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Demonetisation move: Dissecting the impact on the real estate sector

Narasimha Jayakumar, CBO, 99acres | Mumbai | November 21, 2016 12:42 IST
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.
A+ a- 0
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 time to come. Developers will
now look for alternate funding arrangements while
end-users or investors will wait for more certainty
before making any move. Lets delve deeper into the
impact of this change on the real estate sector in
short to long term.
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

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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.

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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.
The author Narasimha Jayakumar is Chief Business Officer of 99acres.
Tags Currency Demonetisation Rs 500 currency notes Rs 1000 currency notes Mumbai Metropolitan Region
Reserve Bank of India RBI home black money Goods and Services Tax Act Real Estate (Regulation and
Development) Act Benami Transactions Act NBFC Narasimha Jayakumar 99acres
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