The Hindu : Tamil Nadu News : High interest, reduced margin

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Tuesday, Aug 12, 2008
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Tamil Nadu

Tamil Nadu

High interest, reduced margin

Shyam Ranganathan

Housing developers face a new crop of problems thanks to the hike in interest rates

Photo: N. sridharan

Rural shine Housing colonies in the outskirts are still affordable

Real estate developers are feeling the effects of the increased home loan rates, albeit indirectly. The middle and upper middle classes seem to be doing a rethink on buying a house due to higher EMIs, leading to a decline in profits for developers.

R. Kumar, managing director, Navin Housing and Properties, says that the slowdown in the economy and the increase in the EMI due to hikes in home loan rates are slowing down the pace at which new projects are being planned. As a result of which developers are being forced to reduce their margins. “Land prices are rising along with construction costs, while affordability is coming down. This means that builders have to cut down their profit margins to deliver scheduled projects,” he says.

The problem, says M. K. Sundaram, chairman, Builders’ Association of India-Southern Centre, is that the hike in interest rates has taken place at a time when there is a huge demand for housing from the middle and high income groups. “We have seen interest rates as high as 22 per cent 10 years ago. But, the demand was not so pronounced then,” he says.

When the actual cost of a house is very high, a home loan at even 14 per cent interest results in a high EMI. For example, an apartment worth Rs. 70 lakh in the city would work out to an EMI of Rs. Rs. 84,000. An increase of 1 percentage point (from 14 to 15 per cent) could translate into as much as Rs. 5,000 extra to be shelled out every month. This would push even quite a few high-earning individuals out of the affordability bracket.

Some developers are also being hit by the increase in borrowing rate. While many builders rely on their own funds and returns realised from earlier projects, some have to borrow at interest rates ranging from 10 per cent to 13 per cent. If the margins keep going down and negative sentiment builds, rising debts may spell trouble for these builders, says P. Suresh, managing director, L&T Arun Excello Realty.

As Mr. Suresh says, builders would move towards taking up fewer projects, and also push for smaller housing. “The next phase of real estate development, which would take about two years to come into effect, could involve reducing the carpet area from, say, 1,500 square feet to 700 square feet. This is the only way that middle income groups can be accommodated,” he explains.

Another solution would be to start projects beyond the city boundaries, according to G.R.K. Reddy, managing director, Marg Constructions. “We are involved in projects outside the city, where low land costs make the entire project affordable. Increased interest rates do not really matter as the cost per square foot is itself low,” he says.

He argues that city developers are hampered by the extremely high costs of land and construction.

For housing that costs Rs. 5,000 per square foot in the city, land costs could be as high as Rs. 3,000 per square foot, with construction costs adding another Rs. 1,200 per square foot.

In contrast, in one of his projects in the suburbs, Mr. Reddy says, land cost is only about 20 per cent of the cost of the apartments, and construction costs are also brought down because of the economy of scale in constructing a massive township.

And, when the cost of housing comes down, it practically negates the effect of interest rates on affordability, he adds.

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