High borrowing cost curbs 25% demand in realty sector

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New Delhi, Sept 7 (UNI) Tight monetery policy and high interest rates have started to show its impact on the realty sector, as it has curbed the demand by about 25 per cent during last seven months in most of Tier II and Tier III cities, an ASSOCHAM study revealed today.

The study said the fall in demand of purchase of properties has been noticed in the last seven months, beginning February to July 2008 due to higher cost of borrowings for real estate developers as also buyers of properties, particularly those of dwelling units.

Releasing the assessment, ASSOCHAM Secretary General D S Rawat said about 1.5 crore people in about 30-40 Tier II and Tier III cities are the claimants for buying of dwelling units who are unable to make purchases as higher borrowing cost have compelled most of real estate developers to defer their projects.

The buyers of dwelling units have also not been able to make payments as higher interest rates as also still higher inflation have come on their ways to partly dampen their enthusiasm and eroded their budget, said Mr Rawat.

The analysis is based on the feedback that it received from its well known affiliates real estate members that are developing real estate projects in number of tier II and tier III cities, which include Meerut, Bulandsahahr, Muradabad, Bhiwadi, Dehradun, Rudarpur, Chandigarh, Sonepat, Panipat, Manesar, Pune, Nasik, Bhopal, Indore and many other such cities and towns in southern and other parts of the country.

The developers who gave the feedback to ASSOCHAM include Parsvnath, Omaxe, DLF, Unitech and BPTP.

It further revealed that not only the cost factor has compelled, the promoters of properties makers to indefinitely defer their real estate projects but non-availability of inputs such as bricks, cement, steel and availability of quality power and delays in obtaining water connections have caused inordinate delays for developers to stick to their schedules as promised in their pre-launch campaigns.

The chamber, therefore, has mooted a proposal to the government to introduce Real Estate Investment Trusts (REITs) to bring the much needed class of institutional investors to strongly support transparency and reign the discipline of domestic commercial real estate market.

It said REITs can also help develop Commercial Mortgage Backed Securities (CMBS) market and create a source of cheaper debt for commercial real estate.

It added that since purchase and sale of real estate assets would form part of the activity of REITs, the presence of a large number of REITs can enhance liquidity in the secondary market for commercial real estate.

The increase in liquidity would make the sale of assets if necessitated in CMBS structure easier, thereby improving the attractiveness of CMBS.

The chamber has further pointed out that principal repayments to CMBS investors are made through refinance or sale of property; hence the enhanced liquidity in commercial real estate will make CMBS more viable, in terms of availability of refinance and quicker sale of property.

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