Rising Interest Rates and Impact on Real Estate

Countries worldwide are fighting with rising prices and falling growth in the economy. Central banks worldwide are dealing with rising inflation and the common way to tackle the same is through increasing interest rates. If prices rise faster than their target, central banks generally use interest rates as a measure to tighten monetary policy. The Reserve Bank of India monetary policy committee (MPC), to combat inflation has raised policy repo rate by further 35 basis points (bps) to take the repo rate to 6.25 per cent, which was at 4% in May 2022.

Indian economy is showing resilience despite a challenging global geographic and economical condition. The institutional investment in Indian real estate has maintained momentum and rising interest rate has not yet significantly impacted the real estate sector. The inflow of private equity investments into the Indian real estate sector has remained robust spearheaded by office properties which has continued to dominate with higher share of private equity deals in the current year thus far. Foreign capital flows into real estate for the first 9 months of Calendar Year 2022 has recorded an amount of USD 2.941 billion. The Indian real estate sector received PE investments amounting to USD 4.2 bn across office, warehousing, residential and retail sectors in the first 9 months of 2022. Mumbai received the highest investments across sectors accounting for 60% of the total investments followed by Bengaluru with 17% of the total investment. Private equity investments share across asset class during the first nine months of CY 2022 is as under

Rising interest rates affects not only the consumers but also the real estate players as they borrow money to build or develop a property and hence the cost of construction for them rises. Higher interest rates by other countries like US, increases the attractiveness towards assets in the US and as a result the demand for dollar also increases. Rising dollar and increase in cost of debt, can have a significant impact on Foreign Private equity investment in India.

The central bank has been on a rate hiking spree to counter the inflation, we believe this was expected by the home buyers and was already taken into consideration by them. The interest rate hike might have a short-term impact on the real estate sector, but over the long term we expect the sector to do well. With the positive sentiment and considering the need to own a house a necessity along with increase in disposable income, we expect the housing demand to sustain. The world bank has revised its 2022-23 GDP forecast upward to 6.9 percent from 6.5 percent and expects India to have a strong GDP growth, and remain one of the fastest growing major economies in the world, due to robust domestic demand.