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Real Estate And Demonetization

The move by our Prime Minister, Mr. Narendra Modi to demonetize the existing notes of Rs. 500 and Rs. 1000 has been one that has had tremendous impact to say the least. With the primary objective of curbing black money, counterfeit currency in circulation and potential terror funding, this move is expected to boost government revenues significantly since more money will become accountable and taxable. With these figures expected to reflect in next year's GDP numbers, this move has been welcomed by all. This is notwithstanding the ongoing operational issues related to the planning, implementation and execution of this move.

Like most sectors, the effect of demonetization of the real estate industry is definitely a positive. The real estate industry has been purposefully moving towards an era of transparency and self-regulation and hence the percentage of business that is conducted in ‘cash’ is negligible. The latter, if any, may be more prevalent in the secondary and unorganized segments of the industry. Cash transactions are also more typically associated in supply chains related to markets i.e. material, labor etc. This is expected to be eliminated as a result of this announcement which augurs really well for the sector. Net-net, the realty market is therefore set to become more robust and attractive for investors like banks, private equity and institutional investors. This much needed stability and credibility is definitely a stimulus for growth and will boost customer confidence thus creating a win-win situation for the industry in the long term.

With demonetization, it is also widely expected that interest rates will come down not only making housing more affordable to the common man but enabling a larger base of customers to purchase their dream home. A significant reduction in the lending rates will lead to a steady rise in demand and will go a long way in help clearing the unsold and excess inventory existing in some markets in the medium term. This is also a positive signal for the affordable housing sector as typically buyers here require a higher percentage of home loans - up to 90% of the property price and hence the demand in the affordable housing sector will not be impacted.

Just like any major change, there could be some short lived impacts in the short and very short term. There is a tendency to “wait and watch” and postpone buying decisions with an expectation that prices could come down. Therefore, some slowdown could be expected to last at best for about a couple of months.

Talking of specific markets, there is likely to be an impact in investor driven markets. However, in markets like Bangalore which is primarily driven by the IT and ITES sectors the impact is negligible. The market here has already seen a correction in the prices and is currently priced most realistically than most other metros. Compared to other metros, the prices in Bangalore are definitely more reasonable due to which the likelihood of prices reducing further is bleak. In this scenario, there could only be a temporary lull in buying as per the current trend everywhere. But in the medium to long term, the real estate market in Bangalore will continue to remain stable with great scope for buoyancy, given the fact that downward lending rates by banks can lead to people in other professions apart from IT and ITES entering the buying space.

All in all, this is a positive move that encourages professional players using the best practices and delivery quality products. While the bigger players will continue to gain ground, the move ensures that even smaller but organized developers get a fair and level playing ground. This would encourage healthy competition among developers and benefit buyers who can choose to compare and make informed choices. Further the eventual implementation of the Real Estate Regulation Act (RERA) is expected to boost transparency and expedite the approval process making the sector more profitable to investors, buyers and builders.

Mr. Cyriac Joseph,

Senior Vice President Marketing,

Vaishnavi Group.