Real estate news on Demonetisation's bearing on Indian real estate

Real Estate services, Regulations/ Legal aspects, Real Estate Regulation Act
Posted on Nov 25, 2016
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 demonetisation 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 will 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.

Retailers' businesses have already slowed down because of the reduced cash transactions, and the luxury retail segment has taken a significant hit on account of its historic dependence on cash transactions. That said, the already large-spread adoption of credit/debit cards and e-Wallets has helped the retail sector maintain a semblance of equilibrium at this time. There is certainly no threat to the overall growth potential of the Indian retail industry, and retailers will go ahead with the expansion plans.

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 demonetisation move because such transaction are institutionalised and have no involvement of cash components.

On the other hand, people who have been carrying out agricultural land transactions will suffer, because cash has always played a big role in such deals. Most land deals in the unorganised sector involve a cash component ranging from 10-40% in different markets. After demonetisation, ongoing and upcoming deals could see longer closure cycles. Land transactions slowing down or failing to materialise could lead to a bigger cash crunch for many developers and force them to sell their land at lower rates.

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