The sudden ban on Rs 500 and Rs 1000 currency notes has resulted in a situation of limited or no cash in the market to be parked in real estate assets.
While the demonetisation initiative by the Central government means further delays in ongoing real estate projects due to the massive cash crunch, it also paves the way for a cleaner and more transparent real estate industry in the times to come. Developers will now look for alternative funding arrangements while end-users or investors will wait for more certainty before making any move. Let’s delve deeper into the impact of this change on real estate sector in short to long term.
Short-term: Market to undergo a slowdown
The sudden ban on Rs 500 and Rs 1000 currency notes has resulted in a situation of limited or no cash in the market to be parked in real estate assets. This has subsequently translated into an abrupt fall in housing demand across all budget categories in the short term. While a share of this dwindled demand could be attributed to distractions caused by the move, many industry experts opine that this is a result of a trust deficit in the market. Money has become dearer, leading to cautious spending and minimal transactions.
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.
Liquidity has been severely impacted and this would result in a deflation with limited sales over the next three months. In short, the move has taken the real estate sector by a storm, and it would take time for all stakeholders in the sector – brokers, buyers, owners and developers - to assess its repercussions on their businesses and decisions.
In particular, transactions in the premium housing sector and the residential land category – overtly dependent on the cash component - would come to a standstill in the short term.
In the short term, buyers and sellers in the middle of transactions might be impacted as cash component would be involved in such deals.
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.
Mid-term Impact: Reduced inflation, better home ownership appetite, improved rental landscape
With limited money floating in the economy, the inflation rates are expected to fall in the next 2-3 quarters. This, coupled with key policy developments such as speculative repo rate cuts by the Reserve Bank of India (RBI), could mean a better home ownership appetite. However, this could be restricted to the affordable housing category.
The heavily cash-dependent secondary market could bear a colossal brunt of the demonetisation move. With the gap between circle rates and market rates bridging, owners would reduce ‘ask’ prices, impacting the average housing prices across cities. Resale properties would, thus, become cheaper and this could pressurise the primary market, as well. Developers might offer new projects at discounted rates or propose incentives to magnetise buyers.
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.
In the midst of all these developments, affordable housing will remain largely unaffected due to their non-dependence on the cash component. In fact, the demand for this category might witness an uptrend due to improved purchasing power.
Long-term impact: Transparency, revived trust and capital inflows in the realty sector
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.
Demonetisation could also mean fresh sources of funding for developers to complete their projects. Some of the alternate sources may include the following:
• Developers will be forced to clean up their balance sheets so that they can avail funding from legitimate sources, however, this may come at extremely high costs from the Non-banking financial companies (NBFC) segment.
• Developers can avail short-term loans from their existing buyers at market price with a promise to deliver the project on time and at an interest rate as per the agreement in the sales deed.
• Investments from private equity firms would usher positive sentiment across the market, helping developers to source funding and strengthen end-user demand.
The real estate sector could witness a major revolution with cash transactions getting eliminated and a major share of trades going online with the penetration of alternative forms of payment such as E-wallets, apps and plastic money. To sum it up, the demonization of old currency has ushered a new era for the real estate industry in India that would be transparent, corruption-free, organised and veracious.