High price-to-rent ratios, easy finance to realtors key concerns: RBI

To gauge trends in the housing sector, there is a need to develop more indicators

While emphasising the need to closely monitor the housing sector, the Reserve Bank of India (RBI) said there are indications the ratio of price to annual rent in some areas in metros such as Mumbai are as high as 50. “House prices in some Indian metropolitan cities have witnessed significant increase in the recent past,” RBI said.

Ashutosh Limaye, head (research) at Jones Lang La’Salle, said, “The price to annual rent ratio is the highest in Mumbai because the demand and supply situation is very skewed here—supply has always been short of demand. This ratio is high because of the unrealistic increase in property prices. Therefore, it is clearly a concern for RBI; it is worried if this ratio goes out of proportion, it could drive away existing investors, too.”

Experts said RBI was concerned property prices in cities had risen exponentially in comparison to the rents of residential properties. “Residential yields have stood at 2.5 per cent to three per cent for almost a decade but home prices and land costs have risen substantially. RBI must be concerned about that,” said Sunil Rohokale, chief executive and managing director at ASK Group.

“If the land owner is a builder and if he has been holding land for a long time, he would have made high margins due to the price escalation,” he added. According to a recent report by stock brokerage Prabhudas Lilladher, lease registrations have risen at a tremendous pace, with April recording about 12,000 registrations, the highest in the last few months.

“This trend clearly displays a preference towards leasing over buying property, given the sticky property prices and the declining rentals. Lease numbers have remained strong, despite slackness in the commercial real estate space,” the brokerage said.

Some, such as Santhosh Kumar, chief executive at Jones Lang LaSalle, said prices were rising because supply was limited and demand was increasing. “Prices tend to increase, as not much supply is coming into the market and there is no mechanism to check price increases,” Kumar said.

Despite moderation in bank credit to the real estate sector, RBI said it was concerned about easy financing options available to developers. “Some of the concerns are complete up-fronting of construction finance by home buyers to developers in some cases and the availability of construction finance to developers at rates on a par with those for home buyers,” RBI said in the Financial Stability Report.

Typically, real estate developers depend on pre-sales to home buyers and bank finance, for their projects; bank finance is usually between 11 and 14 per cent. Samantak Das, chief economist and director (research), Knight Frank India, said, “In complete up-fronting, the builder takes a huge amount upfront from the home buyer, in cash. This usually happens with potential home buyers who don’t take a loan. Therefore, it would be difficult for RBI to regulate this category.” RBI said to gauge trends in the housing sector, there was a need to develop indicators other than price and volume indices and an indicator of credit to the sector.