Demonetization – A Year After

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As we look back a year after that fateful night of 8th November 2016 when PM Narendra Modi took upon demonetization drive, it is imperative to dissect, evaluate and reason the success or failure of the move on Indian economy and to such extent on Indian real estate sector. The move, intended to choke terror funding and corruption in line with the ruling party’s electoral promises, has been the centre of unending debate. It was seen more as desultory without any tangible benefits.

The perceptible impact is the slowdown in the economy (down to 5.7% in Apr-Jun) with the government acknowledging the requirement of intervention to pump in significant liquidity to enable growth. The macro-economic debate has been that while curbing parallel economy has failed, it has mainstreamed the economy by bringing the opaque informal sector into the spotlight. The pain was largely felt in the informal sectors where 84.7% of jobs lay. These are largely concentrated in manufacturing, trade and construction. With a large number of investors in real estate operating in these sectors, the impact was extended and this changed the principles of business. This combined with RERA, demonetization can be argued to have a positive impact on the real estate environment.

It was contested that real estate collapse was inevitable with demonetization, though many experts missed that primary real estate market operated largely on home mortgages and thereby the impact would be limited. Definitely, due to the impact on informal sector, a larger buying base both in affordable and premium real estate did withdraw. This resulted in a short-term slowdown in sales where cash component was high. However, in organised markets, the impact was less due to demonetisation and more due to GST. The impact can be evaluated and reasoned both at developers and customers end.

A large section of developers who relied previously on cash transaction were forced to abandon these practices and take on transparent processes which have reflected well globally. This can be corroborated with the fact that PE investments in Indian real estate are up (H1 2017 saw increase of 61% to corresponding period in H1 2016). Sovereign funds and institutional funds are more excited with India opportunity than before given the clean-up act.  However, CAT B & C builders who relied heavily on cash for their transactions are facing a very uncertain future with respect to liquidity. Also, the structure of operations collapsed right from labour to vendors, serving the developers, who relied heavily on cash resulting in grinding halt in construction progress and lower supply. This coupled with RERA, has had impact on those who have not transitioned into a formal structure with larger scrutiny and access to the institutional finance requiring them to adopt transparency and professionalism.

Impact in residential segment is a crucial barometer with nearly 85% of real estate in India centred on housing. Primary sales across cities have had minimal impact as most buyers in this segment rely on housing loans. However, the value of the mortgages have reduced indicating that due to erosion of cash from the system, the buying preference has shifted as evidenced from sales in affordable and mid-segment housing faring well than luxury or premium housing. The flip side is that home loan growth has slowed compared to 2016, given that a significant segment of borrowers are now struggling with aspects like jobs instability, lower salary increments and low growth environment that can support consumption like before.  Secondary sales have definitely borne the brunt as these were seen as havens for black money investments. The segment has witnessed falling registrations of assets across geographies (down by 37% in Q4 2016).

Therefore, it can be reasoned that real estate did suffer from short term impact of demonetization though in the long term there is no perceived impact except for positive change of bringing in transparency into real estate sector. The current slowdown in reality is immediate from the implementation of RERA and GST introduced to carry out systemic changes to enable a better deal for the buyers.


By: Ajay Sharma, Senior DGM, Consulting and Valuations, HDFC Realty

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