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Tuesday, December 9, 2008

Recent rate cuts and extra spending announced by the government are not enough to spur demand - real estate developers

Amid a global slowdown and slumping economy, the federal government said it would seek approval for extra spending worth $4 billion in the remainder of the fiscal year, while the Reserve Bank of India (RBI) slashed key interest rates over the weekend.

On Sunday, India said state-run banks are to announce a package for borrowers of home loans up to 2 million rupees - Rs. 20 lakh!

"This is unlikely to stir demand unless it is being followed by at least 20-25 percent price cuts by developers," brokerage UBS Securities India Pvt Ltd said in a report on Monday.

Real-estate companies said the loans would help raise demand for homes in small towns and cities as well as for lower-income housing, but were too small to boost demand in India's metros.

"It's not enough. You need to be softening the rate of interest across the board and some other concessions to the consumer who will go buy out properties at this point of time," said Pradeep Jain, chairman of Parsvnath Developers.

"Hardly few properties in tier 2, tier 3 are available." About 35-40 percent of its housing projects are in the 3.5- 4-million-rupee range, he said.

"Unless you are talking of really low-income housing it really does not provide much. Commercial real-estate needs a lot more impetus," said Sarang Wadhawan, managing director, Housing Development & Infrastructure Ltd (HDIL).

It does not offer flats in the 2-million-rupee range.

On Saturday, the RBI said loans by banks to housing finance companies for individuals may be classified under priority sector lending for loans up to 2 million rupees per house, per family.

This, along with Sunday's announcements, would bolster demand for affordable housing, said Ravi Ramu, chief financial officer, Puravankara Projects Ltd. Its unit plans to develop 60 million sq. ft. of such properties across five cities.

31 December 2011? or 31 December 2009 Mr. Jain?

To address the issue of non-performing assets of realty firms, the RBI has extended a regulatory concession to loans disbursed to the sector that are currently dilinquent but can be restructured by June 2009, UBS said.

"The disappointment is they only allowed it up to 30 June. It should be up to 31 December," Parsvnath's Jain said.

Real-estate will continue to be under stress if banks are not asked to start lending again, HDIL's Wadhawan said.

"We maintain that prices have to correct for volumes to revive," the UBS report said.

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