India went to sleep on Tuesday, Nov 8th, grappling with the news of demonetization of Rs 500 and Rs 1000 notes. In the ensuing two days, we have seen a lot of action on the ground. And many of you might be wondering if there is a need to hit the panic button, given how real estate stocks took a beating in the market? The answer is a resounding NO irrespective of whether you are a buyer or a builder/ developer. Here is a short note that captures RoofandFloor’s perspective on the impact of demonetization on home-buyers, the sector, and RoofandFloor.
IMPACT ON HOME-BUYER
Cash transactions have been an integral part of the Indian real estate sector. Market rates across cities in India are usually higher than government prescribed rates. Cash transactions have contributed in large parts, by helping hide the real extent of transactions. This has hurt the interest of genuine home-buyers and honest taxpayers.
Despite a difficult last few quarters and depressed demand for property, real estate developers have held prices at a high level. In the short term, demonetization of Rs 500 and Rs 1000 notes will add to the woes of the industry, as cash transactions will be sucked out of the economy. Speculative buying will reduce significantly leading to the increased build-up in inventory and pressure on builders to relax prices. The accompanying deflationary impact will serve the genuine home-buyer well in the form of affordable homes in the mid to long term. There will be a tipping point where prices of homes will have to correct, if they haven’t already, in line with market demand.
Demonetization of Rs 500 and Rs 1000 notes is an attempt to curb black money in the overall economy. But it will have a huge collateral benefit in terms of rationalizing real estate prices. If you have been paying your taxes and are looking to buy a home, go out and rejoice. This could be your Christmas gift in advance.
IMPACT ON THE SECTOR
Developers: There will be minimal impact on large institutionalized players with a solid brand and governance framework. Sales largely driven by the salaried class or investors with limited cash involvement would not suffer. Smaller developers are understandably very concerned right now because many of them have depended on cash transactions. We are very likely to see a clean-up of non-serious players due to this ‘surgical strike’ on the parallel economy. The impact of RERA will further discipline the industry, which will be good for its health in the long term. Developers who were using cash to fund their construction activities are likely to face short-term difficulties and execution delays.
Residential real estate: The primary sales segment is largely influenced by home finance players, and deals tend to be facilitated in a transparent manner. This segment will, therefore, see at best a limited impact in the larger cities, though some tier 2 and tier 3 cities where cash components have been a factor even in primary sales will see a business crunch. The secondary or resale market will, however, certainly be impacted, given the fact that this segment does see the involvement of cash component.
Real estate investment markets: Projects could get stretched as informal sources of capital may not be available. This, in fact, spells more opportunities for institutional capital. FDI, private equity, and debt players will suddenly find the market even more transparent and attractive. Moreover, banks could start funding land transactions, thereby decelerating land prices.
IMPACT ON ROOFANDFLOOR
RoofandFloor’s mission is to bring trust and transparency to the home buying market. Much like RERA, the latest move by the government is going to have a positive impact on how the real market industry will operate going forward. This is well-aligned with our philosophy and further strengthens our commitment to being a home-buyer-first organization.
Overall, while there is likely to be short-term turbulence, the move is definitely a welcome measure both for the homebuyers as well as the sector.
