Real Estate- RBI measures add to property woes:RBS

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Real Estate
RBI measures add to property woes
The RBI has acted on concerns about rising domestic property prices by raising
reference rates, provisioning norms and risk weights. This will worsen already
weak absorption due to declining affordability, in our view. We expect DLF and
Unitech to come under pressure because of their debt. Maintain Underweight.




RBI acts to cool rising property prices in India
The Reserve Bank of India (RBI), India’s central bank, has stated that “residential property
prices in metropolitan cities have gone beyond the pre-crisis peak levels”. To cool property
prices, it has: 1) raised repo/reverse repo rates by 25bp; 2) increased provisioning norms for
teaser rate loans from 0.4% to 2%; 3) capped LTV (loan to value) at 80% (there was no
ceiling earlier); and 4) increased risk weights for loans of Rs7.5m and above to 125% from
100% (irrespective of LTV).

Measures negative for real estate sector
We believe these measures raising the cost of debt are negative for companies with
significant levels of net debt like DLF (Rs198bn as of 30 June 2010) and Unitech (Rs51.6bn).
The rate hikes, coupled with system liquidity drying up (Chart 4), will likely result in higher
mortgage rates, which have already started firming up. Teaser mortgage loan schemes,
which were driving absorption to some extent, are likely to be phased out (and have already
been withdrawn by many banks). The reduction in LTV will likely deter speculators. Overall,
we see higher mortgage rates affecting already declining absorption levels.

Developers seeing a muted start to the ongoing festive season
We believe these policy measures could not have come at a more inopportune time –
developers are seeing a muted start to the ongoing festive season (October to December),
traditionally marked by high volumes, due to affordability issues. We believe price cuts and/or
new launches at affordable rates are imperative to spur volumes. However, price discounts
of 2-5% on the back of a 15-20% price increase (in most cities) are certainly not enough.

We maintain our Underweight on the sector
In our recent note Mumbai: Feet on the street, dated 25 October 2010, we indicated the
adverse impact of the rapid property price increases on absorption levels. We now maintain
our Underweight rating on the sector. We expect DLF and Unitech to remain under pressure
given their significant debt (although net gearing remains reasonable at 50-70%). On a
relative basis, we prefer HDIL (redevelopment play) and IBREL (attractive valuations).