Impact of Demonetization on Real Estate in India

Real Estate sector has always been one of the most watched and most sensitive sectors of Economy reflecting the changes that have been inscribed by the economic policy changes. Be it the tax reforms or demonetization or interest rate cuts or Shrinking stock markets real estate sector always reflects without a doubt. Indeed it is concerned with both common man of this country or rich uber class who see real estate as a parking centre for excess funds (including Cash). This article intends to discuss the potential changes that the sector may witness because of effects of demonetization and reasons thereof.

1) The housing market of real estate has always been the hot bed of parking black money in an indiscriminate manner and recent ban on 500/- and 1000/- notes will surely effect and result in cooling of housing pockets of real estate.

2) Further, even the luxury houses which are also exposed to large cash play might show corrections in pricing in short to medium term as large cash component is the norm in the luxury housing segment, as many buyers insist on using cash. So luxury home buyers might have mouth watering rates in near vicinity (subject to picking acumen of the end user).

3) As far as primary housing from reputed developers is concerned the corrections might be less as the cash component is insignificant for these companies and also because buyers who invest in such projects take the home loan route and all transactions are carried out through legal channels. Hence, the primary market is likely to remain relatively untouched by the radical step. However, home buyers can look forward to better pricing in the secondary or resale market.

4) Another factor that may add to correction in Real Estate Pricing is the increase in piling of Inventory for developers and real estate sellers and the corresponding increase in working capital pressures. With the reduction in cash component, there is bound to be a sluggish demand in real estate for short term at least which will increase the inventory with the developers. Increased inventory will make developers slash prices to generate required liquidity thereby resulting in corrections. Moreover, if the corrections will appear in the Land deals also and thereby the cost of the project can reduce and benefit will be clearly of buyers in these competitive times.

5) Affordable Housing Going Up – Another very important cycle that the demonetization will initiate is cheaper lending of borrowed funds by Routine Banking Network. Due to increase in funds flow with the bank the Marginal Cost of Lending Rate (MCLR) is bound to reduce which will help the house buyers to buy at affordable EMI’s.

6) This is coupled by developers increased interest in affordable housing in Tier – 2 cities and down under will surely see the surge in end users more in the buying.

7) The commercial real estate will see the minimum impact on office/industrial leasing and transactions business, given that cash components do not play a significant role in such transactions and ever increasing demand for this asset.

8) While the currency notes ban has left less cash in the hands of consumers, thus driving down consumption for the time being taking older Rs 500 and Rs 1000 notes out of circulation is also expected to have a longer term deflationary impact on the economy. It will bring about a slowdown in high-ticket purchases such as white goods, jewellery, high-end retail and of course, real estate.

9) Delay in Delivery of Ongoing Projects – There would be intermittent delays in the execution of ongoing residential and commercial projects primarily owing to the massive cash crunch and minimal trading in the economy.

10) The slowdown owing to this announcement has been more severe in NCR particularly Gurgaon, Mumbai Metropolitan Region (MMR) and certain Tier II markets such as Surat and Vadodara. Minimal impact of demonetisation has been felt in markets such as Bangalore, Pune and Chennai, which are primarily end-user driven and rely on bank funding.

11) The dwindling demand for housing could benefit the rental market across metros but the change might take a year or so to manifest its impact on the rental price points. Both commercial and residential markets could see rentals going north by 10-20 percent.

12) Opportunity to Rebuild the Trust and Transparency in Long Term – The real estate sector is expected to get cleansed of its ailments in the due course of time owing to the elimination of black money clubbed with multiple regulatory changes such as the Goods and Services Tax Act, Real Estate (Regulation and Development) Act and amendment of the Benami Transactions (Prohibition) Act. Subsequently, project approvals will be quicker, resulting in a substantial reduction in the total cost of construction, thereby, the ‘per unit’ cost. Fair pricing would mean a revived demand for new projects in the market.

Before Parting….

The Real Estate overall sluggish and bearish for short to medium term due to several factors as discussed above. The impact can be less or more dependent on which sub area was dependent to what extent on cash component. Commercial Retail Asset and Affordable Housing will get less affected and rentals will overall improve.

Undoubtedly, this is also an opportunity for the government to clean few of lacunas in Real Estate that deflates the customer trust in the industry and implement a conversant and transparent real estate sector. The government should also consider passing Budget Benefits to Real Estate Industry in these tough times to ensure the required revamping.

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