One year of Demonetization: Real Estate Market

On the first anniversary of demonetization, it is but logical to put the past year in perspective since the sudden announcement sent shockwaves around the country.

Overnight, with high-denomination notes ceasing to be legal tender and limits on bank withdrawals, the serpentine queues outside ATMs were a common sight for the first couple of months.

The real estate sector which was called as one of the most prominent industry sector where black money was parked in, also saw a momentum shift. The sudden lack of liquidity had developers and buyers scrambling to tend to their immediate finances and ensure enough working capital for operations. This resulted in real estate action virtually coming to a standstill during the second half of 4Q16. An immediate impact was seen in the residential markets, with launches falling drastically, the very next quarter. The subsequent period, combining for the whole year till date, saw the worst performance in nine years for the Indian residential markets.

Though, institutional money has been increasingly finding its way in to the sector, pointing towards the relative transparency in major asset classes such as primary residential markets and the corporate leasing and sales market, to say that black money was virtually absent from this sector would be a mis-statement. The secondary residential market, which involved an element of cash, saw a fall in the quantum of transactions with investor buyers backing off from such transactions. The lack of buyers forced sellers to reduce prices, resulting in a price drop across most markets, with investor-driven markets the most affected.

Land deals in India have also seen an involvement of cash as prices have risen much faster than reference rates. We saw land prices rationalising across the country with varying degrees; in certain areas land values are trending at 5 year lows.

While some may link the impact on primary residential markets to demonetisation, the fact is that the trust deficit on account of delays and unfulfilled promises in the sector was the major factor behind sales tapering off in the past year. Other asset classes such as commercial and retail faced short term slowdowns, but were largely unaffected on account of majority of the transactions being institutional, though the outright sales market did see some price corrections.

The demonetisation effects have now abated completely. However, the subsequent regulatory changes - GST and RERA are now leading to a realignment of business practices which is prolonging the sector’s recovery. However, these measures, along with the anticipated reduction of black money in the sector’s transactions are positively impacting transparency in the markets which we feel will result in more rational pricing environment and better industry practices as we move ahead.