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Demonetisation to briefly pause real estate markets

real estate Updated: Nov 11, 2016 14:01 IST
demonetisation

Resale market to see further correction due to financial stress. Banks may be forced to reduce interest rates in the short to mid-term.(Parveen Kumar Picture for representational purpose only)

There will be little or no transactions in land, commercial spaces and sale of residential units in the resale market (secondary) for the next three months following the government’s decision to ban Rs 500 and Rs 1,000 notes.

Notes of the two denominations were being used in most cases for buying property. Investors with white money will adopt a wait and watch approach in the hope that prices will decrease further, says an analysis by international consultancy Colliers titled Real Estate Sector: Aftermath of Demonetisation.

Transaction volumes are also expected to go down in the real estate sector in the near term and there will be tremendous downward pressure on prices, especially in land and secondary market transactions, it says.

There will be a lull in the market because majority of the players will get busy in figuring out how to account for the black money and reduce their losses. Developers will be negatively impacted and can expect worsening cash flows. However, most top developers who had stopped the practice of taking cash in primary sales are less likely to get impacted on an immediate basis.

The short to mid-term impact (three to 12 months) due to deflation in the market, a fall in inflation rates is expected. This should push the Reserve Bank of India (RBI) to reduce interest rates in the next cycle by about 50 basis points. The reduction in bank rate will put pressure on the banks to reduce home loan and construction financing rates. The effective price of real estate for buyers should thus reduce, but not enough to trigger massive sales due to uncertainty in the markets, it says.

Some properties may also be available on sale in the secondary market at a further discount due to the financial stress, says the analysis.

Primary market sales will continue to be subdued as buyers will prefer secondary distressed property over primary markets. Some developers may be able to provide discounts though others may try and increase incentives. “We also expect the usual resistance to lower prices . As RERA (Real Estate Regulatory Act) starts kicking in, it shall make the business environment more stricter, making developers hold back, says the analysis.

Prices in the luxury segment will come down further due to paucity of money in the market and the infusion of secondary market units on sale at lower rates. The delta between primary and secondary markets should thus increase.

In the affordable segment, transaction volumes and prices are likely to remain largely unaffected.

In case of commercial rents, there may be a marginal upward pressure in low vacancy markets such as Bangalore, Pune and Hyderabad as new projects get delayed. It will, therefore, be a great time to invest in the real estate from the perspective of an institutional investor as valuations will be attractive.

Cheaper and efficient construction techniques will also evolve and land prices will reduce.

After a year, along with other regulatory changes such as the amendment of Benami Transactions (Prohibition) Act, Goods and Services Act (GST), and Real Estate (Regulation & Development) Act (RERA), these moves will improve transparency in real estate transactions. “We also believe that this pro-active government will make the real estate approval process easier and shorter, as a part of its ease of business initiative,” it says

This will ensure entry of more foreign entities (developers and funds) in the Indian market and more liquidity for the Indian developers who have an established track record.

“This should lead us to a new era of lower interest rate regime, fair competition and a more predictable business environment. At the same time it will lead to a higher threshold to entry in the real estate business,” it says.

Institutionalisation of the sector in the long term will lead to an economy that is more aligned to global compliance standards and an industry with high levels of corporate governance making it easier for foreign entities to invest in India. “We expect cap rates to compress due to decease in risk. It should also boost REIT (Real Estate Investment Trust) listing in Indian market. We should see a more robust institutional investment market as retail investment participation in these segments will shrink,” it adds.