DELHI: The upward revision in repo rate by the Reserve Bank of India is likely to increase pressure on real estate developers to offer discounts in the upcoming festive season as they struggle to clear their inventory at a time when demand is tepid and interest rates are rising.
HDFCBSE -3.17 %, ICICI BankBSE -4.78 % and Axis BankBSE -3.25 % raised interest rates on home loans last month while State Bank of IndiaBSE -3.44 % did so on Thursday and the RBI on Friday raised the rate at which the central bank lends money to commercial banks by 25 basis points.
"Discounts are now inevitable," said Sanjay Dutt, executive managing director of South Asia at real estate services firm Cushman & Wakefield. This festive season is likely to see just a tenth of last year's new project launches, according to an estimate by the Confederation of Real Estate Developers' Associations of India (Credai).
"Developers will want to sell their unsold inventory instead by using innovative schemes and discounts. Rising interest rates, though, will lower sentiments and could impact sales," said Credai chairman Lalit Kumar Jain.
The festival season usually generates about 20% of the annual home sales. But demand has been severely hit this year due to the economic slowdown, higher inflation and job cuts in several sectors. The spike in interest rates can only add to the industry's woes, developers said.
"If interest rates go up, demand will be impacted slightly," said National Housing Bank chairman RV Verma. Home prices fell in 22 of the 26 cities in the quarter to June, according to the National Housing Bank's residential housing index, Residex,
"If developers really reduce prices, some sales should happen this festive season. This is an opportunity for them to clear their inventory pile-up," said a senior SBIBSE -3.44 % official, who did not wish to be named.
DLF's group executive director Rajeev Talwar termed the increase in repo rate a missed opportunity. "There was a need to lower rates to stimulate demand," said Talwar.
According to property research firm Liases Foras, close to 670 million sq ft of stock is lying unsold with developers as home sales have fallen over the past few quarters.
"We will not be launching new projects this festive season. Instead we will focus on delivering old projects and will offer schemes and discounts to get rid of our inventory," said RK Arora, managing director of Noida-based developer Supertech.
Several developers are poised to launch new schemes for existing projects and also offer innovative payment structures, said Anckur Srivasttava, chairman of GenReal Property Advisers. "They are also repositioning parts of existing projects to stir sales," Srivasttava said.