How lower rates will benefit Real-Estate Industry

The sudden urge in masses for owning a house helped developers’ clear inventories off the shelf and gave them the much needed liquidity.

Jun 30, 2021 02:06 IST India Infoline News Service

Real-estate is one sector which contributes almost seven percent to the GDP. The government wants to push this notable contribution to nearly ten percent by the year 2030. The important sector is the second largest contributor as far as generation of employment is concerned and employed more than 5.5 crore people post Covid. 

However, post Covid, real estate has been struggling with liquidity crunch, labor issues, and construction delays due to multiple lockdowns and slowing of demand.  

The pandemic induced lockdown last year has been a kind of a blessing for the developers.The sudden urge in masses for owning a house helped developers’ clear inventories off the shelf and gave them the much needed liquidity.

Government reforms and initiatives also helped in completing some stuck projects, but much more aggressive reforms are needed to scale up the sector, so that it can add the desired more than 10% to GDP. Developers need to be givenmore strength, not only to deliver projects withinthe given time frame but also initiate newer ones. RBI has kept the rates unchanged for almost a year now, but the time is ripe now to further bring down the rates.

Below are some of the compelling reasonsfor an urgent rate cut required for the real-estate sector?

• Increase immediate employment- With easy credit availability, real-estate developers will push for completion of projects. Project completion will need more people, which means it will boost immediate jobs in the sector. The Increase in availability of funds at lower interest will also bring in momentum in the sector, which again will lead to employment boost. Industries are awaiting easier credit policy norms to implement investments; with the ease in policy stance, these industries will take a plunge towards building new capacity in their respective sectors, which again will push employment generation. 

• Easy availability of funds –The lower interest rates will help businesses have access to capital at better interest rates for investment and expansion of business. It will also help bring in momentum in the stalled projects, which have been held up because of lack of funds. As mentioned above, reduced rates will immediately help in improving employment generation which is the crying need of the hour.

• Affordable housing (AH)- The real- estate sector needs one positive sentiment and rate cut from RBI will further help improve demand in the housing sector.  The change in policy rates will lower the interest liability on consumers and invigorate the fence sitters to go for their dream houses. The dream project of GOI is to provide housing for all by 2022 and to achieve the same; RBI needs to support the Government. The 25 basis points fall in interest rates for home loans will definitely push the sales for affordable housing. People have already suffered in pandemic due to high rent; they can instead opt for paying EMIs which will help them come out through distress in household budgets. 

• Help in creating demand- As we know all sectors are somewhat interconnected; increase in demand for one sector can lead to increase in demand for the sector, as a domino effect. For example, when a consumer purchases a new house, he would look for new furnishings, fresh interiors etc. In many cases, people also purchase new cars to scale up their status. Thus, at a macro level, demand in housing will increase demand in sectors like auto sector, FMCG, electronic goods, and also textile. The positive sentiment will increase, and economy will see a better growth in the coming quarters.

No doubt the reduction in rates will make RBI uncomfortable with the inflation number, but this risk is worth considering and need of this hour. Government and RBI need to choose between generation of employment and risk of inflation.

The author of this article is Honeyy Katiyal, Founder of Investors Clinic

The views and opinions expressed are not of IIFL Securities,

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