Moneycontrol
Nov 28, 2016 09:27 AM IST IST | Source: Moneycontrol.com

COMMENT: Cash ban favours organised realty players, but headwinds swirl

JM Financial makes the point that in the medium term, there will be clean transactions and an end-user driven real estate market, rather than an investor- driven market as was generally the case earlier.

Shishir Asthana
Moneycontrol Research

The real estate sector was rightly presumed to be the worst hit on account of demonetization. The BSE Realty index has fallen by nearly 16 percent since demonetization measures were announced, as compared with a 6.8 percent drop in BSE Sensex.

So is the fall over and are realty stocks rightly valued or is there more room for them to fall?

Real Estate is one sector where sizeable transactions were conducted in cash. A JM Financial report says that real estate transactions are believed to account for one third of all black transactions in India. With these now out of the question the general perception is that prices will fall. But there is another school of thought that says that a fall in interest rates that’s a fallout of demonetization will spur buying interest.

The Real Estate sector is divided into organized players and smaller developers. Many of the organized players in the real estate sector moved towards a cashless transaction, collecting the entire amount in cheques. Sales from these builders, normally termed as primary sales, will most likely be unaffected. However, they too might face pricing pressure as smaller builders desperate to close transactions start cutting rates. This could lead to a period of price instability and a delay in transactions.

It’s fairly clear that the smaller builders and the secondary market will face the brunt of the move. Investors used to book property but would not register it in their name in order to avoid taxes and flip over the liability to the next buyer. Demonetization has put to end such practices, which in turn will affect future sales.

JM Financial makes the point that in the medium term, there will be clean transactions and an end-user driven real estate market, rather than an investor- driven market as was generally the case earlier.

But it is still too early to call a bottoming out of the sector. Transactions are literally at a standstill. Investors who were holding inventory of secondary assets have now paid their taxes and have their money blocked. Further, there is an overhang of the Real Estate Regulator, which state governments have to notify by November end.

What is clear in the real estate sector is that demonetization has shifted the game clearly in favour of organized players, but this doesn’t change the fact that the sector is facing unprecedented headwinds.

Even for analysts projecting future numbers is difficult as the price at which transactions will take place and future price trend is not yet clear.  Thus arriving at a net asset value (NAV) based on the underlying asset is a difficult task. Till there is further clarity on the sector it is better to stay clear of the sector. If real estate is not being bought there is no point in buying builder stocks.
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