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Demonetisation impact: Real estate sector still recovering from the jolt

Sector likely to undergo pain for the next 6 to 18 months. Recovery to take place on the back of affordable housing

Vandana Ramnani @vandanaramnani1
Representative image
Representative image

Demonetisation of high-value currency notes of Rs 1,000 and Rs 500 was the most sweeping change in recent history, which was a rude awakening for the Indian economy with the real estate sector being at the receiving end of this move.

The immediate impact was that the total residential sales of the top eight cities fell by 40 percent (Knight Frank India) during the fourth quarter of 2016 compared to the third quarter the same year and launches fell by 61 percent. The impact is still sending shivers down the sector and the pain, according to real estate experts, is likely to continue for the next six to 18 months if not more.

A few months later the real estate sector saw another major structural reform in the form of the Real Estate (Regulation and Development) Act, 2016 that was implemented in May this year. And, the final salvo in the reforms-driven new order was the rollout of the Goods and Services Act in July 2017.

The impact of demonetisation has not been a knee-jerk reaction, it has been felt over time and will continue to be felt over the next 6 to 18 months. The pain is not over yet. The maximum impact has been felt on land and luxury residential segments. This is largely due to the fact that investors had a tendency to park black money in these asset classes.

Land deals are also down and prices in case of such deals have dropped by almost 30 percent to 40 percent on account of drop in cash dealings. However, sales have started to pick up on the back of affordable housing launches, which, say experts is a good sign.

Also, had it not been for the government’s impetus on Housing for All by 2022 and the Pradhan Mantri Awas Yojana scheme, the impact of demonetisation on the realty sector could have been much worse.

Post the note ban, homebuyers across major cities have stayed away from the market and have continued their wait-and watch mode. Buyer evasiveness and developer defaults have all contributed in marring the sentiments for the future of residential sales. Developers are concentrating on completing their projects and are aligning themselves to reforms like RERA and the GST. Property prices at the end of September 2017 have largely remained stable.

After effects of demonetisation

“Post demonetisation the real estate market has become rational. It was diabetic prior to this insulin injection called demonetisation after which it has constantly been monitored on the tread mill through measures such as amendments to the Benami Transactions (Prohibition) Amendment Act 2016, RERA and the GST. It has undergone a complete changeover post all the structural reforms and while recovery will take some months, right now sales are being driven primarily by affordable housing,” says Pankaj Kapoor of Liases Foras, a Mumbai-based real estate rating and research firm.

Incentives coupled with overall softening of interest rates have helped offset the impact of demonetisation. “The government’s vision of Housing for All by 2022 has also helped the real estate sector in overcoming any possible adverse impact of demonetisation. But there is a growing need for tax rationalization. We are aware that the implementation of GST and RERA have added to the challenges of the real estate sector, but going forward, the net impact of these policies, would be positive and the sector should be able to witness a  enhanced sense of transparency and accountability,” says  Niranjan Hiranandani, president, Naredco. 

While the news of affordable housing gradually pushing sales is a good sign, the real estate sector is going to be under tremendous pressure in the coming six to 18 months. The residential sector may see a further downward trend in sales and launches and the prices are likely to remain muted. Office supply will be under stress and leasing volumes will hold steady in the coming months, say experts.

Realty sector to undergo phase of prolonged recovery

“We foresee pain for the real estate market for a minimum of six months that can extend up to end of 2018. The sector is going through a phase of prolonged recovery. There has been a drastic fall in residential sales but affordable housing has picked up which is a good sign as it is the bottom of the pyramid that is showing recovery. This revival on the back of affordable housing which is at the bottom of the pyramid is a sign that recovery this time round will be sustainable,” says Samantak Das, chief economist and national director, Research, Knight Frank (India).

Watch | One Year Of Demonetisation - A Look Back At The Timeline

Also, as far as buyers’ confidence levels are concerned, they are at the lowest. Only Maharashtra’s MahaRERA has been enforced in letter and spirit and other states are yet to catch up. For buyers’ confidence to pick up, all states need to come on board. Unless that happens, the market will continue to feel the pain, he adds.

According to the latest findings by FICCI-NAREDCO-Knight Frank India Real Estate Sentiment Index for Q3 2017 (June–September 2017), the current sentiment score (46) has been hovering in the pessimistic zone for two consecutive quarters - Q2 and Q3 2017 indicating a deterioration in the already pessimistic sentiments of the stakeholders.

The industry feels that the real estate sector is at a much worse position right now than it was six months ago. The current sentiments suggest that the real estate industry has finally started to feel the heat of the structural reforms such as demonetisation, Real Estate (Regulation & Development) Act, 2016 (RERA) and the implementation of the Goods and Services Tax (GST), which has greatly impacted the current sentiments of the stakeholders. The future sentiments pertaining to the real estate sector’s performance in the north have gone from bad to worse.

One of the largest real estate contributors to the northern zone is the National Capital Region (NCR), which is going through a prolonged crisis and the stakeholders’ future sentiments reflect the same. With the future sentiment score going down to 41, the industry feels that the coming six months are going to be very tough for the real estate markets in the north.

This crisis contagion has rubbed off from the north zone to west zone as well. The future sentiment score in the west has been on a constant decline (53) and is the lowest over the past thirteen quarters. Both north and west zone have had a fair share of investors’ interest in the past, which has now waned off from the market. The two zones namely south and east, on the other hand, are more or less holding on to their sentiments. In line with the lackluster sentiments on residential sales and launches, it says.

It says that 73 percent of the respondents have opined that the residential price appreciation will either worsen or remain the same in the coming six months. Respondents feel that with a handful of launches and demand failing to pick up, there is little room for any price appreciation at least in the short term.

Real estate sector to be under observation

Real estate experts say that the sector will be under observation for the next six to 18 months. “Industry stakeholders are spending time on reorienting businesses in line with the new order. The need of the hour is to put our heads down and allow the consolidation process to take its own due course,” says Das.

They say that measures such as demonetisation will not work in isolation. A permanent solution involves rationalising the tax structure and stamp duties. "The note ban is a futuristic step rather than a retrospective measure. The government needs to ensure that circle rates reflect the market reality and are revised frequently. Long gaps in revision kill the objective of circle rates," says Das.

A report titled Currency Demonetisation: Short Term Pain, Long Term Gain by Assocham, says that demonetisation will wipe out the stock of ill-gotten wealth held in cash, while doing little about the wealth that has been converted to assets such as land and gold.

“Lowering stamp taxes on property transactions would incentivise the lower levels of evasion associated with such transactions. Further, electronic registration of real estate transactions (and re-registration of existing ownership claims) to match individual identification numbers will go a good distance in minimising the channeling of corrupt earnings into real estate," says the report.

This will also go a long way in ensuring the 50th slot for India in World Bank’s Ease of Business report.
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