The Reserve Bank of India (RBI) is seriously considering the option of clamping down on overseas financing for real estate in a bid to contain inflation.

The clampdown will be part of a package from the central bank to make end-use norms for external commercial borrowing (ECB) funds more stringent for various sectors.

Real estate prices have almost doubled in the past year, which has contributed to inflation. However, rising domestic interest rates have encouraged real estate companies to opt for ECBs. The difference in the rates offered by local banks and international lenders is as high as 3 to 4 per cent excluding the forward cover cost.

Banking sources said the government may also consider lowering the ceiling on raising of funds overseas under the automatic route.

Real estate companies have raised close to $802 million as ECBs in fiscal 2007, according to statistics put out by Bloomberg. Of this, almost $457 million was raised by two mega special economic zones, Reliance and Mundra Port and SEZ Ltd, which the RBI has classified as lending to the commercial real estate sector.

Overseas fund raising is currently allowed for only integrated township development on a minimum of 100 acres of land. A commerce ministry directive dated January 4, 2002, said the term “real estate” excludes development of integrated townships.

It includes housing, commercial premises, hotels, resorts, city and regional level urban infrastructure facilities such as roads and bridges, mass rapid transit systems and manufacture of building materials.

The RBI is also going slow in clearing pending foreign investment proposals worth $10 billion in the real estate sector.

Realty sector analysts say curbing real estate companies from raising funds abroad will slow the industry’s growth. “In a free market, a company should be allowed to raise funds from wherever it finds them cheap,” said Kunal Bannerjee, vice-president of Ansal API Ltd.

Others disagree. “Inflation is certainly the priority number one and the RBI is on the right track,” said D R Dogra, executive director of rating firm Care Ratings.

“The new norms would force these companies to look for cheaper options and give better end-use justifications to the RBI for raising funds,” he added.

Dogra says the tough ECB guidelines would be eased once inflation is back to manageable levels. “These would be temporary measures. Once the RBI is comfortable with inflation, we can expect the ECB guidelines to ease,” he added.

(Courtesy: Business Standard)

Indian realty stocks top Asia Pacific list: IMF

The real estate boom experienced by India in last couple of years is the highest in the Asia Pacific region when it comes to the growth seen by the stocks of this sector.

As far as house prices are concerned, India stood only second to New Zealand in the region, the International Monetary Fund said in its recently released Regional Economic Outlook for the Asia Pacific region.

According to the IMF, the real estate stock prices in India increased 14 per cent during 1999-2006, while Indonesia saw the second highest growth (10 per cent) during the same period. New Zealand stands first in house prices increase with more than 12 per cent rise whereas Indian house prices increased by more than 10 per cent on an average during 2002-2006.

In comparison, China’s real estate stock prices increased close to 8 per cent and the house prices increased by more than 8 per cent.

The IMF said rapid urbanisation may have contributed to the increase in housing prices both in India and China. “Moreover, given these two countries’ rapidly expanding economies, foreign demand for housing and commercial space is likely to have ballooned in recent years, as firms establish a presence in these markets.”

“Similarly, speculative capital inflows may have played a part in house price inflation in some Chinese and Indian cities, with these inflows either seeking straight capital gains or, in some cases, using housing as a way to capitalise on expected currency gain,” it added.

Both in India and China, the IMF held, the increase in house prices was uneven and was higher in larger cities like Delhi and Bangalore.

“While prices in China and India may not be growing particularly rapidly on a nationwide basis, a number of large cities in these countries have experienced annual real price increases well in excess of 10 per cent over the past five years,” it said.

The IMF cautions that housing price spike in these countries may not be sustainable for long. “A rapid rise in the ration of housing prices to household income may suggest that housing is becoming less affordable and that, therefore, the gains in housing prices may not prove sustainable.”

(Courtesy: Business Standard)

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