RBI may clamp down on real estate sector

Reserve Bank may tighten its grip on the country's real estate sector further in its forthcoming mid-term review of the monetary policy on October 30, Ernst and Young has said.

"With real estate prices continuing to appreciate, we foresee that the (RBI's) policy baton may tighten in near future as well," E&Y said in a study on the country's real estate sector.

This will leave real estate developers with little option but to resort to more expensive financing options, it said.

Already concerned about the growing exposure of sceduled commercial banks (SCBs), the apex bank has clamped down on foreign debt into the real estate sector, hiking risk weight for home loans and increasing provisioning requirements of banks.

These measures had some dampening impact on the housing demand, though overall absorbtion remained healthy. These also helped to keep specualtors away from the market, it said.

Exposure of the SCBs to real estate sector grew by alomst 80 per cent in 2006 over the previous year, E&Y said, adding that the sector constitutes 91 per cent of their lendings to sensitive sectors.

"With limited bank credit and restriction on infusion of foreign debt into the sector, going forward, financing real estate projects may become more challenging especially for developers with limited development experience and management background," E&Y said.

This will lead to more pressure on the profit margin of the real estate developers, who are already bearing the brunt of rising input and overhead costs.

"The cost for key input material such as steel and cement has been growing in the last couple of years. It is estimated that the cost of cement has increased by 30 per cent and that of steel by 10 per cent, translating into a 15-20 per cent hike in overall cost of construction," E&Y said.

The impact of such a rise has not been witnessed extensively as the same has been set off by rapidly rising capital values for real estate, it added.

E&Y also believes that with increasing global integration, the Indian real estate sector is no more isolated from possible tremors in the global economy.

It exposes the sector to global risks, including rising global oil prices and the downturn in the US economy.

In such cases, any such adverse movement could be a dampener to real estate sector's growth momentum.

RBI will certainly consider these risks while drafting the mid-term policy to "cool off" the country's real estate sector, it said.