MUMBAI Real estate index slid almost 8 percent to a two-month low on Tuesday, after the Reserve Bank of India (RBI) withdraw some liquidity measures and raised banks provisioning requirements for commercial real estate exposure.
Real estate firms, who were propped up by easing guidelines by the RBI last year, are now benefitting from a stock market rally and ample liquidity, prompting developers to raise prices and spark concerns of an unsustainable boom.
"The central bank is trying to curb the formation of an asset bubble - in other words, trying to control the asset prices for end users," said Shobhit Agarwal, Joint Managing Director at property services firm Jones Lang LaSalle Meghraj.
By 2.18 p.m. (0724 GMT) India's top listed developer DLF was down 5.6 percent at 406 rupees, rival Unitech fell 8.3 percent to 85.05 rupees and Indiabulls Real Estate slid 4.9 percent to 250.80 rupees.
The BSE realty index was down 6.56 percent at 4032.45 after losing almost 8 percent, its lowest since Aug. 24.
The Reserve Bank of India in its quarterly policy review on Tuesday increased provisioning for commercial real estate loans to 1 percent from 0.4 percent for standard assets, and also raised the statutory liquidity ratio by 1 percent.
The move may make it difficult for banks to access loans, increasing the cost of debt, a key worry for the sector, said analysts.
"For the sector overall, this is a negative. The cost of loans will go up, but since most developers have already restructured bank debts, the immediate impact may be marginal," said Adhidev Chattopadhyay, analyst at Centrum Stock Broking.
"But unlisted firms which depend more on debt funding should be impacted more," he added.
COMMERCIAL VS RESIDENTIAL
Industry experts said the central bank move will put more pressure on commercial and retail segments, which have not seen as much of a recovery as the residential segment.
Real estate firms reacted cautiously, hinting at passing on additional costs to the end-users.
"The sector is just recovering and this will definitely affect developers," Sarang Wadhawan, managing director, Housing Development & Infra, said.
"On projects which were under execution, now we will have to increase prices to compensate for this cost which is going to be incurred."
Others ruled out any major impact and said the move will, in fact, benefit the larger, listed developers.
"Because of more caution the better quality developers will stand out and be valued more by banks for lending purposes," Puravankara Projects Director Ravi Ramu told Reuters.
"This fact will benefit us and the track record will ensure that we will get cheaper loans."
(Additional reporting by Narayanan Somasundaram and Ketan Bondre; Editing by Ramya Venugopal)
Trending On Reuters
The Reserve Bank of India (RBI) has not said it is done with interest rate cuts and will keep a close eye on incoming data, Governor Raghuram Rajan told CNBC in an interview. Read | RBI more likely to cut rates in Sept - Reuters poll