Real Estate demonetisation: Measuring the impact

After note ban, a large number of buyers went off the market due to scarcity of cash and sellers can do little but wait. This will also result in the reduction of prices, thereby benefitting buyers

Written by Ashwinder Raj Singh | Updated: January 14, 2017 10:45 am
demonetisation, note ban, real estate, demonetisation effect on real estate, india news, latest news Demonetisation brought a lot of confusion, uncertainty — and, most of all, rumour-mongering — especially when it came to the realty sector.

Demonetisation — the most-repeated word used by the nation in the current times. Since November 8, 2016, the day Prime Minister Narendra Modi announced this revolutionary step affecting India’s economy, demonetisation has dominated every conversation. The purpose of the entire exercise was to clean up the system, and that is how it invariably got connected with real estate.

It is high time to tame the wild rumours and uniformed angst about the impact of demonetisation — and other macroeconomic and policy changes in 2016 — on the Indian real estate sector.

Let’s have a bird’s eye view of the entire market:

Pre-demonetisation

The Indian real estate sector has been facing significant challenges in the past few years in terms of sales and overall growth. With a lot of measures, the sector was clearly pointing towards a slow and gradual, but sure recovery.

Sales & prices: After stagnating or even declining sales for past couple of years, the first half of the year saw some upward movement on the back of many positive factors. These include growth in the economy, attractive deals & discounts by developers, and schemes such as Smart Cities, AMRUT and ‘Housing for All by 2020’. The positivity these factors induced, coupled with increasing incomes and lowering of prices, encouraged buyers to begin finalising deals that were previously put on hold. Importantly, it was not only investors but also end-users who started coming back in the market.

Unsold inventory: Except for a few pockets in Delhi-NCR, most of the prominent real estate markets, saw a gradual decline in the unsold inventories that had been choking up liquidity for builders. One of the reasons was the residential market being flooded with expensive projects, against the demand for more affordable ones — in simple terms, a classic supply-demand mismatch. To liquidate their holdings and ensure financial stability, developers became amenable to negotiating more and offering attractive deals. They also tied up with financial institutions to offer affordable loans, and announced other schemes to help buyers take decisions.

New launches: New launches reduced markedly in the current fiscal, owing to higher unsold inventory. Also, catering to the demand of affordable housing, new launches started focusing on that segment instead of catering to the high-end residential sector.

Post-demonetisation

Demonetisation brought a lot of confusion, uncertainty — and, most of all, rumour-mongering — especially when it came to the realty sector. No doubt, everyone was affected by this radical measure, and initially, all possible economic activities slowed down to a large extent.

This is not to say that the real estate sector has not been affected by the demonetisation move; however, it is
important to understand where the pinch really lies, and where the silver lining is. The sector contributes 5-6 per cent of the country’s GDP, and any misinformation in a sector that is largely sentiment-driven can lead to chaos.
To get a clear picture, let us examine how demonetisation affected the residential market:
Secondary market: This market got affected, considering the structure of the deals involved often take here. With scarcity of cash, a large number of buyers went off the market and sellers can do little but wait. This will also result in the reduction of prices, thereby benefitting buyers. However, the pricing reduction might take time and the magnitude of reduction cannot be predicted at this stage.

Primary market: This is the area that has been overlooked and bundled with the rest of the real estate sector. The rumoured decline in this segment is very far from reality, because the primary market, consisting of ready-to-move homes and new projects, caters to end-users whose primary sources of funding are banks and other financial institutions. Simply put, it is home loans which finance the purchase of such properties. So, this segment is effectively insulated from the currency ban. It was not expected to be affected, and in fact, was not — other than in terms of the initial confusion-induced decline in sentiment. The trend emerging now points towards a recovery in buying sentiment, with serious buyers already returning to the primary markets.

This positive development is adequately illustrated by the performance of the JLL Residential (JLLR) division, which has had a phenomenal year and doubled its profits in 2016 over 2014-15 with 60 per cent revenue growth. Such a performance in what has been one of the toughest phases for the real estate sector in more than a decade could not have happened in a declining market environment.

Above all else, these readings vouchsafe the faith that buyers have in developers with credible reputations. Real estate developers with transparent business practices have not been affected by demonetisation, and have instead witnessed sales growth. Such Grade A developers continue to launch new projects, partnering with corporatised consultancies to market them ethically to a highly responsive end-user clientele.

The fact is, demonetisation has already resulted in a major reduction of home loan rate interest rates, and they are expected to reduce further. Developers offering good deals and discounts are maintaining their position in a market which is now ideal for serious end-users.

The writer is CEO-residential services, JLL India

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