Demonetization: Immediate And Long-Term Impact On Real Estate

PM Modi's surprise move to remove Rs. 500 and Rs. 1000 currency notes from legal use came as a shocker to all Indians. As of now, everyone is still inconvenienced, but all Indians also realize the greater good this move will accomplish in cleaning out black money from the economy. Crowds outside ATMs are already thinning out and life is gradually normalizing across Indian cities. However, the ones who will continue to be affected the most are obviously those who have been holding and transacting in large amounts of unaccounted cash. When considering the business sectors on which the demonetization move has greatest pertinence and effect, the real estate sector comes almost naturally to mind, and Indian real estate industry has historically seen a high incidence of cash transactions. However, the large-scale turmoil that many market pundits have been predicting is an exaggeration. The market is expecting a correction in the resale properties segment, which is very likely to happen. However, the primary sales market in the larger cities is not going to be affected, especially when it comes to strong, established developers. Prices have already stabilized in view of the situation prevailing prior to the demonetization move, and there is minimum chance of further correction – especially in low-end projects. High-end and luxury projects may see a correction to some extent. Land transactions, which have historically been driven by cash, are taking a major hit and we can expect a correction of 20-30% in land valuations in the unorganized sector. Lower land costs in emerging areas and smaller cities will eventually result in lower cost of budget housing, as developers will assuredly pass on the benefit of these savings to their customers. Pricing is a critical factor in the current market environment, and no player will lose the chance to offer more benevolent price tags in order to secure business. The full impact of demonetization will be more visible only after the next Union Budget is announced in February. The negative sentiment currently prevailing is likely to be negated to a large extent by some very positive announcements. We expect the Finance Minister to roll out special incentives for first-time home buyers in the budget properties category, and also a positive revision of income tax slabs – which will help reduce the financial burden on home buyers and increase purchasing power. With home ownership always being a priority investment objective for all Indians, this will have very positive implications for the residential real estate sector. On the whole, the demonetization move is very good news for the health of the Indian real estate sector. The Real Estate Regulatory Bill (RERA) will be deployed across the country by mid- 2017, and Maharashtra has recently put forth its own draft laws. Along with the impact that the demonetization move has had on India’s parallel ‘black economy’, we will see a lot of sanitization in the industry. The Indian real estate sector will now become more transparent, credible and attractive to all kinds of serious investors, especially institutional investors. In the long term, we will see a much more holistic and healthy pattern of growth in the Indian real estate sector. The Government's many initiatives to render the Indian business environment more attractive for both domestic and foreign investments will definitely bear fruit. For end-users and investors, the current time is extremely favourable to make their move to secure the best real estate bargains. Smaller residential developers and investors will be more eager than ever before to offload their inventory so as to alleviate their liquidity woes to some extent. The salaried class which uses home loans to purchase properties will not face any problems at all because of the demonetization move. Since the above measures will serve to make the real estate sector more transparent and wholesome, future growth in the residential property sector will be steady and rational. Those who invest in residential real estate now can, therefore, look forward to very satisfactory long-term capital appreciation. Also, to be noted - the slowdown induced by the demonetization move has nothing to do with the huge pent- up demand for housing in India. This is still very much intact and in fact growing at steady pace. The residential sector was in fact in revival mode shortly before this move, and though overall sentiment has now faced a new setback, this is strictly temporary. Fly-by-night developers get driven out and large players who have already made transparent transactions a standard will emerge stronger. Within the next 12-18 months, we will see a much more sustainable and robust real estate market emerging in India.