The demonetisation of the R500 and R1,000 notes will adversely impact the real estate sector in terms of pricing and sales of units, particularly in the secondary market, according to developers and consultants. However, the move is expected to bring in some transparency in the sector, which generally has the reputation of being a safe haven for black money.
Analysts said that the impact is likely to be felt more in the secondary market, as the primary market is largely driven by large, reputed developers who generally do not deal much in cash transactions.
“Corruption is one reason why prices of real estate is so high, I expect prices to come down in the medium term,” said Deepak Parekh, chairman of the country’s leading housing finance company, HDFC.
Sale of premium and luxury residential apartments, priced above R5 crore, is also expected to be impacted. This is because it is a common practice to charge part of the booking amount as well as amenities cost, such as parking, club house access etc in cash. Generally, a bigger cash payout means a deeper discount on the total apartment price. According to some estimates, at the moment, about 30% of the total transaction value in the real estate sector is funded directly by cash.
Naturally, high investor-driven markets, such as the NCR (national capital region) and Mumbai and high-ticket sized units will feel the pressure of sales more than others in the near-term, a Kotak Institutional Equities report said. “Transactions in tier-II and small towns will be affected in the near term the most, as we believe the ‘use of cash’ in transactions is higher in such markets,” the report added. “More than prices, cash flows and sales posit a more serious challenge,” Rajeev Bairathi, executive director and head of capital markets in Knight Frank India said. “Because the purchasing power of a class of buyers and investors will reduce, so will sales and when sales slump, prices correct,” he added.
Some believe the damage will be limited to large-sized projects in some micro markets, especially in the north, which has traditionally been the mainstay of investors. “Other than the north and some pockets in Mumbai, the rest of the primary market is led by mortgage financing, so they are insulated,” said Kumar Gera, chairman of Pune-based, Gera Developments.
Since the cash component in the affordable housing segment is much lower, the direct impact on demand will be somewhat mitigated here but still the sentiment will get hurt. “Even if one is not an investor in the luxury segment, the widespread expectation is now going to be that prices will collapse so people will wait and watch rather than make a purchase,” said a sector analyst, who added that the positive sentiment that had emerged from sales data from September and October is not relevant anymore. Echoing the view, Kamlesh Rao, CEO at Kotak Securities said that sales volume might get impacted as purchases get postponed on hopes of prices coming down.
But with more transparency coming in, overseas investors will feel more comfortable, according to Sunil Rohokale, CEO and managing director at ASK. In the past three to five years, fund managers have struggled to raise international corpuses. Fund managers might trade governance with lower return on investment expectations, Rohokale added, as it would lead to a more conducive capital raising environment.