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The Pros & Cons of Demonetisation

The government’s demonetisation move has sent shock-waves through the entire Indian business community, and the real estate sector has definitely been affected as well – though not, perhaps, to the magnitude that market pundits have been predicting.

In addition to this, the imminent nation-wide deployment of the Real Estate Regulation Act (RERA), will drive the Indian real estate landscape towards a lot more transparent scenario. This, in turn, means that the sector will become far more attractive to both domestic and foreign investors.

In the residential property sector, the secondary or resale market will definitely see a backlash, as it has historically seen quite a large volume of cash components being transacted. This also holds true for the luxury and high-end housing segment, where sales have already slowed down on the back of the demonetization move.

Generally, we will see tier-II and tier III markets being impacted to a higher degree. However, the primary sales segment is not going to see much of an impact as it is driven by the salaried class availing of home loans. Such transactions happen in a transparent manner.

That said, the business of many smaller developers in the unorganised sector, especially in the smaller cities an outskirts of larger cities, will suffer if their business model has included accepting cash components in primary residential sales. However, the bigger institutionalised developers with a strong brand and solid governance framework in place have long since moved away from this model and will not be affected. In that respect, Modi’s ‘surgical strike’ on the parallel economy will lead to a faster clean-up of marginal, non-serious players.

Grade A office real estate will see minimal impact because of the demonetisation move, since cash components are not a factor in this segment. Again, Grade B and C office buildings both in the metros and smaller cities w ill be affected if cash has played a role.

Generally, completion timelines for projects could now get extended with the sudden withdrawal of informal sources of capital. Banks may now begin funding land transactions, which can induce much-needed downward pressure on


land prices. On the retail real estate front, there will certainly be some impact.
Finally, land sales and leasing will be affected only marginally. Wherever land has been transacted via joint ventures, joint development or facilitating corporate divestments, we will not see any impact from the demonetization move because such transaction are institutionalized and have no involvement of cash components.
Post-demonetisation, the affordable housing segment will get a much-needed boost. Confined to the fringe areas of metros, this segment is expected to get a boost as land prices will plummet in the next few years, especially in far-flung areas around Indian metros, and the tier-II, III cities.
Most agricultural land transactions involved a cash component, which got affected after Prime Minister Narendra Modi’s announcement on the evening of November 8.
INR500 and INR1000 notes ceased to exist as legal tender from November 9. Land dealings involving a cash component, therefore, will no longer be carried out in the old ways. Those dealing in cash will be unable to pay in the old currency notes and those with undeclared sources of income would fear paying entirely in white as that will carry a risk of attracting the I-T department’s scrutiny.
While the areas within metropolitan limits will be saved from land devaluation due to their high-demand and low-supply scenario, their poorer cousins – the fringe areas – will see an impact after a year or so. As land prices ease in these areas, ticket sizes of apartments are also expected to come down. This should help bring house prices closer to the affordability of many salaried home buyers and spur real estate demand – this time, driven largely by end users and not speculative investors.
There is a high possibility of prices softening in sub-markets or precincts located away from the city centres and which have seen a lot of housing supply in recent years. For example, in Mumbai metropolitan region, precincts such as Vasai-Virar, Palghar, Kalyan-Dombivli, Shilphata and upcoming locations around Panvel have a lot of supply.
Tier-II and III cities, especially those driven by business communities, such as Jaipur, Surat, Indore, etc., will see higher impact of demonetization and easing in land prices in the medium-to-long term.
Certain projects in Kolkata’s northern sub-market may witness price reduction in the next three-four quarters. Vacant land in the north of Kolkata, along BT Road (outside its municipal limits), would see easing of prices in the next one year.
In Hyderabad, precincts like Uppal, LB Nagar, Shamirpet in the eastern sub-market has more plotted developments and row houses than residential apartments. Therefore, the cash component in transactions is also relatively higher, and due to consistent delays in the metro project, there is a possibility of price correction here.  g