Demonetisation impact: Cashless or less cash for the real estate industry?


One year after the government announced the demonetisation drive, we look at its impact on the real estate industry and whether it can curb black money in the sector

It has now been a year, since the Indian government announced the demonetisation exercise on November 8, 2016. The debate now centres on whether demonetisation has helped or hurt the real estate sector. The answer, however, may not be a simple one, as it would depend on economic, as well as political factors.

To understand the after-effects of demonetisation, one has to first address the following questions:

 

  • Has demonetisation restored the faith of consumers in the property market?
  • Has demonetisation boosted sales or led to lower absorption of real estate?
  • Can the business of Indian real estate survive without the cash component?
  • Can banks and financial institutions alone drive funding for the housing market?

 

Demonetisation’s impact on new launches

According to a PropEquity report, new home launches dipped 83 per cent, across the top eight cities in the third quarter of 2017, from 24,900 units to 4,313 units. Despite the fact that new launches reduces, the unsold inventory dipped by just four per cent to 4,46,730 units from 4,65,116 units. The PropEquity report says: “Housing demand (absorption) across key cities dropped by 35 per cent to 22,699 units from 34,809 units, due to fewer new projects in the market and the lag in the revival of end-user driven demand, which is expected to pick up from Q4, which is seasonally the best time to launch new projects.” Another report by PropTiger, confirms that home launches across the top nine cities in India fell 53 per cent, to 22,115 units in the July to September period of 2017, against 47,032 units launched in the same period last year.

 

Segments that were most impacted by demonetisation

The economy experienced a tiny speed breaker, owing to demonetisation and the after-effects of the same, were felt on the real estate sector, as well, says Ashish R Puravankara, managing director, Puravankara Limited. “In its initial phase, demonetisation disrupted the overall real estate business across the country, impacting new launches, sales and enquiries. However, after the initial jolt, the southern real estate markets observed a steady rise in customer enquiries, out of which many turned out to be positive leads. With renewed consumer confidence in the last quarter of FY2017 (January-March 2017) Bengaluru’s property market remained stable, vis-à-vis other cities,” he says. According to Puravankara, the prospects remain bright for end-user driven markets that are backed by white collar job opportunities.

Surendra Hiranandani, CMD of House of Hiranandani, maintains that the primary residential market and projects undertaken by credible and reputed builders, were not affected significantly by demonetisation. “In these cases, the transactions are mainly financed through legal channels of banks and housing finance institutions, who provide home loans to buyers. Only projects where cash component was involved and those in the secondary market, have been affected,” he explains.

A number of property consultants have also pointed out that the market is back on course, after the immediate after-effects of demonetisation. For example, Colliers Research suggests that the demonetisation wave seems to have settled down and the prospects for the real estate sector look promising.

See also: Indian realty sector’s future sentiments plummet to 39-month low

 

Demonetisation, GST and RERA

Privately, many developers reveal that their major investors have pulled out of the market, when it comes to land financing, as well as investments in under-construction inventory. They attribute this, not just to demonetisation, but also the temporary disruption caused by the implementation of the Goods and Services Tax (GST) and the Real Estate (Regulation and Development) Act (RERA). Requesting anonymity a leading Bengaluru-based developer shares his experience, as to how one of his trusted investors, after having paid Rs 100 crores for a luxury villa project a week before demonetisation, requested to put his commitment hold.

 

Secondary market worst hit by the note ban?

According to some experts, demonetisation has hurt the secondary market more than the primary market. A conservative estimate suggests that transactions in the secondary market may be down by 50 per cent. Does lower transaction in the secondary market have any correlation with the primary residential market? “Yes,” says Gaurav Bhargava, a real estate analyst. “Secondary market transactions also include someone selling his smaller house, to buy a large house in the secondary or primary market, which is an incremental housing purchase. Hence, lower transactions in the secondary market, will have a bearing on the primary residential market,” he explains.

While demonetisation was intended to curb black money, the fact is that the cash crunch it caused, contributed significantly to the slowdown in the real estate industry, where the financial model of the business heavily relied on cash transactions. Nevertheless, one year may be too short a time, to assess the long-term impact of this unexpected financial surgical strike.

(The writer is CEO, Track2Realty)

 

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