In demonetisation by the Government of India, announced on Tuesday 8th November, that Rs. 500/- & Rs. 1000/- notes would no longer be a legal tender. This is likely to hit the real estate sector hardest. It’s not a secret that in the deals involving the sale or purchase of plots, houses, flats, and commercial property still involves a combination of cheque & cash component across India. However, as per real estate developers, the decision to curb black money can bring more transparency into sector.
This bold move of Government has suddenly cut off the supply of cash money from the market which was the strength and tool of real estate players. Will this affect the real estate sector? How will it affect the prices of land and flats across India? Will it affect the ongoing projects as well as projects in the pipeline? How this will affect the property transactions, that are done but yet to close? What will be its short term, medium and long term effects?
Anujpuri (Chairman & Country Head of JLL India) have given the more explanation to Economic Times Market and those are as below:
There is currently a lot of debate happening on how the government’s demonetisation move will impact the real estate sector. The Nifty Realty Index fell almost 12% on Wednesday, purely on sentiment. While the bellwether indices are hinting at dark days ahead, these fears can at best be called unfounded when it comes to the Indian real estate business.
Let’s look at how the major real estate segments will fare
Residential Real Estate:
The primary sales segment is largely influenced by home finance players, and these deals tend to be facilitated in a transparent manner. This segment will, therefore, see at best a limited impact in the large cities, though some tier II and tier III cities, where cash components have been a factor even in primary sales, will see a business crunch. The secondary or resale market will, however, certainly get impacted, given the fact that this segment does see the environment of cash component.
Commercial Real Estate:
There will be a minimum impact on office/industrial leasing and transactions business, given that cash components do not play a significant role in such transactions.
Real Estate Investment Markets:
Projects could get stretched as informal sources of capital may not be available. This, in fact, spells more opportunities for institutional capital. FDI, private equity and debt players will suddenly find the market even more transparent and attractive.
Retail real estate:
Retailers could see some impact on their business in the short-to-medium term due to reduced cash transactions. The luxury segment is likely to be hit because of the historically high incidence of black money acceptance in this segment. However, credit/debit cards and e-Wallets should come to the rescue. Overall, the domestic consumption story remains intact, with no threat to the overall strength and growth of the Indian retail industry.
Land sales and leasing:
Where land transactions have been happening in the realm of joint ventures, joint development or facilitating corporate divestments, will see very little impact of the demonetization move. This is because JVs, JDs and corporate divestments are all quite institutionalized, with little or no cash involvement. However, those carrying out direct land deals will doubtlessly suffer – especially when it comes to agricultural land transactions, which tend to involve significant cash involvement
There will be minimal impact on large institutionalised players with a solid brand and governance framework. Sales largely driven by the salaried class or investors with limited cash involvement would not suffer. Smaller developers are understandably very concerned right now because many of them have depended on cash transactions. We are very likely to see a clean-up of non-serious players due to this ‘surgical strike’ on the parallel economy. The impact of RERA will further discipline the industry, which will be good for its health in the long term.
Impact of Trump’s Triumph:
It is a bit early to make any accurate predictions on the full impact of Trump’s victory in the US presidential election on Indian real estate. Megan Walters, Head of JLL’s Asia Pacific Research, says we may see some volatility in currencies within the APAC region as the news is digested and risks are assessed.
For real estate investors, currency gains might be sufficient enough to prompt global investors to execute exit strategies on cross-border investments. In fact, large institutional investors would be well-advised to implement investment strategies now, before the market picks up again. Asia Pacific, and to some extent India, could stand to gain if investments pick up.
On the larger front, the overall sentiment implied by statements that Trump has made so far with regard to India can have some positive political implications. That said, there are definitely concerns in terms of how Trump’s win can affect outsourcing to countries like India. The country’s real estate sector does depend a lot on the commercial real estate demand generated by this sector. Likewise, the entire IT/ITeS sector has had a direct correlation to residential demand in the country.
What can be said with any degree of certainty is that there are some very interesting times ahead.
AnujPuri is Chairman & Country Head of JLL India. Views expressed in this writeup are his own and do not represent those of ETMarkets.com)