Residential Prices across cities, Repo rate Impact on CRE
This week's real estate newsletter covers two key topics in the Indian market. Firstly, the residential sector price movements. Secondly, we explore the impacts of repo rate changes on commercial real estate (CRE) in India.
Residential: Housing prices continue to rise across key Indian cities led by robust sales
Despite rising interest rates, demand in the residential sector remained healthy, thus housing prices continued to head northwards. During Q1 2023, overall housing prices in India increased 8% YoY.?All eight cities except MMR saw an increase in housing prices with NCR witnessing the highest increase at 16% YoY, closely followed by Kolkata at 15%. In Q1 2023, Pan India unsold inventory increased 12% YoY. Hyderabad and Ahmedabad saw the highest surge in unsold inventory on a YoY basis.
?About 95% of the total unsold inventory across all 8 cities in India are under-construction units
Reserve Bank of India (RBI) kept the #reporate unchanged at 6.5% in this month's meeting. Home loans may start dropping at the end of 2023 or Q1 24.
Let's explore the impacts of repo rate changes on commercial real estate in India.
1. Cost of borrowing: When the repo rate is lowered by the Reserve Bank of India (RBI) , commercial banks can borrow funds at a lower cost. This often leads to reduced lending rates for businesses, including loans for commercial real estate investments. Lower interest rates make borrowing more affordable for investors, encouraging them to seek financing for commercial property acquisitions or development projects.
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2. Increased investment activity: Lower repo rates tend to stimulate investment activity in commercial real estate. Reduced borrowing costs make investing in properties more attractive, potentially leading to an increase in demand for commercial spaces. This heightened demand can drive up property prices and rental rates in the short term.
3. Expansion and development opportunities: The availability of lower-cost funds due to reduced repo rates can present opportunities for businesses to expand their operations or undertake development projects. Lower financing costs can make commercial real estate development financially viable and generate additional supply in the market. This can contribute to the growth of commercial real estate and provide investors with potential opportunities for investment and leasing.
4. Yield compression: In a low-interest-rate environment, investors seeking stable returns may turn to commercial real estate as an alternative investment option. This increased investor demand can lead to yield compression, where the returns on commercial properties decrease due to higher property prices and lower initial yields. As a result, investors may need to carefully evaluate the potential return on investment and consider long-term appreciation potential.
5. Impact on existing borrowers: Changes in the repo rate can affect existing borrowers in commercial real estate. If the repo rate increases, commercial banks may raise their lending rates, leading to higher interest expenses for existing loans. This can put pressure on cash flows and potentially impact the profitability of commercial real estate investments.
It's important to note that the impacts of repo rate changes on commercial real estate are interconnected with various other factors, such as market dynamics, economic conditions, and investor sentiment. It's crucial for investors to assess the overall market landscape and evaluate the potential risks and opportunities associated with repo rate fluctuations in conjunction with these factors.
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Have a Great week!