The government’s demonetisation move, has shaken the nation. There has been much conjecture, on what the impact will be, on the people and the economy. While there will be an upheaval in the way business is carried out in several sectors of the economy, one can foresee a positive evolution in the realty sector in the future.
Short-term impact of demonetisation
It is estimated that over Rs seven lakh crores, will be pumped back into the economy, either by way of direct deposits or improved tax collection or higher inflow from the RBI to the government. Thus, the immediate result, will be a surge in liquidity available with the banks, which in turn, will result in a lowering of interest rates. With home loans becoming cheaper, there will be a greater demand for quality homes in cities like Mumbai, where supply is hard pressed to meet the demand.
Large real estate developers with excellent corporate governance and track record, will benefit immensely. Such developers have better liquidity and easier access to credit. Consequently, they will be able to complete all existing projects on time. Hence, demonetisation will not impact the business, for such players.
Medium to long-term impact of demonetisation
With the liquidity situation remaining buoyant, there will more funding available. The government will be able to take on large-scale infrastructure projects that will increase business opportunities and create jobs. This will lead to more money being available in hands of buyers, to purchase homes. Inflation will be under control and interest rates will continue to be low. This will boost corporate earnings, due to lower funding costs. International investors will also be attracted, due to greater transparency in transactions and thus, the demand for quality homes and commercial premises will increase. Again, developers who are transparent and have excellent fundamentals, will be able to manage short-term disruptions, if any.
Moreover, the salaried class has been the least affected by demonetisation and they constitute almost 70% of realty customers, who are looking for homes for end-use. With the demand for quality homes outstripping supply, prices are unlikely to fall in Mumbai. There may be a few instances of builders offering discounts, due to stress. In fact, there will be an increase in the demand for well-planned and well-executed projects by reliable builders, due to a softening in home loan interest rates. Additionally, the Maharashtra government’s introduction of the RERA (Real Estate Regulation and Development Act, 2016) would, in all likelihood, create a higher premium for homes in projects undertaken by quality developers. To sum up, the real estate sector’s future will be bright, as we enter into a new era of transparency.
(The writer is chief financial officer, Rustomjee Group)
