Two Years Of Demonetisation: Real Estate Sector Stronger, Sturdier
After almost a three-year long slump within the real estate sector, stakeholders were looking at various ways to revive the market. There had been attractive offers floating in the market, ongoing competition, advertisements and so much more. In the middle of all this, when one would have been shifting one's focus to concentrate on who becomes the President of the United States, Indian media had to flood the first few pages with news about a revolutionary step taken in the history of India in the modern times – demonetisation - which many skeptics believed was a deathblow especially when the fate of the realty sector was being reviewed. Even after two years, the topic of demonetisation has not died down and remains a platform of debates with as many supporters as naysayers.
There are no two thoughts on why demonetisation was necessary. As Prime Minister Narendra Modi himself asserted, there was a clean-up of the economy and various sectors that was long pending and inevitable. Many cheered the move, but it cannot be denied that businesses did get impacted in a big, unflattering way. But, we'd count the blessings too.
What or whom did demonetisation target? Primarily two categories:
- Unscrupulous practitioners who gave into unaccounted cash and thus evaded taxes
- Black-money holders who could use such currency to sponsor terrorism, artificially inflate market pricing, or other anti-social activities.
Demonetisation was then to ensure that paying taxes was not just the honest man's responsibility.
Prior to demonetisation, say, the early half of 2016, the Indian market saw faint lines of recovery. The climate was steadily becoming conducive to trigger a purchase in the market. A lot of policies rolled out by the Centre and the states such as Smart Cities, Housing For All 2022 and AMRUT also ushered in some positivity. Yes, prospective buyers and stakeholders did understand that these would take time but the agenda was clear. Real estate sector looked like it needn't worry about going bleak all over again. All this time, fence-sitters climbed down, a little more confident that finalising a deal was not a bad thought after all. Investors too saw this as an opportune time. Unsold inventory numbers, too, came down if not miraculously low.
Even before demonetisation happened, the focus of developers was slowly shifting towards fewer launches as players realised that too much on their platter with few takers meant they would be cash-strapped for long. They couldn't afford the demand-supply imbalance at this juncture, hence the turn for the better. The cherry on the cake for home buyers at this juncture- property prices looked like an advantage with prices as low as they could get – one prices hadn't risen in the last few years, second, most developers did not mind a little over the table bargain and negotiation as unsold inventory off their back meant business while a rigid pricing policy would render them helpless. Therefore, except for certain micro-markets within the National Capital Region (NCR), most other markets saw unsold stock going down. Ready-to-move-in affordable projects were the choicest flavour.
With demonetisation, the real estate sector witnessed a disruption of sorts especially because real estate sector happens to be one of the most sentiment-driven business too. Given that the sector's contribution towards the GDP is considerable, the industry couldn't afford the uncertainty for long. Within the industry, stakeholders will agree that 2017 did see a consolidation within the industry with multiple developers combining forces to sustain through RERA implementation. This year, the focus was on fewer launches as the Real Estate Law did not allow anyone the luxury of shared mind space for multiple projects at a time. The focus was on the buyer and his needs and to provide that, the industry had to go through a clean-up. After all this, sales were slow but we are expecting a sustained pickup after the third quarter. It is the most crucial time for industry where survivor will be winner in the long run. The foundation for future growth has been setup and the economics has started falling into place.
Let's focus on the impact on the various aspects:
Ready-to-move-in and new projects dominate this segment and this market didn't have much to lose given the way it operates. It caters to end-users who depend on banks or financial institutions. Therefore, if loans were to be provided by the banks, the investor or end-user is not affected and hence transactions did not take as bad a hit. Nevertheless, sentiments did take a blow and the effect of this would seep through for the next two quarters or three.
Primarily consisting of resale units, this segment took a big hit given the nature of transactions which involved a huge cash component. The extra cash vanished overnight and those looking at homes for an investment purpose, lost their appetite for the same. Scarcity of cash and the uncertainty about the future of paper currency too led to potential buyers opting for a step back just to wait and watch. A few who could afford the volume of cash component through legal and valid channels could however sail through. On the whole, such home buyers too waited for prices to correct and the market to settle.
Large amounts of cash is involved in this segment, too. With affordable homes being the cry of the common man and with demonetisation trying to make the market a level-playing field, luxury homes too suffered a hit. But the silver lining was that such properties would have to bank on lower capital values, a difficult but only way to sustain their survival. For the buyer, this meant having a wider bandwidth to choose from.
The other giants
The Real Estate Law, the Goods and Services Tax (GST) and the Union Budget 2017, too, slowed down the market for a while. With the Law around, homebuyers felt they should wait for some clarity and a certain price cut. However, delays in operations and setup of state regulators led to the market thinking positive but acting stable.
The GST has been hailed as a tax reform but as with all policies and reforms, it takes time to settle the unsettled market. The impact of GST was studied by experts, discussed and debated across platforms until all stakeholders understood how it was to impact the market and respective businesses. In short, this too led to a delay in real estate's recovery. Going forward however, GST will drive GDP growth and, in turn, boost demand for homes. In fact, there is little doubt that the GST rollout will prove a shot in the arm for the country´s economy in the medium to long term.
With Budget 2017, those aspiring for a second home changed their mind. The government had capped the tax benefits on purchase of second homes and the maximum deduction on interest was be capped at Rs 2 lakh as against the entire interest that was previously, tax-free. The losses however could be carried forward in the next 8 years. But those who planned on a second home at this juncture understood, they would be in for a loss given that interest on loan and rental income would both be taxable. All of the above together did slow down the sales and revenue for businesses.
Area and property wise impact
Small cities such as Surat, Indore, Jaipur where businesses dominate and business families are the ones buying homes saw a sharper impact of demonetisation. Land parcels in off-municipality areas could also see price correction in the medium to long run. Also, areas where supply was way higher than the demand could meet some price cuts given all other economic and sentimental determinants remain stable.
Impact on home loans
From the previous 8.9 per cent to eight per centc, the country's largest bank, State Bank of India (SBI), on January 1 announced a reduction of 90 basis points in its marginal cost-based lending rates (MCLR) for one-year tenure. MCLR is the benchmark lending rate at which banks price their loans. The new lending benchmark came into effect from April 1, 2016, and has replaced the base rate system. Similarly, Punjab National Bank (PNB), Union Bank of India, ICICI Bank, IDBI Bank lowered their lending rates. This meant more spending capacity for a home buyer.
Impact on NRIs
Indians residing abroad have not kept away from Indian real estate. Demonetisation did send out panic waves but because Indian currency means nothing to such folks abroad, sentiments were hardly hit. However, it may not be wrong to say that the hope of a better, price-corrected market may have kept them holding on for a while longer before they purchased.
Impact on developers
The long and short of has already been studied. With RERA being announced in 2016, demonetisation was a lesson in making this class of stakeholders stronger and quicker to adapt to change. In fact, in the months that followed, many policies, amendments and reforms, although difficult for developers were taken up stoically- be it GST, implications of RERA and benami transactions or also of insolvency and bankruptcy proceedings. In months to follow after demonetisation, only genuine developers held on to the market. Multiple reforms made it difficult for the ingenuine ones to survive.
What will matter in days to come?
Credibility of the developer and his firm and the affordability factor is what will be most talked about and sought after. As businesses wrap up or reinvent, we understand that post demonetisation, the sector has stood the test of time, emerging stronger and sturdier.