There is currently much debate on how the government’s demonetization move will impact the real estate sector. The NIFTY Realty Index fell by almost 12% on November 9, purely on sentiment. While bellwethers are hinting at dark days ahead, these fears can at best be called unfounded when it comes to the Indian real estate business within the country.
Demonetization: A boon or bane?
Let’s look at how the major real estate segments will fare:
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.
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Commercial real estate: There will be a minimum impact on office / industrial leasing and transactions business, given that cash components do not play a significant role in such transactions.
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.
Retail real estate: Retailers could see some impact on their business in the short-to-medium term due to reduced cash transactions. The luxury segment is likely to be hit because of the historically high incidence of black money acceptance in this segment. However, credit / debit cards and e-Wallets should come to the rescue. Overall, the domestic consumption story remains intact, with no threat to the overall strength and growth of the Indian retail industry.
Land sales and leasing: Where land transactions have been happening in the realm of joint ventures, joint development or facilitating corporate divestments, will see very little impact of the demonetization move. This is because JVs, JDs and corporate divestments are all quite institutionalized, with little or no cash involvement. However, those carrying out direct land deals will doubtlessly suffer – especially when it comes to agricultural land transactions, which tend to involve significant cash involvement.
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.
Hotels and hospitality-related real estate in the organized sector will see a very negligible impact by the demonetization.
