cut indications of a significant correction of property prices-by as much as 25 per cent in non-metro locations.
This scenario would put pressure on developers to quickly liquidating their existing unsold stock.
"Many developers in tier II and III cities follow a module whereby they fund the project on the strength of the retail investors, who in turn rely on home loans. With home loans becoming expensive and adversely impacting demand, developers are going to be pressurised into liquidating their assets. They will have no choice but to reduce prices by almost 20-25 per cent," said Pritam Chivukula, national director, Colliers International, a property services company.
Added to this is the trend of banks exercising increased caution in lending capital to smaller real estate developers, and even the larger ones.
"The RBI had anyway been telling banks to be cautious of its exposure to real estate. We are all wary of lending to developers at this stage. Demand will slow down as a result of home loans becoming more expensive and buyers expecting a further correction in the property market," said a senior bank executive.
While home buyers are disgruntled over the recent hike of interest rates on home loans, the good news for them is that property prices are heading south, by at least 20-25 per cent in tier-II and III towns like Jaipur, Mohali and Ludhiana. Peripheral suburbs like Kundli in Gurgaon and north of Thane in Mumbai are expected to see a correction of 10 per cent.
Arvind Parakh, chief executive officer, Omaxe Ltd said, "There is no doubt that there will be a correction in the next three to six months. There was already a 10 per cent slowdown in certain pockets like in the National Capital Region," he said.
Typically, smaller developers' preferred choice for raising money is through banks. These small firms, found in abundance in smaller cities and even in peripheral suburbs, are usually unable to attract private equity and are thus under financial pressure.
They will have no choice but to reduce property prices to meet their commitment or to sell their projects to bigger developers at lower valuations.
Oversupply is another area of concern. According to a study by AC Nielsen last December, the supply of houses costing Rs 25 lakh and above, constructed during 2004-06, had exceeded demand by 16,764 units in the NCR, Ludhiana, Chandigarh, Panipat, Sonepat and Jaipur.
Smaller developers not having deep pockets as well as the ability to raise money could sell out their projects 30-40 per cent cheaper, said one developer.
"Bigger developers will buy out the smaller builders and developers," said Pradeep Jain, chairman and managing director, Parsvnath Developers.
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