Impact of demonetisation on India’s real estate industry

On 8thNovember 2016, Indians heard an announcement that would shake the foundations of economy for some time to come. A ban on Rs.500 and Rs.1000 rupee notes had a deep impact across the board – from large industries to kirana stores. While there are pros and cons of the move and staunch debaters on both sides of the coin, it’s clear that the move left much change in its wake.

The real estate industry was caught in the debate as well. While some naysayers predicted significant value depletion in the industry, another set firmly believed that prices will remain stable and the move will bring in the much-needed purge of malpractices. From 2016 to now multiple factors have steered the fate of the industry – introduction of the RERA Act and GST to name a few, but the stamp of demonetisation has been definitely remarkable. Let us take a look at some of the impact areas:

  • Termination of unsecured cash transactions

Real estate has always been an industry infamous for unrecorded and unregulated cash flow, and as one of the prominent banks for dumping ‘black’ currency. A sudden shift to the cashless economy revolutionised the whole process. Inability to use unaccounted for cash in real estate transactions brought in significant transparency. This transparency enabled easy tracking of fraudulent practices and boosted customer confidence.

  • Slowdown in the industry

Inability to make cash transactions saw a drop in demand, which in turn led to a drop in property prices and a slowdown in launch of new projects. The housing and urban affairs ministry said that the property prices dropped by 5-10%and additional freebies offered by builders ranged an additional 5-7%. A report by Knight Frank India pegged the dip in sales volumes and fresh launches in the second half of 2016 at 23% and 46% lower respectively compared to the second half of 2015. 

While the industry is still recovering from the wait-and-watch mode the buyers adopted, schemes such as the Pradhan Mantri Awas Yojana for affordable housing kept the sector going.

  • Dip in home loan interests

The instant effect of demonetisation was a massive inflow of cash deposited in banks. The sudden influx pushed banks to implement immediate measures to dispense cash that flowed in. The strategy adopted was to encourage people to borrow loans to invest in property. The apex bank RBI slashed the interest rate on home loans to lure the crowd towards real estate investment. Subsidised interest rates were also made available to people under the affordable housing schemes.

  • Enhanced FDI

The year 2016surprisingly locked in an all-time record foreign investment of US $5.7 billion for the Indian real estate sector. In order to power the limping economy, the government eased the FDI norms, making it an attractive deal.  Demonetisation attracted a lot of foreign interest for investment because it pushed down property prices guaranteeing high returns in the long term.

  • Rentals took the cake

Reduction in cash payments also brought in transparency and standardisation in the rental space. There was also an increased demand for rental properties as property purchases dwindled. Major cities saw a significant rise in rental values with rents going up by as much as 8%. 

While in the short terms demonetisation slowed down the industry, measures introduced alongside are helping the industry pick up pace. The boost on affordable housing segment, the sustained momentum on commercial real estate, and strong demand creation in the country with global developers stepping up their investments, the future of the ecosystem definitely looks bright.

Impact of demonetisation at a glance

Factor Pre-Demonetisation Post-Demonetisation
New launches Normal business scenario with promised project delivery.     Slowdown in new launches    
Sales and Value proposition   The beginning on 2016 saw an all-time high for real estate.   Demonetisation slowed down the transactions in the industry because of chronic cash deficit.
Interest Rates for home loans The interest rates for home loans were normal The interest rates for home loans dipped due to RBI policies during demonetisation
Construction Work     Smooth run of work, and usual pace of progress Ban on the currency notes led to an immediate halt of work because the labourers were all paid in cash.  
Realty Stocks       Strong and steady pace for the S&P BSE realty index realty index The S&P BSE realty index shows a sudden fall in the prices of its stock post demonetisation. Large housing companies faced an immediate descend, affecting the performance for some time.  

Leave a Reply

Your email address will not be published. Required fields are marked *