Demonetization and its impact on Real Estate Industry

On 8th November 2016, the Government of India announced in a move that sent shockwaves across Indian economy, to demonetize high value currency notes in the country. The strong statements from the Prime Minister Mr. Narendra Modi, on curbing the menace of Black Money and corruption in the country is likely to have far reaching impact on the economy.

While the overall impact will be felt across industries, in this mail we seek to examine the overall socio economic impact with focus on the real estate industry.

Socio Economic Impact

The Government’s strong stand on corruption and black money has the potential to trigger a civic revolution in the country. If subsequent steps are targeted and focused on weeding out the menace of corruption and creating a strong and ‘honest’ economy, there is reason to believe that Good Days (‘Acche Din’) may not be that far away. As more money moves into the regular economy it creates an artificial QE type situation. The positive impact of higher tax collections on the country’s balance sheet shall enable higher investments on infrastructure development create a strong upside potential.

If the government follows up these moves with a calibrated reduction in taxes and also works on simplifying the tax code, the impact on the economy shall be multifold, as higher cash retentions will drive corporate investments as well as wages growth fuelling the domestic consumption.

Impact on Real Estate

As a participant in the Real Estate value chain we are convinced that Real Estate will be the most adversely hit sector in the short term:
• End users shall postpone purchases awaiting a fall in prices creating significant liquidity pressure on developers.
• Investments will slow down as cash component moves out of the transactions.
• Impact on commercial transactions most likely will be driven by corporates holding off expansion plans till the dust settles.
• Land transactions which have a significant cash component face the highest downside risk.
• There will be slow down in construction activity as developers face liquidity crunch driven by slow sales, lower investments and reduced ability to invest.

However, over the long term the move is a strong positive for the sector along with the Real Estate Bill. As the sector cleans up, artificially inflated prices will crack, and increased transparency should drive volumes in the sector. Good developers with clean practices shall flourish as volumes increase. There is likely to be a significant investment window opportunity in next 2-3 months as prices fall across the board driven by a mix of paranoia, chaos and misinformation. This presents an excellent opportunity for investors to make returns as markets will settle down over next 6-9 months.

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.

We are very happy to inform you all that we have opened new offices at Trivandrum & Chennai and started our business operations in Kerala & Tamil Nadu.