Demonetization: Immediate And Long-Term Impact On Real Estate

Demonetization: Immediate And Long-Term Impact On Real Estate
19/12/2016 , by , in EXPERT ZONE

PM Modi’s surprise move to remove Rs. 500 and Rs. 1000 currency notes from legal use came as a shocker to all Indians. As of now, everyone is still inconvenienced, but all Indians also realize the greater good this move will accomplish in cleaning out black money from the economy. Crowds outside ATMs are already thinning out and life is gradually normalizing across Indian cities. However, the ones who will continue to be affected the most are obviously those who have been holding and transacting in large amounts of unaccounted cash.

When considering the business sectors on which the demonetization move has greatest pertinence and effect, the real estate sector comes almost naturally to mind, and Indian real estate industry has historically seen a high incidence of cash transactions. However, the large-scale turmoil that many market pundits have been predicting is an exaggeration. The market is expecting a correction in the resale properties segment, which is very likely to happen.

However, the primary sales market in the larger cities is not going to be affected, especially when it comes to strong, established developers. Prices have already stabilized in view of the situation prevailing prior to the demonetization move, and there is minimum chance of further correction – especially in low-end projects. High-end and luxury projects may see a correction to some extent.

Land transactions, which have historically been driven by cash, are taking a major hit and we can expect a correction of 20-30% in land valuations in the unorganized sector. Lower land costs in emerging areas and smaller cities will eventually result in lower cost of budget housing, as developers will assuredly pass on the benefit of these savings to their customers. Pricing is a critical factor in the current market environment, and no player will lose the chance to offer more benevolent price tags in order to secure business.

The full impact of demonetization will be more visible only after the next Union Budget is announced in February. The negative sentiment currently prevailing is likely to be negated to a large extent by some very positive announcements. We expect the Finance Minister to roll out special incentives for first-time home buyers in the budget properties category, and also a positive revision of income tax slabs – which will help reduce the financial burden on home buyers and increase purchasing power.

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