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BW Businessworld

Demonetisation: Into The Storm

The demonetisation drive will deal a big blow to real estate and only stronger balance sheets of developers will come to the rescue

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In a normally busy real-estate construction site, workers are wandering around aimlessly with shovels, awaiting work. The usual flurry of activity of loading and unloading trucks of gravel and cement is trickling to a low, and the noisy air of engines lifting concrete has now given way to pin-drop silence. Workers are worried, sombre and hoping that the crisis of cash dies down quickly so that work can soon resume. “We were not expecting this,” says a construction worker. But real-estate developers are striving to keep their chins up.

“When I saw the demonetisation news for the first time, I was wondering whether this was really happening,” says Himanshu Kanakia, managing director, Kanakia Spaces. “It will have an impact on real-estate sales in the short run. There’s going to be a lot of benefits accruing to the real estate in the long run.”

In a demonetisation drive that targets black money, real estate is often e of underhand dealing and, in some markets, the cash component comprises nearly 60-70 percent of the value of a property. Now that the Prime Minister has announced – and defended – the demonetisation move, real estate no doubt will be the first to be seriously affected.

“Prices could be impacted in certain pockets by 20-30 percent,” says Niranjan Hiranandani of Hiranandani Constructions. “In big cities such as Mumbai, the impact will be lower because cash dealings have become almost negligible and most developers have been accepting 100 percent cheque payments. But that impact will be seen across sectors, not just real estate. GDP will come down to 5 percent,” he continues.

Indian real estate is not a standardised industry and as players are largely fragmented and unorganised, not all developers will be affected similarly. Black-money dealings are not across the board in all segments. Secondary market may see a bigger impact on prices as compared to primary market. However, a slowdown in off take of real estate will hurt overall sentiments. Says Anshul Jain, managing director, Cushman & Wakefield: “Secondary real estate will become more illiquid for a period of time. The primary market is unlikely to get affected as much because most builders do not deal in cash transactions.”

On the whole, the industry can be segregated into agricultural land, new-development markets in cities, and the secondary-sales market where an existing owner seeks an exit from his investments in property.

As the highest cash component is often found in rural property dealings where banking is usually not deeply enough penetrated, the impact on rural property prices could be the highest. Gaurav Gupta, Director, Omkar Realtors and Developers believes rural would be the biggest hit. “The cash component is usually large in these places, and now demonetisation would slow down the rural markets.”

Over in the cities, a different set of market dynamics are at play. Real estate demand varies between affordable, mid- and luxury housing. In the luxury market, launches have reduced considerably, while the affordable housing segment is seeing larger number of project launches. At the lower end, the price impact will not be much, but at the extreme high end, there could be some correction which could vary between builders and their cash situation.

Of course, wherever the cash dealings are high, needless to say, there is likely to be a bigger price contraction. An example is the Delhi NCR market where cash dealings are said to be considerably higher.

On the other hand, the secondary-sales market in Mumbai could be impacted because of a considerable difference between the ready-reckoner rates and those prevailing in the market. However, of the new offerings, the ready-reckoner rates are so high that there’s really no room for cash dealings, points out Kanakia.

In Mumbai and Bangalore, typically, buyers comprise BFSI and IT professionals who would rather pay all their dues by cheque, for then they could obtain better mortgage deals. Borrowers want the maximum amount of loans against property purchases; so if there’s a high cash transaction involved, property buyers would be able to secure lower loan amounts.

Developers worry that if the liquidity situation lasts long enough, the real-estate market could reel under pressure – and start cracking some more. Says Kanakia, “Home buyers can wait because they have that luxury, but the banker does not wait for his interest repayment. The situation should turn better soon.”

Not all is going to go awry for the real-estate sector, though. In the past few days, over Rs 6 lakh crore has found its way into the formal banking channels – and that would go a long way in lowering interest rates in the economy. Already, the 10-year G-Sec has dipped to below 6.4 percent, a level not seen for a very long time.

Real-estate buyers are typically interest-rate sensitive. And rightly so; for any fall in interest rates results in huge savings for a buyer. Says Gaurav: “When interest rates come down, as they will, there will be more enquiries and more off-take for home loans in urban and semi-urban areas. So, while there’s going to be a short-term blip, in the long term the real-estate sector will emerge from the woods.”

The expectation is that interest rates could dip to as low as 7.5 percent in the next 6-12 months, spurring housing demand in coming years.

Developers are also expecting supplies to be constrained, particularly since the Real Estate Regulation Act has come into force. This Act stipulates that no new project launches can be announced unless a builder has all necessary approvals. Because of this, a drastic fall in prices can be ruled out.

Developers generally take about 6-12 months to obtain all necessary approvals depending on the size of a project. Hence, no fresh projects in real estate will be announced very soon. “You are cutting supplies for almost a year with RERA. If you combine that with lower interest rates, the impact will not be very much, particularly in cities where there is a genuine demand-supply mismatch,” says Gaurav.

Developers expect people to spend on essentials in the first three or four months, and sales of big-ticket discretionary items could be hurt, as also many other sectors which are going through a liquidity crisis. In the long run, though, developers are expecting sops for housing and real estate in the coming Budget – and that should drive genuine demand.

Another positive fallout of the demonetisation and RERA is that the real-estate sector is expected to become cleaner and more transparent. Foreign investors are likely to view the sector more favourably as cash dealings would be eliminated or turn out to be minuscule. And the stringent regulations would ensure that deliveries to investors are completed.

“We will see a lot of interest from investors in the real-estate space, which would ultimately increase the value of the real-estate business. There will be more liquidity, and the perception regarding the real estate sector would change for the better in the next one or two years,” believes Kanakia.

However, given that the real-estate sector is vast—and fractured – not all developers would be able to withstand the current market slowdown. Some companies with stressed finances could be crushed.

Hiranandani reckons stressed developers may find themselves in an even bigger soup, while companies that had average balance-sheet strengths could see get into a stress, if the market doesn’t improve. Stronger companies could face a problem for two or three quarters, but if they can withstand the storm, they can emerge stronger.

Says Hiranandani: “In reality, the end buyer is not going to get unnerved and, sooner or later, they will buy property. People may now want to look at other assets apart from currency – and real estate will remain at the core of a family’s assets. In fact, mature investors will buy property when prices are down. Over time, in fact, there will be more investments in real estate than less.”


PRIMARY RESIDENTIAL PROPERTY. Prices will hold up as reputed developers don’t do cash transactions, though. A slowdown in volumes anticipating a fall in prices can bite the real estate sector where it hurts.

SECONDARY RESIDENTIAL PROPERTY. As the secondary market generally witnesses a higher degree of cash transactions, it will get impacted much more than the primary offerings.

COMMERCIAL PROPERTY: In office and industrial complexes, as the cash component forms a minuscule portion of leases, an impact on prices will be limited, though deals could slow.

AGRICULTURAL LAND: This segment can take the biggest hit as cash often comprised of a big chunk of property transactions, making the segment even more illiquid.

UNDER CONSTRUCTION PROPERTY: Projects of developers facing a stress in their balance sheets are at risk, and could be marked by delays in execution. Funding issues could also crop up for certain builders in Tier 2 and Tier 3 towns

PROPERTY DEALS: Experts see a slowdown in property deals in the short run which could boost illiquidity. Property investors will have to wait longer to find an exit route.

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