ICRA sees stagnation in Mumbai property prices & heightened interest in peripheral areas?

Rating Agency ICRA, expects Developers in Mumbai to increasingly find it difficult to raise property prices, owing to the increase in inventory levels, subdued demand with no immediate improvement in the near future, and uncertain macro environment.

"Declining affordability and high economic uncertainty are the twin reasons, which would cause property prices in Mumbai to remain subdued, in the near and medium term," ICRA has said in its research report on Mumbai's real estate market. This, despite the fact, that while affluence levels are highest in Mumbai, only 13% of Mumbai's tax payers own a house, compared to 40% in Bengaluru and 17% in Hyderabad, indicating to a large latent potential.

The capital rates in the city's real estate market have remained largely firm in the past, supported by limited supply as well increasing cost pressures, ICRA noted. However, peripheral areas of Thane, Navi Mumbai, would continue to report healthy development as well as traction in the affordable housing segment, given the lower ticket sizes.

Although RBI in June 2013, has lowered the risk weightage on loans extended to developers for residential projects to 75% from 100%, which could have provided some breather on interest rate front, the increase in base rate and recent tightening in the liquidity, has nullified the impact to a large extent. Moreover, most of the banks have increased their base rates in the recent past, which in-turn would lead to an increase in acquisition cost for the buyers thereby resulting in slower off-take.

Strong Opportunity for NBFCs

ICRA has noted that considering less rigid regulatory environment coupled with their larger risk appetite, NBFCs have benefitted, owing to slowdown in the banking sector's lending to the real estate sector. There has been an average growth of 18% in the real estate loan book of NBFCs as on FY2012, with as much as 40% to 50% growth rate for certain NBFCs. Structured Deals in addition to plain vanilla funding is another option which NBFCs have been adopting. In contrast, the ratio of Commercial Real Estate (CRE) Loans to the Total Loan Book for the Banking sector, reduced to 2.4% as on March 2013, as compared to 2.9% two years back, after peaking at 3.5% in June 2009. The liquidity position of real estate developers has thus been aggravated by the increasing difficulty in accessing bank funding.

DCR & Impact on Developers

ICRA has noted that although Development Control Regulations (DCR) have been revised, and project approvals have started flowing in the system, the approval process itself is yet to gather momentum characteristic of earlier years. Earlier, the real estate market in Mumbai had come to a near standstill in terms of new launches owing to abrupt ceasing of approval process by the regulatory authority, the MCGM.

Source : Equity Bulls

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