RBI housing loan directive pulls realty shares down. Here's why

Shares in real estate companies fell after the Reserve Bank of India (RBI) said late on Tuesday that housing loans from banks to individuals should be closely linked to the stages of construction.Upfront disbursal of lump sum loans should not be made in case of incomplete or housing projects under construction, the central bank said.

DLF slumped 3.9 percent, Indiabulls Real Estate fell 3.8 percent, while Housing Development & Infrastructure was down 3.2 percent.

Analysts say this may lead to further liquidity issues, lower sales for developers, which can force them to cut prices.

However, developers say the RBI move will lead to an increase in home prices.

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According to Kishor Pate, CMD - Amit Enterprises Housing, the RBI move will raise funding costs for developers at a time when construction costs have risen sky-high.

"Many developers have been banking on funds generated by these 80:20 schemes where in a consumer pays 20 percent of the loan upfront and the remaining at the time of completion to complete and deliver their projects.This comes at a time when construction costs have risen sky-high and the cost of funding is crippling, so it is unlikely that this will lead to a reduction in prices," he told Firstpost.

Anil Pharande, Chairman - Pharande Spaces & Vice President - CREDAI echoed the view.

"Builders who had been relying on this scheme to generate project funding will be hit hard if banks abolish it. Since this would effectively raise the cost of project capitalization even higher, there is no question of a correction in prices as a result of this move. We can only hope that the reverse does not become a reality instead," he told Firstpost.

With inputs from Reuters