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In September 2008, when Lehman Brothers collapsed subsequently fuelling a global financial crisis, the tremors were felt in India by the real estate sector that attracted huge investments from some of the storied global investment firms. But on Tuesday night, as developers and real estate analysts settled in front of the television to watch the ballot readings of the US Presidential poll, the blow came closer home. The announcement by Prime Minister Narendra Modi that high value notes would cease to be legal tender from midnight will have a major impact on the industry here, which had shown early signs of some recovery after a pile-up of inventory, feel realty investors, developers and analysts. More importantly, the latest move could well signal the start of a decline in home prices and a more transparent and cleaner mode of financing.
“After 8 pm, America didn’t matter. Everything had changed,” said Apurva Shah, founding partner, Abundance Realty LLP. Early Wednesday, the impact was reflected in real estate stocks, which fell 15 to 20 per cent with HDIL, Indiabulls Real Estate and Godrej Properties feeling the heat.
Analysts say the inventory pile-up in the city had started showing a “slight visible movement” since August, with advertorials promising iPhones, discounts, and even membership to music classes, with the fresh cash flow — after a long lull since 2011 — seen as working capital. But now, with no investors expected to bankroll projects for at least two months, “and not till the new year”, the cement mixers on the ground may turn slow. Developers are, however, not comfortable talking about a correction yet. “The overall cost structure, and all levies have increased the construction cost. The discount schemes are already in place and the monetisation will not affect that aspect. The interest too these days are being sub-vented for an average of two years by the developer. There is no further solution,” said Dharmesh Jain, president, Maharashtra Chamber of Housing Industry, Confederation of Real Estate Developers’ Associations of India.
A south Mumbai-based builder who did not want to be quoted said while he would maintain the schemes, all freebies would now be recalled. Another developer, Lalit Kumar Jain, said the “pain and discomfort” as such should be “short term”. “Frankly, it’s an excellent move as it will bring in a lot of liquidity into the system, which will only promote growth. In fact, I would say we are looking for a kickstart to housing,” he added, explaining that the ready reckoner rates were frozen in urban markets and mostly allied closer to the market rates. Most developers are unanimous in their opinion that land price correction might not happen.
In a note on real estate in India, Kotak Institutional Equities has indicated that investor-driven markets such as the National Capital Region (NCR) and the Mumbai Metropolitan Region (MMR) and high ticket size units will feel the pressure of sales in the near term. The paper says NCR and MMR markets will be affected more compared to those like Bengaluru, Pune, Chennai and Hyderabad as the former have a higher proportion of investors.
The early impact of the demonetisation move is expected to be felt at construction sites. In real numbers, the realty sector is the most active labour churning market. With migrant labourers shifting from one site to another at an average gap of four years — the real estate sector is the largest employer of labour class most of whom do not have access to bank accounts — wages in Delhi and Mumbai are paid either weekly or daily. The genuine requirement for liquid cash, towards construction cost, came from part cash payments made by investors. “Such a big amount of money getting out of the system, it will have an immediate impact. This works on a working capital. It will trickle the chain and finally hit the pace of construction,” said Shah. According to most builders, the construction cycles might even shift to a temporary credit mode.
“In all fairness we will have to figure over the next seven days, and really understand what is mandated. We might have to ask laborers to open accounts as even today as they are constantly migrating they are not looking to have accounts,” said Dharmesh Jain. Builders also agree the move might benefit the huge circle of labourers with a monetary identity like a bank account, helping them avail government schemes.
In a recent realty exhibition, which Jain hosted, the sales had started showing visibility. “Post festive season, the real estate demand is coming back to the market, which is an encouraging sign. In fact, the purchases are being made by actual users, we are happy with that situation too,” he said.
The market in the last one year has already been seeing end users. Since 2011, the primary market, considered the “pulse of real estate”, already has seen much streamlining with private equity, and the more recent Real Estate Regulation Act (RERA) providing for greater transparency. Analysts point out that the ready reckoner rates have caught up with market rates in most markets, and even exceeding them in some, rendering transactions in cash difficult.
The demonetisation move may not cast a shadow as much on this segment — except the “secondary market confusions” could trickle to lower prices in the primary market.
“There is no authority or institution which tracks the secondary market. So the difference is too difficult to say on how it will pan out. What I do see the impact on is the land prices eventually, which could drive the overall sale prices to come down. If one looks at the overall project cost in India, unlike International Markets you probably have 30 per cent to 40 per cent land cost and equal amount of construction cost, and the balance would be financial cost. The ratio is here pretty much flipped. The land cost would amount to 70 per cent to 80 per cent of the total cost, there will be 10 per cent financial cost and the balance will be construction cost. Ultimately, as the cities expand, the land today is with the agricultural farmer, and there again one will deal with cash. The same set of people come into picture then, who may not own an account or who may not want to own a bank account,” said Shah.
Anshuman Magazine, chairman, India & South East Asia, CBRE Group Inc, said, “While it may seem chaotic initially, the move is likely to prove structurally positive for the real estate sector in the long run. It certainly helps that the real estate industry has already moved towards transparency in its operations. This will be a landmark decision in imposing the much needed transparency in real estate transactions, particularly in the housing sector.”
Sunil Rohokale, CEO and managing director at ASK Investment Managers Pvt Ltd, said though the near term impact of the crackdown was largely expected to deepen the crisis that the sector was already going through, the intention was to bring transparency on the whole impact financing.
Good governance would provide comfort to overseas investors, he said, suggesting that fund managers might settle for lower returns in companies or projects with better governance, leading to a more conducive capital raising environment for the sector.