Impact of interest rate surge on the real estate sector

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Analysing the impact of rate surge on the realty sector

The real estate sector was affected by the COVID-19 pandemic just like every other sector because of multiple challenges in terms of supply and demand. Various logistical and human factors such as the unavailability of raw materials, unavailability of transport during the lockdown, and shortage of labourers caused demand to dip. However, the sector has since shown signs of recovery and has even recorded historical growth and a fast recovery post-pandemic. Factors such as low-interest rates, government initiatives, and pent-up demand have contributed to this recovery.

The growth in the real estate sector post-pandemic has been driven by a number of factors, including the shift towards hybrid work culture and new ways of sustainable living patterns, as well as a change in mindset among younger generations who want to live closer to their families. Developers such as DLF Ltd and M3M are now investing in tier 2 cities to meet this demand. People living in metros are also seeking out opportunities to invest in second homes that are closer to home but still offer a sense of peace and privacy. This shift in market sentiment has led to robust growth in the real estate market in 2022 despite repetitive increases in loan interest rates. This growth has also been helped by the sale of pending and delayed projects as a result of the pandemic, but the continuation of this growth may be affected by the ongoing cycle of rate hikes.

The monetary department may need to find ways to put a brake on inflation to sustain growth in the commercial segment, as well as maintain the profitability of investment tools such as REITs and InvITs. The recent rate hikes have led to a dip in the actual profit realisation from these investment vehicles. The global recession will also likely have a moderate adverse effect on the Indian market. Nevertheless, the premium and luxury segments have attracted investors in 2022 due to the announcement of new office spaces and co-working spaces. Sectors such as retail, hospitality, and warehousing, in conjunction with government schemes such as the Production Linked Incentive (PLI) scheme around the opening of data centres in different cities, have contributed to the growth of the commercial segment. Overall, it is important for the government and monetary department to monitor the inflation and interest rates and come up with policies that will support the growth of the real estate sector.

Developers have used various strategies to manage the impact of interest rate surges on the real estate sector, such as offering better financial support and discounts, but in the long term, this practice may not be sustainable if inflation and recession hit globally and locally. To maintain growth in the real estate sector, there is a need for friendly financial ways for the housing segment as well as easier lending and mortgage rates to attract investors towards the commercial segment. The positive onset of REITs and continued stable demand, coupled with better supply conditions, can help the housing, commercial, and luxury segments to do better, but this will require government support on the policy front and a rationalised interest rate regime. The government can help this by pushing for relaxed rates by banks and implementing flexible policies that support the growth of the real estate sector.