Demonetisation and Real Estate

While the demonetisation initiative by the Central government means further delays in ongoing real estate projects due to the massive cash crunch, it also paves the way for a cleaner and more transparent real estate industry in the times to come. Developers will now look for alternative funding arrangements while end-users or investors will wait for more certainty before making any move.
The real estate sector will definitely be affected by the demonetization exercise, as it has traditionally seen a very high involvement of black money and cash transactions. However, almost all such incidences have been in the secondary sales market, where cash components have traditionally been a veritable ‘must’. In other words, the resale properties segment will take a big hit. However, short-term pain is inevitable when we look for any eventual long-term cure for the disease. There has for long been a strident demand to bring transparency in the sector so that the it becomes more organized, and cash dealings must necessarily be the first symptom of the disease to be dealt with.
The luxury and high-end segments of residential real estate will also see a major impact from this exercise, since it is another area which has seen a lot of payments done in cash. The legal banking/financing channels have accounted for only a small part of all transactions in this space. The demonetization move is likely to result in luxury property prices dipping by as much as 25-30% as sellers struggle to offload properties to generate liquidity. This means that luxury home buyers will suddenly have a much wider bandwidth of options to choose from.
With black money suddenly being wiped out of the market, a lot of investors who have been investing in projects with unaccounted-for money – and raising prices to book profits – will be eliminated from the system, thereby aiding a much-needed correction. 
Short-term: Market to undergo a slowdown The sudden ban on Rs 500 and Rs 1000 currency notes has resulted in a situation of limited or no cash in the market to be parked in real estate assets. This has subsequently translated into an abrupt fall in housing demand across all budget categories in the short term. While a share of this dwindled demand could be attributed to distractions caused by the move, many industry experts opine that this is a result of a trust deficit in the market. Money has become dearer, leading to cautious spending and minimal transactions. The slowdown owing to this announcement has been more severe in NCR particularly Gurgaon, Mumbai Metropolitan Region (MMR) and certain Tier II markets such as Surat and Vadodara. Minimal impact of demonetisation has been felt in markets such as Bangalore, Pune and Chennai, which are primarily end-user driven and rely on bank funding. Liquidity has been severely impacted and this would result in a deflation with limited sales over the next three months. In short, the move has taken the real estate sector by a storm, and it would take time for all stakeholders in the sector – brokers, buyers, owners and developers - to assess its repercussions on their businesses and decisions. In particular, transactions in the premium housing sector and the residential land category – overtly dependent on the cash component - would come to a standstill in the short term. In the short term, buyers and sellers in the middle of transactions might be impacted as cash component would be involved in such deals. There would be intermittent delays in the execution of ongoing residential and commercial projects primarily owing to the massive cash crunch and minimal trading in the economy. 
Mid-term Impact: Reduced inflation, better home ownership appetite, improved rental landscape
With limited money floating in the economy, the inflation rates are expected to fall in the next 2-3 quarters. This, coupled with key policy developments such as speculative repo rate cuts by the Reserve Bank of India (RBI), could mean a better home ownership appetite. However, this could be restricted to the affordable housing category. The heavily cash-dependent secondary market could bear a colossal brunt of the demonetisation move. With the gap between circle rates and market rates bridging, owners would reduce ‘ask’ prices, impacting the average housing prices across cities. Resale properties would, thus, become cheaper and this could pressurise the primary market, as well. Developers might offer new projects at discounted rates or propose incentives to magnetise buyers. The dwindling demand for housing could benefit the rental market across metros but the change might take a year or so to manifest its impact on the rental price points. Both commercial and residential markets could see rentals going north by 10-20 percent. In the midst of all these developments, affordable housing will remain largely unaffected due to their non-dependence on the cash component. In fact, the demand for this category might witness an uptrend due to improved purchasing power. Long-term impact: Transparency, revived trust and capital inflows in the realty sector 
The real estate sector is expected to get cleansed of its ailments in the due course of time owing to the elimination of black money clubbed with multiple regulatory changes such as the Goods and Services Tax Act, Real Estate (Regulation and Development) Act and amendment of the Benami Transactions (Prohibition) Act. Subsequently, project approvals will be quicker, resulting in a substantial reduction in the total cost of construction, thereby, the ‘per unit’ cost. Fair pricing would mean a revived demand for new projects in the market. Demonetisation could also mean fresh sources of funding for developers to complete their projects. Some of the alternate sources may include the following: 
• Developers will be forced to clean up their balance sheets so that they can avail funding from legitimate sources, however, this may come at extremely high costs from the Non-banking financial companies (NBFC) segment.
 • Developers can avail short-term loans from their existing buyers at market price with a promise to deliver the project on time and at an interest rate as per the agreement in the sales deed.
 • Investments from private equity firms would usher positive sentiment across the market, helping developers to source funding and strengthen end-user demand. The real estate sector could witness a major revolution with cash transactions getting eliminated and a major share of trades going online with the penetration of alternative forms of payment such as E-wallets, apps and plastic money. To sum it up, the demonization of old currency has ushered a new era for the real estate industry in India that would be transparent, corruption-free, organised and veracious.
What stays mostly unaffected?
The primary market – or, more specifically, the market formed by projects undertaken by reputed and credible developers in the top 8 Indian cities – will remain more or less unaffected. This is because buyers into such projects take the home loans/finance route to buy their homes, and transactions are done through legal channels. Therefore, there will not be any major impact on sales in this segment. However, there might be an impact on quite a few projects in tier 2 or 3 cities where cash has played a role even in primary residential sales. However, the turmoil in this segment will settle down in a short period of time.
Overall Impact on the sector
In the past one year, there have been a few positive and potentially long-lasting changes in the Indian real estate. The passing of RERA (Real Estate Regulation and Development Act 2016), the Benami Transactions Act and now the demonetization move will ensure that going forward, the sector will lose much of its historic taint and become more transparent. Only players who conduct their business with integrity will survive. This bodes well for end-users, who will be aware of their rights, have the assurance of not being cheated and will no longer need to contend with constantly rising prices. They will be able to buy properties of their choice at affordable prices, in projects which will assuredly be delivered on time.
The demonetization exercise was a very necessary step which was bound to bring with it a tremendous shake-up wherever black money has played a major role. Over the long term, the Indian real estate sector will emerge stronger, healthier and capable of long periods of sustained growth. As of now, there is no reason for developers and investors who have conducted their dealings transparently and legally to panic. It will essentially be business as usual for them.

Author Name
(MBA, LLB) | Managing Partner, Dayal Legal Associates .India. Advocate, Supreme Court Of India. 

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