India is undergoing an economic transformation with the government’s recent demonetisation move. The first demonetisation drive was in January 1946, when the then active government demonetised Rs. 500, Rs. 1000, and Rs. 10,000. The second demonetisation declaration was in January 1978, where the notes of Rs. 1000, Rs. 5000, and Rs. 10,000 were demonetised.
All three times, overnight demonetisation has had varied impact on the ‘Aam aadmi’ and several cash dependent sectors/industries with differing intensities. However, those were the times when India was in the nascent stages of industrialisation. This time, the impact is not only limited to the common public but also to several other sectors/industries. Many unorganised sectors such as manufacturing, used cars, consumer durables, gems and jewellery, food and beverage, retail and luxury goods, private education and private medical sector will face long-term disruptions while agriculture, small traders, SMEs, services sectors and freelance professionals like doctors and utility service providers will face short-term disruptions in their transaction processes.
The real estate sector is also following suit. Besides demonetisation, the government recently passed the ‘Real Estate Regulation Act’ (RERA), 2016 and the ‘Benami Transactions (Prohibition) Amendment Act’, 2016. RERA was passed to regulate and promote the real estate sector. It ensured that any sale of any plot, apartment, building or sale of any real estate project is carried out in an efficient and transparent manner while protecting the interest of the consumers. The act also calls for formation of Appellate Tribunals to hear appeals on the decisions, directions or orders of the Real Estate Regulatory Authority and the adjudicating officer and for matters connected therewith or incidental thereto.
While ‘RERA’ is expected to bring transparency to sale or re-sale of real estate properties, the Benami Transaction (Prohibition) Amendment Act, 2016 will prohibit ‘benami’ transactions (transactions made in the name of another person) and confiscate such properties.
While all three decisions will adversely affect the growth of real estate in the short term, in the long term these acts will stabilise the sector and foster transparency, credibility and reliability. While there would be minimal impact in the budget and mid-segment housing sector as most buyers in this segment are end-users buying through home loans, the premium and luxury real estate sector that depends heavily on cash transactions will foresee a downfall in sales. This would result in fewer new launches in the following year and will also affect investor sales that are struck at discounted prices; thereby bringing down property price points.
Bulk investor sales will also see a dip in sales for a short span of time. Cities such as Bengaluru, Hyderabad, and Pune will see minimum impact as 80% of the residential sales are end-user driven and more than 70% of the inventory is in the mid- segment.
Negative impact
In terms of land deals, especially outright sale involving agricultural lands, there will be negative impact as most developers today are going for JD, JV deals in land where the cash component is low.
The commercial office space leasing sector will not be affected; however, the luxury retail sector will get impacted for a short span of time, thereby bringing down lease transactions especially in luxury malls and high-streets. Demonetisation will also lead to a decline in interest rates both on deposits as well as lending rates. A reduction in interest rates is likely to provide stimulus to the economy, thus impacting yield rates for rent yielding properties.
The government’s brave decision to demonetise higher denomination currencies, and passing the RERA and Benami Acts are going to impact the country’s real estate scenario in a positive manner. The amalgamation of the three will minimise title risks, boost buyer confidence, and encourage transparency and accountability in the real estate sector. While the New Delhi and Mumbai markets will observe corrections in the total number of transactions up to 30% across all sectors, the south market will see correction of 15-20%. Along with these corrections, we also predict an increase in investment deals due to transparency in the market.
