19/11/2016
– POSITIVE IMPACT ON
• The government has initiated a number of key reforms in the real estate sector like Real Estate Regulation Act ( ), GST, REITs and Benami Transactions (Prohibition) Amendment Act, 2016, besides reforms related to FDI, to bring in transparency. Consequent to the reforms, foreign investors are already betting big on real estate.
• There is a cash component of 20-30 per cent in property transactions, largely due to the difference between the collectorate rate and market rate of property. This is even higher in land transactions and property transactions in smaller cities.
• Now that the government has come down heavily on black money, the cash component in property transactions will go down. This will result in a drop in land prices and land deals will likely see a substantial dip.
• The debt-ridden developers, in the short term, will face cash-flow issues. And, in view of the high inventory and cash crunch, they may well have to resort to price-cutting to push up sales, much to the delight of property buyers.
• Going forward, with improved liquidity of banks following currency demonetization, interest rates are expected to further come down, making homes more affordable.
• This will boost home sales which have seen a 15 per cent hike in Q2 FY17 across the top eight cities. And, as RERA becomes operational and home buyers get protection of their investment, sales will further pick up, especially in the affordable segment, much to the benefit of the government's Housing for All mission.
• It's not just the top cities, even the tier II and III cities where the government is focusing on for All, and Smart City projects, are expected to gain. Of late, many big organised players with corporate governance have been entering these cities.
• Some of these cities which offer good job opportunities, especially in IT and have good physical and social infrastructure, are already on the radar of domestic and global funds. Demonetization will further boost investors' confidence in the long run.
• And, since corruption and approvals' bottlenecks are major factors responsible for price inflation, demonetization, coupled with the government's next big reform to introduce a single-window clearance system, will make property affordable for the masses.
• Notwithstanding initial setbacks, as the sector reorganizes itself, real estate will be transformed into a more efficient, evolved, corporatised, fair and transparent asset class, well on its way to a long-term sustainable growth path.
• 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.
• , 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 institutionalised 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 organised sector will see a very negligible impact by the demonetization.
• The black money was mostly in land purchase. But in last 6-7 years, there has been no major land buying in this sector. Big builders and organised players are already using bank channel and they would gain from this decision.
• In a note on real estate in India, Kotak Institutional Equities has indicated that investor-driven markets such as the National Capital Region (NCR) and the Mumbai Metropolitan Region (MMR) and high ticket size units will feel the pressure of sales in the near term. The paper says NCR and MMR markets will be affected more compared to those like Bengaluru, Pune, Chennai and Hyderabad as the former have a higher proportion of investors.
• In a recent development, global private equity player Xander has formed a joint venture with Dutch Pension Fund Manager APG Asset Management to deploy $1 billion in real estate in India. Much to the relief of cash-strapped and debt-ridden developers, institutional financing will also come with lesser risk weightage.
