The government’s recent move to demonetise Rs 500 and Rs 1,000 notes will impact the real estate sector. This includes the resale market, commercial sales and some pockets in the primary market largely driven by small developers, investors rather than end-users who prefer to deploy excess cash in buying apartments or land. This pain, however, won’t last long. The cash flow problems some developers are likely to face will effect their working capital needs and also put pressure on property prices.
Real estate experts say the correction will be anything in the range of 10% to 15% in the primary market and perhaps around 20% to 30% in case of resale (both apartments and land) and commercial properties as these asset classes are seen as a safe haven for parking black money.
In the long term though, these measures to curb unaccounted wealth will increase transparency and credibility in the sector. The setting up of a Real Estate Regulatory Authority (RERA) in each state will also bring about increased accountability in the markets.
Also, while the general mood of a not-so-desperate property seller will be to wait and watch, these times may actually prove to be a boon for homebuyers who can look forward to some affordable all-white deals that suit their pocket.
Next year around this time, a different real estate market may evolve as both RERA and Goods and Services Tax (GST) will be in place by then and the new found-confidence in the sector may actually give an impetus to the market. Demonetisation may lead to huge pressure on prices in the short term as there will be cash flow issues. The number of transactions will be less initially, but it will be good for the medium and long term as cleaning up of the market would have happened by the same time next year, says Samantak Das, chief economist and national director – Research, Knight Frank (India) Pvt Ltd.
Pankaj Kapoor of Liases Foras, a Mumbai-based real estate rating and research firm, says that demonetisation of these high-value currency notes that are mostly used for realty transactions may create difficulties for the luxury market and land transactions as the cash component ranges between 30% and 50% of the deal value in such transactions. Prices in the land segment could see a 20% to 25% correction once black money is out of the equation.
Upcoming markets such as Greater Noida West or Noida Expressway where there are people desperate to sell may also see a price correction of 10% to 15%. Primary markets may also be affected as there will be pressure on builders to sell unsold inventory in markets (with excess available stock) due to cash flow issues, even though deals in such markets are primarily in white, says Nitin Jain, a broker active in Noida and Ghaziabad markets.
Plotted development, floors (in kothis) may see prices crashing by almost 30% as the cash component in such properties and commercial properties is much higher.
For commercial properties worth Rs 1.25 crore, the cash component is usually Rs 50 lakh. Due to demonetisation of Rs 500 and Rs 1000 notes, this segment may see a correction of 25% to 30%, says Amit Parekh, a broker active in Noida.
Dhruv Khanna, a Gurgaon-based realty agent, says properties hit the most would be those with deals already struck and part payments made. Uncertainty is likely to continue for the next six months and this may perhaps be the right time for homebuyers to enter the market in the next financial year for all-white deals. The long term impact is extremely positive and a huge confidence booster for FDI investors
The sub Rs 1 crore completed, ready-to-move-in properties will be the least impacted in Gurgaon as these see maximum end-user activity. Under-construction projects, however, will feel the pain and experience price correction of 10% to 15%, says Khanna. Apartments in prime areas such as Golf Course Road and Golf Course Extension where the difference between circle rates and market rates is about 30% may see price corrections of 10 to 15% in the short term, he says.
The rental market will feel the heat as liquidity will be out of the market and those wanting to sell will be forced to lease their units. “Rental market prices may go down as availability of stock will go up. This will be due to the fact that delayed stock that was to be completed in Gurgaon in 2012 is now coming into the market and will add on to the existing supply, putting pressure on the rental market, which will correct by 5% to 10% going forward for the short term,” adds Khanna.