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Interest rates affecting property markets in India, says RICS

There has been robust economic growth but that has created challengers for the property market, developers and builders. Political instability and indecision, allegations of corruption, issues relating to the environment and land acquisition, regulatory delays and inefficiencies have all negatively impacted on investment demand, said Sachin Sandir, managing director of RICS in South Asia.

Also, the existing unfavourable global environment, political risks in the Middle East and North Africa and concerns in the Eurozone will continue to pose challenges in 2012, he pointed out.

‘Specifically in relation to the built environment, construction activity has witnessed a slowdown to 8.2% year on year in the first quarter of 2011 as compared to 9.2% year on year in the first quarter of 2010,’ he explained.

‘Additionally, infrastructure output growth also slowed to an annual rate of 2.3% in September 2011 from the earlier anticipated 3.7% declared in August 2011,’ he added.

Surging interest rates in the country have also been a tremendous cause of concern. With several rate revisions having already taken place in the last year in order to dampen growing price pressures, RICS expects that a further interest rate hike is unlikely, at least in the near future.
However, the existing high interest rates have increased the cost of borrowing for real estate developers, who continue to face a liquidity crunch on account of the high risk weightage allocated to the realty sector, affecting the ability of developers to access low cost funds and adding to their liquidity woes.

‘Consumers too have been impacted by the steady hike in interest rates. With cost of borrowing becoming dearer on one hand and price escalations on the other, consumer sentiment has been adversely affected and the uptake in housing stock has seen a slowdown, resulting in over supply in some markets,’ said Sandir.

Additionally, with inflation high and rising, real interest rates are extremely accommodative and have also started to exert upward pressure on commercial property prices. The latest RICS India Commercial Property Survey indicates that the market has started to lose momentum and capital values for commercial property have in fact turned negative for the first time since 2009.
Consequently, it says, investments in the commercial property sector are likely to witness a dip in the beginning of 2012 as occupier demand and rental values dip, with prevailing over supply in the market.

‘Overall, the sentiment for 2012 is likely to remain cautious. Given the inflationary pressures that continue in the market, the RBI could once again look at increasing the interest rates which could have a direct bearing on the residential market, where absorption rates are likely to remain on the lower spectrum with fewer project launches expected in the coming year,’ explained Sandir.

‘Retail property, on the other hand might see an uptake now that 50% FDI in retail has been allocated. However, given the lack of political and economic consensus on the decision, international retailers may play the wait and watch game, prior to setting up business in the country,’ he added.